Basics of Investing

Erica Abbott & Jean Lown,

FCHD Dept., USU
with assistance from Advanced
Family Finance students
Information Credits to:
Dr. Barbara O'Neill
Rutgers Cooperative Extension

Welcome

Please ask questions or ask for

clarification as we go along.
I

may defer some Q that require a

detailed answer to the end

Things To Do Before Investing

Pay off credit card debt!

No

investment pays as much as

credit card companies charge

Build an emergency fund

Consider your goals
Timeline
How

soon will you need the $?

Consider your Goals

Vehicle purchase/replacement
Down payment on a home
Childs education
To build wealth
For retirement
What are your financial goals?
How much $ will you need?
4

Determine your Risk Tolerance

How much risk can you stand?

If

you have trouble sleeping at

night because you are worried
about your investments then pick
a more conservative mix
For experienced investors:

How did you react to 2008-2009

losses?

Risk tolerance scale-worksheet

5

Relationship Between Risk and Return

High

Intl Stocks
Stocks
Real Estate
Expected
Return

Intl Bonds
Bonds
Cash
Equivalents

Low
Low

Risk

High

Before you Invest

Is your budget balanced?

Do you save every month?
Do you pay credit cards in full
every month?
Do you carry adequate insurance
to protect against major
catastrophes?

Potential Risks

Being too conservative (Savings

accounts, CDs, etc.)
Keeps

principal safe but

Inflation reduces purchasing
power

Inflation averages about 3.1%

Risk

not reaching your goal(s)

Risks

Being too aggressive (too much

in stocks)
Higher

potential for growth but

More market volatility
No guarantee or insurance
Potential to lose some or all of the
principal

Managing Risks

Consider your goal

Emergency

fund- be conservative
Retirement- be more aggressive

Match your goals with your risk

tolerance
Can

you handle the market

volatility?

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Managing the risks continued

Consider your time frame

Short Term months to 3 years
Stick

with safe savings options

Mid Term 3 to 10 years

Take

some risk to grow your $ &

beat inflation

Long Term 10 or more years

Take

more risk to grow your $ &

beat inflation
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Saving Terminology

Cash Equivalents
Usually

low risk
Savings, CDs, cash on hand
Also called liquid assets
Use for short term goals or if you
have you have low risk tolerance

13

Investing Terminology

Stock ownership in a company

Bond loan money to issuer
Mutual fund A diversified
portfolio of stocks and/or bonds
Opposite

of putting all your eggs

in one basket

14

15

Retirement Funds

401(k) retirement plan offered by

employer
$ grows tax deferred
Some employers will match (~3%)

Need to invest > just the match

IRA: individual retirement account

Invest on your own
$ grows tax deferred
16

Retirement Funds

Roth IRA
Pay

taxes now
No taxes when you withdraw
= no taxes on the growth!
Traditional

IRA

Upfront

tax deduction
Pay taxes at withdrawal
17

Retirement Funds

Retirement accounts are NOT

an investment
How

the government treats that

money for tax purposes
Where you put that money is up to
you

18

IRA Criteria

Must have an earned income

If

married, non-earning spouse

can use a spousal IRA

$5,500 annual limit

You

can contribute less

Age 50+: $6,500

19

401(k), Roth, or traditional IRA?

Invest in 401(k) up to full match

Instant

100% rate of return!!

Possible downsides
employer picks the funds
May charge heavy fees

If no employer match, consider

an IRA

20

401(k), Roth, or traditional IRA?

Use a traditional IRA if

Your employer doesnt match
or youve already invested up
to the match
You expect to be in a lower
tax bracket at retirement
Take the tax break now

21

401k, Roth, or traditional IRA?

Use a Roth IRA if

You expect taxes to rise
You expect to be in a higher
tax bracket at retirement
Offers tax diversification
If

most of your retirement

income will be taxable invest
in a Roth

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Establish Your Long-Term

Investment Strategy

Strategy 1: Buy and hold

anticipates long-term economic
growth.
Stock

market has offered a

positive return over every 15 year
period

Past returns no guarantee, but longterm buying and holding is a great

strategy
23

Long-Term Investment
Strategy 2
Dollar-cost averaging buys at
below-average costs
Invest same amount every month

Avoid following the crowd

Jumping in when the market is high
Pulling out when it drops

Set up automatic deposit

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Long-Term Investment
Strategy 3 & 4
Portfolio diversification
reduces volatility
Money is like manure. Left in
a pile, it stinks. If you spread
it around, it'll grow some stuff.
Dave Ramsey
Asset allocation keeps you in
the right investment categories
at the right time
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Determinants of Portfolio Performance

Security
Selection
4.6%

Market
Timing
1.8%

Other
2.1%

Asset
Allocation
91.5%

Source: Determinants of Portfolio Performance II, An Update by Gary Brinston, Brian D. Singer and Gilbert L. Beebower, Financial
Analysts Journal May-June 1991.

Investing Made Easy

Set up Automatic Investing

Payroll

deduction or
Automatic transfer from checking
to:
Individual Retirement Account
Mutual fund
Other investment

27

Mutual Funds

Advantages

Professional management

Reduce risk through diversification

Monitoring investments is easy

Disadvantages

Own small part of lots of different investments

Funds charge fees

Be aware

follow market performance (down & up)

No guaranteed rate of return

28

Successful Investing

Educate yourself
Determine your risk tolerance
Decide on asset allocation
Stick to your plan
Monitor investment performance
If you need help, consult a
professional advisor
(N.B.

most are salespeople)

Avoid fraud!
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More Successful Strategies

Ask questions about

Expenses
Historical

performance: 3, 5, 10 yrs.
Investment goal (e.g., capital
appreciation)

Rule of Three comparison

Compare

at least 3 investments

Core and Explore approach

For

more adventurous
30

Low-Maintenance Strategies

Target maturity date mutual

funds for retirement

Index funds

Automatic deposits

Annual financial check-up

31

Ideas on where to invest

Fidelity

(800) 343-3548
Vanguard (877) 662-7447
T. Rowe Price (855) 389-9464
Charles Schwab (866) 855-9102
Russell (800) 426-7969
*This

is not a comprehensive list

or an endorsement
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Remember
Never invest in something
you dont understand

33

Investing Resources

Risk tolerance quiz:

http://njaes.rutgers.edu/money/riskquiz/

Investing for Your Future http

://www.extension.org/pages/1098
4/investing-for-your-future
Money 101 #4: Investing basics:
http://money.cnn.com/magazines/moneyma
g/money101/lesson4/index.htm

34

Questions? Comments?
Experiences?

Where to Find FPW

http://usu.edu/fpw/
http://fpwusu.blogspot.com/
https://www.facebook.com/Fina
ncialPlanningforWomen
Second Wednesday of the
month TSC room 336 11:3012:30
Family Life Center 493 North
700 East. 7:00 to 8:30
36

Financial Planning for Women

www.usu.edu/fpw

April 10th: Social Security with SSA

expert Mickie Douglas
11:30

only; no evening program

May 8th: Great Mutual Funds for

your IRA
June 12th: Get your house in order
before you buy
July 10th: Investing for College
37