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SFL 260 > Exam 4 - Investing and Such > Flashcards

Exam 4 - Investing and Such Flashcards

1
Q

Investing vs. Speculating

A 
Investing:
-long-term
-stewardship, ownership
-slow, disciplined
Speculating:
-short-term, greater risk
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2
Q

First Presidency - Investing

A

-in response to fraud, unwise investments
-COUNSEL
=live within budget
=avoid consumer debt
=save against time of need
=invest wisely w/ good institutions
-INVESTMENT CONCERN
=relationships of trust used to promote bad stuff
-COUNSEL
=before investing, seek advice

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3
Q

Eight Principles of Successful Investing

A
  1. know yourself, goals, family (budget, risk..)
  2. understand risk (inflation, market, liquidity..)
  3. invest low-cost, tax-efficiently (watch out for transaction costs)
  4. invest for long-run (don’t time market)
  5. stay diversified (variety!)
  6. monitor portfolio (look periodically at returns)
  7. invest only w/ good people, institutions
  8. develop good investment plan, follow closely
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4
Q

Three Asset Classes

A
  1. cash and cash equivalents
  2. fixed-income investments (bonds)
  3. equities (stocks)
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5
Q

Cash and Cash Equivalents

A 
Ex: 
-checking accounts, CD, treasury bills...
Adv: 
-liquidity (turn to cash quickly)
-stable principal (insured by FDIC)
-low risk
-good for emergency fund
Dis:
-low rate of return (doesn't keep up with inflation!)
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6
Q

Fixed-Income

A 
Ex:
-treasury bonds, corp. bonds, bond mutual funds..
Adv:
-greater rate of return than cash
-generally stable 
Dis:
-less liquidity than cash
-less rate of return than stocks
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7
Q

Stock Equities

A 
Ex:
-stocks 
=Large cap ($10+ billion)
=Mid cap ($2-10 billion)
=Small cap (s, diversification)
=pools money of 1000s of people together
=fund managers invest money into one or more asset classes (money market, bonds, stocks/equities)
Adv:
-excellent return long-term (8-12%!)
Dis:
-volatile 
-less stability 
-more risky
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8
Q

The Bottom Line of Investing

A
  • create livable budget + 10% GI to long-term savings
  • invest in no-load, low fee, tax-advantaged mutual fund that represents a diversified set of stocks and bonds
  • DON’T TRY TO TIME THE MARKET
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9
Q

What are stocks?

A
  • real ownership of part of business
  • all stocks = total ownership of co.
  • stock values vary dramatically (three days in 2008, the whole market dropped by 22%!)
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10
Q

Three Major Stock Exchanges

A
  • New York Stock Exchange (3,200+ co’s, majority are large, Dow Jones, S&P more reliable b/c more co’s)
  • NASDAQ (OTC market, 2,800 smaller co’s)
  • NYSE AMEX (stocks of small-med co’s)
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11
Q

What are dividends?

A

-distribution of portion of business to investors
=usually paid 1/4
=usually paid by large, est. co’s
=reduces risk to holding the stock

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12
Q

Six principles for successfully investing in stocks

A
  1. take on right amount of risk
  2. diversify!!
  3. don’t try to time market: get in, stay in
  4. invest in passively-managed stock index funds
  5. keep expenses low
  6. minimize taxes
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13
Q

Take on right amount of risk

A

two basic risks:
-co. risk
=manage by investing in mutual funds or index funds
-overall market risk
=cannot manage…
basic advice
-if need money soon (<5 yrs) do not invest heavily in stock market
-stable, well-paying job helps you to take greater risks

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14
Q

Diversify!!!!

A 
portfolio should have broad range:
-large cap stocks
-small cap
-international
mutual funds and index funds!!
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15
Q

Don’t try to time the market!!!

A

avg. investor in stock market earns 5% less than overall stock
-WHY?? = trying to time the market!, transaction costs
most gains in stock market are on 10-20 big UP days

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16
Q

Invest in passively-managed stock index funds

A
  • eliminates co-specific risks
  • secures return that matches overall market
  • reduces costs (0.1%/yr!; actively = 1-3%/yr…)
  • probability of same actively managed fund beating market: 63%, 85%, 95%
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17
Q

Keep expenses low

A 
=costs:
-sales charge
-mgmt fees
-distribution expenses
-custodial/legal/admin
-brokerage commissions
=avoid by investing in no-load, passive index funds
=avoid day-trading like the plague!!!
=avoid actively managed funds
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18
Q

Minimize taxes

A

-make major stock investments to tax-adv retirement accounts
=(401k, traditional IRA defer income taxes on your investments and returns)
=Roth IRA makes all returns tax free when withdrawn after 59.5 (do pay income tax on money going in)
-make charitable contributions w/ appreciated stock
=pay tithing this way and you can deduct market value of stock on income tax and not pay income tax on the gain!

