Why You Should Invest in Securities


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An easy to understand guide to investing in securities like stocks, bonds and mutual funds for your financial future. This is material taken from chapter two of my book, "Figuring Out Wall Street".

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  • There are two facts of life we can’t escape: Taxes and inflation reduce the real actual returns you have from savings or investing.If you are getting 2% or less in a savings account, money market fund, or certificate of deposit you are barely keeping even.We take 3% in real income, add 4.7% in inflation for total return of 7.7%, or $7,700 in historical income and/or asset appreciation.Take off 25% taxes of $1,925, and we are keeping 75% of the income, or $5,775. the 7.7% return when we add inflation and real growth together, is about equal to the blended stock and bond return over the last 35 years for the average investor. Except... that last bar on the right is a bit troubling. we still have $3,000 in real economic growth - but now our share of that growth is only $1,075. Meaning that we are only keeping 36% of economic growth, and the government is taking a full 64% of the real growth in the economy through taxes. The remaining $4,700 wasn't growth or income at all, but merely keeping up with inflation, keeping up with that steady and never-ending slide in the value of what a dollar will buy. If we remove the real growth component and look at inflation only, then your asset is now worth $104,700, but the dollar is only worth 95 cents, so in real terms, you still have a $100,000 asset.
  • This is the example of Jane who started saving $1,000 per month and earned an hypothetical 8% rate of return. At age 65, Jane has $3.5 million to retire on. Gary started 10 years later, saving the same $1,000 per month @8% and had half as much at age 65.
  • Why You Should Invest in Securities

