bennie waller wallerbd@longwood 434-395-2046

Bennie D Waller, Longwood University

Personal Finance

Bennie Wallerwallerbd@longwood.edu

434-395-2046Longwood University

201 High StreetFarmville, VA 23901

Bennie D Waller, Longwood University

Investments

Bennie D Waller, Longwood University

Investing Understand the difference between investing and speculating.

An investment is an asset that generates a return. For example, many stocks pay dividends and bonds pay interests.

Speculation is in essence a gamble on what might happen in the future. For example, buying a piece of real estate because you heard a rumor that Microsoft was moving into the area.

Gold coins Baseball cards

Speculation revolves largely around supply and demand

Invest, don’t speculate

Bennie D Waller, Longwood University

InvestingStarting your investment program

Pay yourself first.

Make investing automatic.

Take advantage of Uncle Sam and your employer.

Windfalls

Make two months each year investment months.

Bennie D Waller, Longwood University

InvestingSecurities – stocks and bonds issued by companies to raise

capital

Securities markets – where you buy and sell securitiesPrimary market – where companies take the company

“public” (IPO)Seasoned new issues – Investment banking

Secondary market – marketplace where previously issued securities tradeOrganized exchanges, (NYSE)OTC – NASDAQ

Bennie D Waller, Longwood University

InvestingRegulation of Securities markets

SEC Insider tradingChurning

Types of OrdersMarket order – buy/sell at current market priceLimit order – trade made only at certain priceStop-loss order – order to sell if price drops some

specified amount

Bennie D Waller, Longwood University

InvestingShort selling – very dangerous!

If you believe that stock will drop, you borrow stock from broker account and sell it.

IF stock price does drop, you buy it back at the lower price and return to broker account

HOWEVER, if price goes up, you must buy it back at higher price and return to broker account.

Bennie D Waller, Longwood University

InvestingFull service brokers

Get paid on commissionsDiscount brokers – execute trades, but no advice

Cost of trading includesCommissions to buy/sell stockTransaction fees

Day trading is not investing

Good sources of investment informationFinancial newsYahoo! FinanceWSJ

Bennie D Waller, Longwood University

Investing Derivative securities – a security whose value is dependent

upon the value of some underlying asset, e.g., MBS

Bennie D Waller, Longwood University

InvestingOptions – a security (financial instrument) that gives the owner

the right to buy or sell an asset (typically common stock) for a specified price over a specified period of time.

Call option – gives the owner the right to purchase an asset at a given price (strike price) before the expiration of the option. e.g., if you believe that a stock will increase in price, you could purchase a call option. If the stock goes above the strike price, the option could be exercised and the underlying stock purchased.

Put option – give the owner the right to sell an asset at a given price before the expiration of the option.

Bennie D Waller, Longwood University

Investments Investment goals should consist of short-term (<1 year),

intermediate (1-10 yrs.) and long term (>10 yrs.)

Basic Investment choices Lending (Debt) investments –

Bonds (corporate or government) Savings account

Ownership (Equity) investments – ownership in an income producing asset

Stocks Real estate

Bennie D Waller, Longwood University

Investments Returns on investments

Holding period return Tax considerations

Capital gains (or loss) –

Income – Stocks – dividend payments Bonds – interest payments Real Estate – rental payments

Bennie D Waller, Longwood University

Interest rates Interest rates

Affect the value of assets

Interest rates are affected by a number of factors. The Federal Reserve, which is charged with maintaining the stability of the nation's financial system, raises or lowers short-term interest rates in an effort to maintain that stability (bankrate.com)

Nominal Interest rate -

+ IP + DRP + LP + MRP

Bennie D Waller, Longwood University

Interest RatesNormal Yield Curve - A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates.

Bennie D Waller, Longwood University

Risk/Return Expected return is a function of risk.

“The risk curve is upward sloping” The more risk you assume, the more return you should

expect to earn!

The objective is to optimize the trade-off between risk and return.

Bennie D Waller, Longwood University

Risk and Return

Both kickers made 10 field goals. Which one would you want on your team? Why?

A B

Bennie D Waller, Longwood University

Risk and Return

E(Return)

Time

The “Risk Curve” is upward sloping A

Bennie D Waller, Longwood University

Risk and Return

E(Return)

Time

The “Risk Curve” is upward sloping B

Bennie D Waller, Longwood University

Risk/Return

2%

4%

6%

8%

10%

12%

14%

16%

18%

0% 5% 10% 15% 20% 25% 30% 35%

Ann

ual R

etur

n Av

erag

e

Annual Return Standard Deviation

T-BondsT-Bills

Large-Company Stocks

Small-Company Stocks

Bennie D Waller, Longwood University

Risk/Return Sources of Risk

Interest rate risk - Inflation risk - Liquidity risk Business risk – risk associated with particular business Market risk – overall market fluctuations

Diversification – the reduction of risk by investing in different assets. “Don’t put all of your eggs in one basket”

Bennie D Waller, Longwood University

Diversification

Bennie D Waller, Longwood University

Asset allocation

The Early years (<54) Your investment horizon is significant, so you can handle

fluctuations in the market. A typical portfolio might include 80% in stocks, 20% bonds.

The Golden Years (55-64) Preserve wealth and plan for retirement

Move out of stocks (due to volatility and investment horizon) and into bonds. (e.g., 60% stocks, 40% bonds)

Retirement You will be spending more than saving. Income should be

primary investment objective. Continue to move into bonds and other liquid assets.

Bennie D Waller, Longwood University

Asset allocationCalculating returns

Holding period return

Bennie D Waller, Longwood University

InvestmentsMarket efficiency – asset prices reflect information.

Be mindful of trying to “beat” the marketDon’t get overconfident (arrogance) – trading too often

“Disposition” effect – no one wants to be a loser

“House money” effect – don’t take irrational risk

“Herd behavior” effect –

Bennie D Waller, Longwood University

Thank You