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19
Q

Three types of stock orders

A

-market order
=order to buy or sell shares at current market value price
=assumes you know current price of stock
-limit order
=specify price at which you want to buy sell “x” # of shares
=risk: might select price that is too high/low and order will expire
-stop-loss order
=set limit in an attempt to stop your loss
=sell when price drops to certain level
=can set up multiple for gain and/or loss

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20
Q

Stock Split

A
  • co. lowers price of high-priced stock by splitting shares
  • almost always good event
  • reverse stock split exact opposite
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21
Q

Two kinds of Bonds

A

Coupon
-bond issuer sells bond for set amount to bond purchaser until a maturity date
-issuer makes regular interest payment to purchaser until maturity date
-issuer repays face value on maturity date
Zero-coupon
-issuer sells bond for a set amount (<face value)
-issuer does NOT make reg interest payment
-issuer repays face value on maturity date

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22
Q

Things to look at when considering bond purchases

A
  • interest the bond pays (coupon rate)
  • # times interest is paid
  • end of bond term (maturity date)
  • amount paid back at end of term
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23
Q

How value of bonds is affected by IR

A
  • IR go down, bond prices go up

- IR go up, bond prices go down

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24
Q

Other considerations when buying bonds

A

Obtain
-prospectus (types of bonds a fund invests in)
-shareholder report: breakdown of credit ratings
Look at
-fees the bond manager is charging you
-don’t pay more since the bond manager isn’t really going to do much overall

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25
Q

Catchy saying about bonds!

A

Bonds can’t make you rich…but they can keep you rich

26
Q

Benefits and Risks of Investing in Bonds

A

Benefits
-less volatile, not very correlated with stocks
-hedge against stock market risk
Risks
-default/credit risk
=issuer may have hard times and be unable to pay you interest or principal (junk bonds)
-interest rate risk
=fixed rate (if IR rise unexpectedly, you can’t take adv of them w/ the bond)
-time
=more time = more risk

27
Q

U.S. Treasury Bills/Bonds

A
  • used to finance U.S. debt
  • fixed interest paid semi-annually
  • maturities 2-30 yrs
  • back by “full faith + credit” of U.S.
28
Q

Municipal Bonds

A
  • issued by state and local govt.
  • typically coupon bonds
  • not taxed by fed govt.
  • relatively safe
29
Q

Types of Municipal Bonds

A

General obligation bonds
-safest b/c taxes might be inc. in order to repay bondholders
Revenue Bonds
-used to dev. project that must earn revenue to pay interest and principal
Private Activity Bonds
-non-govt. activities; may have alt min tax for higher inc.

30
Q

Corporate Bonds

A

-Typically issued in $1,000 face value denominations
-fixed IR
-the riskier the co., the greater rate of interest
-“high yield” or “junk” bonds
-if business does well, the stockholders will do well, but bondholders don’t generally share in the wealth
RATINGS
-want above BB or Ba-

31
Q

Do these things in your 20s…

A

-invest 10% of GI each month in tax-advantaged, low fee, diversified, primarily stock-based, mutual funds and/or index funds
=contribute to Roth IRAs or Roth 401k’s as long as your marginal tax rate is lower now than it will be at retirement (<=25%)
=contribute to traditional 401k or Traditional IRAs
=always max employer match

32
Q

Typical Sources of Retirement Income

A

-social security (includes cost of living adjustments)
-pensions
=Defined Benefit (DB):
==paid for life of pensioner
==disappearing (2008: 20% of co’s)
=Defined Contribution (DC)
==co. contributes a % of salary each month, employee manages
==increasing (2008: 31% co’s)
=Combination plan
==co. matches employee contribution into a 401k (~3-6%)
-retirement accounts
=401k, 403b, Traditional IRA
=Roth 401k, Roth IRA
-assets/other
=stocks, bonds, real estate, precious metals

33
Q

When to retire?

A

-full retirement now 66 (soon to 67, benefits inc. until age 70)

34
Q

Life expectancy

A
  1. 7 overall
  2. 2 for men
  3. 0 for women
35
Q

Goal of retirement portfolio diversification

A

-max returns while maintaining appropriate risk
-three components:
=stock mutual funds (relatively high return, modest risk; retirement decades in the future)
=bond mutual funds (modest return, low risk; retirement approaching)
=cash (savings, CDs..) (low/no return - no risk; during retirement)

36
Q

Four Major Tax-Advantaged Retirement Plans

A

Individual
-IRA = INDIVIDUAL retirement account (Traditional & Roth)
Company-sponsored
-401k = subsection 401k of internal revenue taxation code provides co’s w/ option for DC’s (Traditional & Roth)

37
Q

Traditional vs. Roth

A 
Traditional 
-contributions are tax deductible 
=save taxes on this year's tax return
-distributions are taxed as regular income (pay taxes in retirement)
Roth
-contributions are taxed 
=pay taxes on this year's return
-distributions never taxed 
=tax-free income in retirement!
38
Q

