chapter 13: investment fundamentals garman/forgue personal finance ninth edition ppt slide program...

Chapter 13:Investment Fundamentals

Garman/Forgue

Personal FinanceNinth Edition

PPT slide program prepared by Amy Forgue and Ray Forgue.

Copyright ©Houghton Mifflin Company. All rights reserved. 13 - 2

Learning Objectives

1. Explain how to get started as an investor.

2. Discover your own investment philosophy.

3. Identify the kinds of investments that match your interests.


Learning Objectives

4. Describe the major factors that affect the rate of return on investments.

5. Decide which of the five long-term investment strategies you will utilize.

6. Create your own investment plan.


Starting Your Investment Program

• Investing is more than saving.– Savings– Investing– Securities– Stocks– Portfolio

• Are you ready to invest?



• Decide why you want to invest.

• Where can you get the money to invest?



• What investment returns are possible?– Financial (or Business) Risk

– Total Return

– Current Income

– Interest

– Rent



• What investment returns are possible?– Dividend

– Capital Gain

– Capital Loss

– Rate of Return (or Yield)


Your Investment Philosophy

• How to handle investment risk– Pure risk

– Speculative risk

– Investment risk


What is your Investment Philosophy?

• Are you a conservative Investor?– Preservation of capital

• Are you a moderate investor?– Risk indifferent

• Are you an aggressive investor?– Risk seeker


Your Investment Philosophy

• Should you take an active or passive investing approach?


Identify the kinds of investments you want to make.

• Do you want to lend or own?– Lend = Bonds– Debts– Fixed maturity– Fixed income– Equities

• Choose investments for their components of total return.


Random and Market Risk

• Random (or unsystematic) risk

• Diversification

• Systematic (or market or undiversifiable) risk


Other Types of Investment Risks

• Business failure (or financial) fisk

• Inflation (or purchasing power) risk

• Time risk

• Business cycle risk


Other Types of Investment Risks

• Market-volatility risk

• Liquidity risk

• Reinvestment risk

• Marketability risk


Returns

• Transaction costs reduce returns– Commissions

• Leverage may increase returns.


The Tax Consequences in Investment Fundamentals

• After-Tax Return

• Income Versus Capital Gain

• Tax-Deferred Investments

• Tax-Exempt Income

• Tax-Exempt Investments


Establish Your Long-Term Investment Strategy

• Real Rate of Return

• Securities Markets

• Bear Market

• Bull Market



• Long-term investors understand market timing.– They are market timers.

• Calculate the real rate of return (after taxes and inflation) on investments.



• Strategy 1: Buy and hold anticipates long-term economic growth.– Buy-and-Hold (or Buy to Hold)



• Strategy 2: Dollar-cost averaging buys at “below-average” costs.– Dollar-Cost Averaging (or Cost

Averaging)– Below-Average Costs

• Dollar-cost averaging in a fluctuating market– Average Share Price– Average Share Cost



• Strategy 3: Portfolio diversification reduces portfolio volatility.

• Strategy 4: Asset allocation keeps you in the right investment categories at the right time.



• Strategy 5: Modern portfolio theory evolves from asset allocation

– Modern Portfolio Theory (or MPT)– Monte Carlo Analysis


The Top 3 Financial Missteps In Investing

People slip up in when they do the following:

1. Invest only money that is left over at the end of the month.

2. Follow a conservative investment philosophy for long-term goals.

3. Fail to regularly rebalance the assets in their portfolio.


Good Money Habits in Investing Fundamentals

• Sacrifice some of your income by investing for your future needs and lifestyle.

• Start early in life to invest in a diversified portfolio of assets consistent with your investment philosophy.

• When investing for the long term, willingly accept more risk.



• Invest regularly through your employer’s retirement plan using an asset allocation strategy.

• Invest no more than 10 percent of your portfolio in your company stock, or any single company stock, for that matter.



• Follow the buy-and-hold long-term approach to investing.

• Invest in stocks, mutual funds, bonds, and real estate, not life insurance or annuities.

chapter 13: investment fundamentals garman/forgue personal finance ninth edition ppt slide program...

Documents

undiversifiable risk

risk seeker slide

investment returns

investment philosophy

investment strategies

investment plan

risk indifferent

rent slide