Chapter 11 Flashcards
principles of investing
- identify how rare something is and its potential to grow in value over time and invest in it
purpose of investing
to build wealth
- buy things that are going up in value
- look for good return on money
- commit capital
What does it mean to commit capital?
decide on an amount of money to take from somewhere else and use it to invest (find something that is not priority)
importance of investing
- rising prices: keep up with inflation (investment should have same or higher return than inflation)
- job raises may not keep up
- people are living longer
- concern that SS will not be enough
- so much is self-directed in retirement plans
When are you ready to invest?
- stable life (same place, steady income, basic insurance, etc.)
- net worth is positive
- regular savings plan accumulated
- no credit card debt
- employer sponsored retirement plan
investing definitions:
- return
- total return
- yield
- current yield
- investment risk
return: monthly income from investment
total return: annual income (shows a/depreciation)
yield: return from bond (at the end what you will receive)
current yield: yield/market value
investment risk: level of uncertainty about the investment
4 steps in investing
- set goals/ develop investment attitude: ask questions, get interested in things going on
- assessing risk and return
- selecting instruments and allocating assets: decide on reasonable amount to invest, diversify, etc.
- managing investments: observe the patterns, process, etc.
what are some strategies to Setting Investment Goals and Developing an Investment Attitude?
- ask yourself questions: what am I investing for?
- set long term goals: 7+ yrs
- set intermediate goals: 3-7 yrs
- set short term goals: 0-3 yrs
- determine goal time horizon
- engage in social conversation, pay attention to what people are buying, doing, activities they are engaging in etc.
factors in Assessing Risk and Return of Investment:
- chance of value falling vs. value rising
- mergers and how they effect the value of stock (positively and negatively)
- investment horizon: when do I want the money?
- expected return: amt you expect to get back from your investment
- your current income
- capital gains adding to your income
- tax implications of your gains
- capital losses
Define: asset allocation and important factors involved
asset allocation: pulling together the amount of your assets you wish to invest
diversity: spreading your investments among different categories
- decrease risk of capital loss
portfolio: a list of all of your investments and the money you have invested
- important for keeping track of your investments
what is rebalancing your asset allocation and how often should you do it?
rebalancing: adjusting your asset allocation based on your age, career stage, level of risk tolerance, time horizon and tax exposure
1x per year
what is the concept of laddering your investment?
bottom on ladder = smallest risk, smallest yield
top of ladder = highest risk, highest yield
you want to start at the bottom of the ladder and work your way to spreading upward to have a combination of low risk and higher risk investments
you DO NOT want investments in only 1 level
4 levels of investment ladder
TOP: speculation: high risk (emerging markets, international stock)
growth: the younger you are, the more growth investments you want (stocks and mutual funds)
safety and income: low risk items that are bound to produce income (large capital US stock)
security: very low risk, lower capital gains (savings accounts, bonds, money market)
Important aspects of managing you investment:
when re-evaluating and managing, continue to ask yourself:
- how much should be invested? based on budget
- how long should investment be held?
- who should be involved in investment decisions and processes?
observe patterns and progress of market
what is “Buy and Hold”?
the concept of making an investment (buying) and holding onto it throughout fluctuation and not getting scared and pulling out.
types of investment:
- savings:
- stocks: ownership of part of company
- bonds: lending money to govt or company with interest
- mutual funds: groups of investments with financial management
- money markets
- real estate
- social security, companion pension
- large holdings: own part of a company through family or job
- owning your own business, anticipated inheritance, precious metals, collectibles
- annuities: money to life insurance for monthly payments
conservative, moderate and aggressive models of investment
conservative: large percentage in bonds
moderate: equal holding in cash, stocks and bonds
aggressive: most in stock and cash, little in bonds
dollar cost averaging
strategy where you put the same amount of money into an investment (stock, bond, mutual fund) each month regardless of fluctuation
- proven to be a beneficial technique in building wealth
dividend reinvestment plan (DRIP’s)
direct investment plan
employee stock ownership plan
dividend investment: taking the dividends of an investment and reinvesting them automatically (no broker)
direct investment: investing directly through company without stockbroker
employee stock ownership plan: benefit of working for a company with stock options at lower rates
what are some important aspects to consider when starting to invest?
- working fulltime
- take advantage of employer’s stock options
- invest in retirement plan through company
What are some tips in deciding when to sell your stock?
- leave it in when its growing, decide on a small percentage to take out when its doing well to invest elsewhere and diversify
- make a decision to take out half of the investment when its doubled, keep other half in
- know your gut and your risk tolerance
advice for beginners investing:
- know your risk level
- pick one or 2 companies and investigate them
- history, progress, market, company’s goals, etc.
- hope
- stay the course
- invest
- diversify
- accumulate and then sell
investment gender gap:
women are less likely to invest and make off investments
- start later in life
- less likely to take risk
two kinds of investment risk
- risk of losing money by being too aggressive
2. risk of losing buying power by being too conservative
small- capitalization stock:
represent companies that are less well established but in many cases faster-growing than mid-cap stocks
What is the most volatile and best estimate of the current economy
stock market
