Get Rich Slow

Investment Ideas for the Rest of Us

Time (The Ultimate X Factor)

The amount of time that an investment has to grow is more important than the amount invested or the interest rate earned.

Time

Couple A: Invests $500 per month beginning at age

30. Quits investing at age 40. Earns 10% per year.

Total Value at age 65: $1,240,000

Total invested: $60,000

Time

Couple B: Invests $500 per month beginning at age

40. NEVER quits investing until retirement. Earns 10% per year.

Total Value at age 65: $663,416

Total invested: $150,000

Time

The difference? Couple A: Invested total of $60,000.

Ended up with $1.24 million. Couple B: Invested total of $150,000.

Ended up with $663,416.

Couple A STARTED SOONER, was able to invest less, and ended up with more.

TIME is the investor’s greatest ally. START NOW.

Rate of Return

Rate of Return MattersA fraction of a percentage point makes a significant difference over time.

Consistency

Dollar Cost Averaging: Buy more when the price is low Buy relatively less when the price is

high

Investment Objectives

Identify Objectives before Choosing Investments

De-Mystifying Investment Terms

Beware: The Media has a Short-Term Focus

The Financial Industry has NO Incentive to Clear Any of This Up

Investor Confusion Rules

Too much informationNot enough understandingNot enough planningEveryone has ‘Advice’Emotions rule the dayRisk is not kept in checkAll is madness…

Stock

Shares of Ownership in a Corporation

Publicly Traded Shares Are Easy to Buy and Sell

Bonds

Form of DebtWhen you buy a Bond, you are promised an interest payment and a return of the original investment.Sold by Governments and Corporations

Stock Exchanges

A place where shares of Stock are traded.NYSE (A physical exchange)NASDAQ (A non-physical exchange)AMEX, Philly, Pacific, London, Tokyo

Stock Indexes (Indices)

Measure the performance of a group of Stocks

Be VERY CAREFUL: Understand what the Index measures, before drawing conclusions

Dow Jones Industrial Average: Measure of 30 Industrial StocksNASDAQ: Measure of all Stocks listed on NASDAQ exchange.S&P 500: Measure of 500 large stocks in USA.Russell 2000: Small StocksWilshire 5000: Total Stock Market Index

Mutual Funds

Collect money from a large number of people.Invest the money together in a group of stocks.Gives the small investor ability to DIVERSIFY investments.

Mutual Fund Types

More Mutual Funds exist today than individual StocksEach Fund Invests in a specific way (outlined in a document called a prospectus)

Growth FundsSector FundsIncome FundsInternational FundsLarge/Mid/Small Cap FundsValue FundsIndex Funds

Mutual Fund Characteristics

Some charge a Sales Fee (Load)All charge an annual Management Fee (average of about 1.5% per year)You pay tax on realized gains (even though you don’t withdraw $)

Fees Matter

Tax Efficiency Matters

Actual Return is impacted by Both

Advertisements LIE about these things…

Selecting Mutual Funds

How do you choose?

Chase hot tips…Read mountains of reports…Follow your ‘GUT…’

Pray…

Choosing Mutual Funds

The Benchmark:

The Game:

Success Rate:

S&P 500 Index Historical Average of

approx. 10.7%

Try to actively manage your fund to a higher return than the S&P 500

85% of all Mutual Funds FAIL to beat the S&P500

INDEX Mutual Funds

The mutual fund buys the same stocks found in the Index (such as the S&P500)Require very little active management, resulting in lower feesBuy and Sell less frequently than actively managed funds, resulting in lower taxesReturn the average that the Index returns (will beat 85% of actively managed funds over time)

Index vs. Actively Managed Funds

Index (S&P500) Fund: 0.20% Mgt fee No Sales fee (load) Low turnover / low

taxes Earns the average

of the Index Performs well over

long periods of time

Actively Managed Fund: 1.5% Mgt fee Some have loads (some

don’t) Some have very high

turnover / high taxes Beats the S&P500 Index

15% of time Can outperform in down

markets Some funds consistently

outperform Indexes. Some funds are flat-out

lousy.

A Word About Tax-Deferred Plans

Deferring the taxes on an investment plan allows more money to work for you over time.

When taxes are finally paid at retirement, hopefully one has dropped to a lower tax bracket.

IRA and 401(k) are common versions.

401(k)

Company Sponsored Retirement Savings Plan Contributions to the plan are tax-deductibleEmployers may match part or all of contributionInvestments in 401(k) are not taxed until withdrawals beginRestrictions / Penalties for early withdrawal

IRA (Individual Retirement Acct)

You may set up the account on your ownContributions are tax deductible (maximum limits apply)Investments grow tax-deferredTaxed at withdrawal

Roth IRA

Contributions are not tax deductibleInvestments / Earnings in the account are not taxed, even at withdrawal.Maximum contributions / limits apply

A Simple Way to Start

Open a Roth IRA account with Charles Schwab, Fidelity, or someone similarPurchase a Vanguard Index 500 Mutual Fund WITHIN the Roth IRA AccountAdd to it regularlyAs more money becomes available, investigate other alternatives

How?

Call a 1-800 number, ask for an applicationFill it outAttach a checkMail itWait a few days for confirmation to be mailed to you

Other Topics

Investing in Individual StocksBond FundsDerivatives (Option and Futures Contracts)

Conclusions

Start earlyBe consistentEducate yourselfTake advantage of tax-deferred programsMake investing a habitPay tithing, avoid debt, and be proactive

Other good sources of information

Smartmoney.comFool.comThe Wall Street Journal Guide to Understanding Money and InvestingThe Wall Street Journal Guide to Planning your Financial FutureMoney.comOne Up on Wall StreetB201 (non-bus. Majors), B410, B411, B418

Morningstar.comQuicken.comFinance.yahoo.comBloomberg.comBusinessweek.comKiplinger.comThe Millionaire Next DoorFundamentals of InvestmentsMoneycentral.msn.com