Traditional IRA

A
  • account created by individual at financial institution
  • contributions tax deductible
  • earnings grow tax-exempt
  • no matching and no loans available
  • may withdraw principal at any time without penalty (after five years: for first home purchase downpayment up to $10k; higher edu., kids…; unreimbursed med - >7.5% AGI)
  • distributions begin at age 59.5, MUST begin at 70.5
  • taxed as ordinary income
39
Q

Roth IRA

A
  • no matching and no loans are available
  • may withdraw principal at any time without penalty; after 5 years, can withdraw earnings without penalty for (first downpayment up to $10k; higher edu; unreimbursed med expenses greater than 7.5% AGI)
  • unrestricted tax-free distributions may begin at age 59.5
  • no forced distributions requried
40
Q

Traditional 401k

A
  • DC created by employer; tax deductible contributions
  • matching and loans ($50k) are available
  • no withdrawals while still employed w/ company (unless owner disabled)
  • distributions @ age 59.5, MUST @ 70.5
  • taxed as ordinary income
41
Q

Roth 401k

A
  • DC pension plan created by employer; contributions taxed
  • matching and loans ($50k) available
  • no withdrawals while still employed w/ company (unless owner disabled)
  • after leaving co. tax penalty (10%) if withdrawn before 59.5
  • distributions @ age 59.5, MUST @ 70.5
  • no taxes paid when withdrawn
42
Q

Percent couples who divorce who have financial problems

A

90%!

43
Q

Couples should talk about…

A
  • saver vs. spender?
  • attitude toward debt?
  • materialism?
  • net worth?
  • FICO scores?
  • buying affordable ring?
44
Q

Couples - hold all assets in common?

A

YES

- joint checking, savings accounts
exception: pre-nup

45
Q

Three costs a couple should understand

A
  1. true cost
  2. opportunity cost
  3. relationship cost
46
Q

Seven ways to create harmony

A

1) choose to create energy
2) choose to seize quality time
3) Bundle: do two or more things together in harmony
4) focus one thing at a time
5) take care of you and your family: eat, sleep, etc.
6) choose to work flexibly
7) simplify your life

47
Q

Three essential things to teach children about finances

A
  1. deny themselves
  2. work for that they need and want
  3. know that wants are often not satisfied
48
Q

Avoid (letting your children learn this) like the plague

A

Creating a sense of ENTITLEMENT when it comes to material things

49
Q

Three components to counter a culture of entitlement

A

1) giving - gratification of all needs and some wants
2) limiting - seeing that children do not get too much or inappropriate things
3) containing - helping children work through feelings about limiting

50
Q

Hill Family Bank

A
  • children may invest money in and borrow money from the family bank
  • money invested earns 10% interest/month (max @ $100)
  • money borrowed costs 10% interest/month (max @ $100)
51
Q

Hill Missionary 401k

A
  • deposits matched by parents until child graduates HS
  • balance earns 1%/month
  • only used for mission, edu, down payment
  • max balance @ $10k
  • parents keep sufficient real funds in real bank to cover this
52
Q

4 principles to teach children about finances

A

1) 10% to the Lord
2) xx% to long-term savings
3) prioritize needs/wants
4) share financial resources w/ others

53
Q

Get most from food budget

A
  • HALT
  • go with list
  • make a menu
  • shop ads, ad match
  • buy store brands
  • take advantage of loss leaders
  • pay cash from envelope
  • buy in bulk
  • cut back on meat
  • buy lunch fixings
54
Q

Supposed savings from making your own bread

A

$4.83/loaf

$0.67 for making the bread

55
Q

Save money when eating out

A
  • share meal
  • opt for lunch date over dinner date
  • drink water
  • coupons
56
Q

Save on transportation costs

A
  • buy used
  • make car payment ahead of time
  • get smaller car
  • junk car for male teenagers
  • scooter/motorcycle
  • shop around for insurance
  • one car?!
  • service car regularly
  • walk or bike
  • avoid trips (bundle)
57
Q

Reduce monthly household expenses

A
  • get rid of cable
  • get rid of landline
  • be “smart” about cell phones
  • cut own family’s hair
  • lower/raise thermostat
  • turn off electronic devices
  • shut doors
  • dry clothes on line
  • be Amish
58
Q

Save money on household items

A
  • garage sales in nicer neighborhoods
  • online (ksl, Craigslist…)
  • D.I.
  • 30 day wait for major non-essential purchases
59
Q

Get most from vacation dollar

A
  • camp/backpack
  • leverage timeshares
  • airline miles from credit card
  • good hotel deals online
  • stay w/ family members
  • vacation at home (does he understand what a vacation is????)
60
Q

Make most of entertainment budget

A
  • dollar theater
  • no popcorn
  • free/cheap DVDs @ library
  • Amazon prime
  • library books
  • go to park, go for a walk..
61
Q

Save money on taxes

A
  • have kids
  • be generous
  • make all contributions and pay all mortgage interest in alternating years and take standard deduction in other years
  • contribute appreciated stock for tithing
  • contribute to tax-deferred retirement savings

SFL 260 (3 decks)

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