    1. 1. Financial Services Industry Training Why Invest in Securities? Chapter Two – Figuring Out Wall Street Your Guide to Savings and Investing Saunders Learning Group, LLC Saunders Learning Group, LLC, Andover, KS
    2. 2. Training from Saunders Learning Group Saunders Learning Group provides a variety of training programs, workshops and seminars targeted to the financial services industry. Programs are available in a wide range of topics, and we are specialists in developing custom programs that are targeted to your needs. Contact the founder, Floyd Saunders at 316-680-6482 or at floyd@floydsaunders.com for more information. Saunders Learning Group, LLC, Andover, KS1
    3. 3. All About Figuring Out Wall Street ... Everything has changed in the financial services industry and it effects your financial well-being. From bank failures, to record unemployment, home foreclosures and panic around the world, Figuring Out Wall Street, is the concise guide to help everyone from first time investors to veterans of banking understand what to do to persevere and restore our faith in our financial systems.The materials in this presentation is taken from Chapter 2 of Figuring Out Wall Street Saunders Learning Group, LLC, Andover, KS 2
    4. 4. First Time Investing The first time you make a decision you invest your hard earned money you may not be sure of where to start. Investing can be confusing and risky With an overview of how to get started investing and understanding the difference between savings and investing will get you going in the right direction. Saunders Learning Group, LLC, Andover, KS 3
    5. 5. Investing vs. SavingsInvesting Savings  Money in a piggy bank does Higher earnings are possible with not earn interest. investment products, but each contain a degree of risk. The right  Safest investments - you know your approach is a balance between rate of return. savings and investing. —Money Market Funds Higher potential investments —Savings accounts and certificates of include… deposit.  Municipal bonds. —U.S. savings bonds.  Corporate bonds. —United States treasury bills.  Preferred stocks, utility stocks or common stocks. Right if you are not willing to take risk and  Mutual funds. enjoy the assurance of federal protection for  Real estate rental property. your money. Bank savings account are insured by the FDIC. Saunders Learning Group, LLC, Andover, KS 4 subtitle date
    6. 6. How Taxes and Inflation Affect YouSimple assumptions:• you have $100,000 to investment.• real growth rate of the economy over the last 35 years is 3% per year (after discounting for inflation).• Taxes take 25% of your earnings.• Take 3% in real income, add 4.7% in inflation for a total return of 7.7%, or $7,700 in historical income and/or asset appreciation.• Take off 25% taxes of $1,925,• Growth actually equals $1,075.. Saunders Learning Group, LLC, Andover, KS 5
    7. 7. How Taxes and Inflation Affect You Saunders Learning Group, LLC, Andover, KS 6
    8. 8. Stocks Bonds or a Mix of Investments Comparing returns from 1926 to 2010  Average return if 100% invested in short-term savings and bonds  Compared to a balanced mix of investments equals about 8% Saunders Learning Group, LLC, Andover, KS 7
    9. 9. Personal Investing Steps 1. Determine where you are financially 2. Set your financial/investment goals 3. Develop a plan 4. Understand investment vehicles 5. Develop an investment strategy 6. Implement your strategy 7. Monitor your investments Saunders Learning Group, LLC, Andover, KS
    10. 10. Step 1: Determine Where You Are FinanciallyNet worth = what’s left after you subtract your liabilities from your assetsAnalyzing Your Cash Flow will: • Indicate your ability to save • Let you size up your standard of living • Indicate if youre living within or beyond your means • Highlight problem areas Saunders Learning Group, LLC, Andover, KS
    11. 11. How do you stack up? Saunders Learning Group, LLC, Andover, KS 10
    12. 12. Performing a Financial Checkup Work to balance your budget. • Do you regularly spend more than you make? Pay off high interest credit card debt first. Obtain adequate insurance protection. Start an emergency fund you can access quickly. • Three to nine months of living expenses. Have access to other sources of cash for emergencies. • A line of credit is a short-term loan approved before the money is needed. • Cash advance on your credit card. Saunders Learning Group, LLC, Andover, KS
    13. 13. Step 2: Setting Investment Goals Financial goals should be specific and measurable. They should be tailored to your financial needs and what you want to accomplish. To develop your goals ask yourself..  What will you use the money for?  How much will you need for your goals?  How will you obtain the money?  How long will it take you to obtain the money?  How much risk are you willing to assume in an investment program?  Considering your economic circumstances, are your investment goals reasonable?  Are you willing to make sacrifices such as reducing current consumption, to insure you meet your investment goals?  What will the consequences be if you don’t reach your investment goals? Saunders Learning Group, LLC, Andover, KS
    14. 14. What are Your Goals? Saunders Learning Group, LLC, Andover, KS 13
    15. 15. Matching goals to investmentsHere are some typical investments suitable for three sample goals Contingency or College funding for College funding for emergency fund: a 16-year-old: A a 2-year-old: money market fund mix of stocks (20- common stock 30% and bonds (70- portfolio 80%) maturing in 2- 6 years Saunders Learning Group, LLC, Andover, KS
    16. 16. Your Time Investment HorizonThe length of time that you have to reach your goal is considered by many advisors as the mostimportant factor in determining which type of investment is best suited to meet that goal. Saunders Learning Group, LLC, Andover, KS
    17. 17. Step 3: A Personal Investment Plan Create your personal investment profile Continue to evaluate your investment Getting Money to program. Start Investing List different Choose at least investments you two different want to investments. evaluate. Reduce possible Evaluate risk investments to a and potential reasonable return for each. number. Saunders Learning Group, LLC, Andover, KS
    18. 18. Your Personal Investment Profile Shaped by: Your age and the stage in your career Your need for liquidity The size of your portfolio Your cash flow needs Your income tax bracket Your required rate of return Your risk tolerance Saunders Learning Group, LLC, Andover, KS
    19. 19. Getting Money to Start Investing  Pay yourself first.  Take advantage of employer- sponsored retirement programs.  Participate in elective savings programs.  Payroll deduction or electronic transfer.  Make extra effort to save one or two months each year.  Take advantage of gifts, inheritances, and windfalls.  Consider a second job Saunders Learning Group, LLC, Andover, KS
    20. 20. Start Early With Compound Interest Saunders Learning Group, LLC, Andover, KS
    21. 21. Five Components of Risk Inflation risk Interest rate Business Market risk - Global - during risk - you failure risk - prices investment periods of may invest in affects stocks fluctuate risk - changes high inflation a bond at a and because of in currency your lower rate, corporate behaviors of affect the investment and then bonds. investors. return on return may interest rates your not keep go up. investment. pace with the inflation rate. Saunders Learning Group, LLC, Andover, KS
    22. 22. Step 4: Understand Investment Vehicle Cash Bonds Stocks Mutual Funds Rental Property Saunders Learning Group, LLC, Andover, KS
    23. 23. Cash is not an Investment  Money in a piggy bank does not earn interest.  Safest investments - you know your rate of return.  Savings accounts and certificates of deposit.  U.S. savings bonds.  United States treasury bills.  Suitable for short-term needs and emergency funds  Higher potential income investments include…  Municipal bonds.  Corporate bonds.  Preferred stocks, utility stocks or common stocks.  Mutual funds.  Real estate rental property. Saunders Learning Group, LLC, Andover, KS 22
    24. 24. Investing in Stock Stock or equity financing.  Equity capital is provided by stockholders, who buy shares of a company’s stock.  Stockholders are owners and share in the success of the company.  A corporation is not required to repay the money obtained from the sale of stock.  They are under no legal obligation to pay dividends to stockholders. They may instead retain all or part of earnings. Saunders Learning Group, LLC, Andover, KS
    25. 25. Classification of Stock Investments Blue chip stock • Generally attracts conservative investors. • Strongest and most respected companies, such as General Electric. Income stock • Pays higher than average dividends from a steady source of income, such as a utility stock. Growth stocks • Earn profits above the average profits of all firms in the economy. • Less than 30% of profits are paid out as dividends, with rest reinvested in the company. Stock value, and price, should go up. Cyclical stock • Follows the business cycle of advances and declines in the economy. • ex. automobiles, heavy manufacturing, paper, and steel. Defensive stock • Remains stable during declines in the economy, and have a history of stable earnings. Johnson and Johnson and utility stocks are examples. Saunders Learning Group, LLC, Andover, KS
    26. 26. Classification of Stock Investments (continued) Large cap stocks Mid cap stocks Small cap Penny stocks • Issued by a • Issued by a stocks. • New or erratic corporation that corporation that • Company has companies whose has a large amount has capitalization capitalization of stock typically sells of stock between $1 billion $500 million or for less than $1 per outstanding and a and $5 billion. less. share. Speculative, large amount of expect to lose capitalization (5 money as often as billion +). you make money. Saunders Learning Group, LLC, Andover, KS
    27. 27. Investing in Bonds Corporate and government bonds. A bond is a loan to a corporation, the federal government, or a municipality. Bondholders receive periodic interest payments, and the principal they lent is repaid at maturity (1-30 years). Bondholders can keep the bond until maturity or sell it to another investor before maturity. Saunders Learning Group, LLC, Andover, KS
    28. 28. Bonds Types U.S. Corporate government bonds securities Mortgage- Municipal backed bonds securities Saunders Learning Group, LLC, Andover, KS
    29. 29. Bond Rating GuideSaunders Learning Group, LLC, Andover, KS
    30. 30. Investing Mutual Funds Investors’ money is pooled and invested by a professional fund manager. You buy shares in the fund. Provides diversification to reduce risk . Funds range from conservative to extremely speculative. Match your needs with a fund’s objective. 13-13 Saunders Learning Group, LLC, Andover, KS
    31. 31. Investing in Real Estate The goal of a real estate investment is to buy a property and sell it at a profit. In addition to income from rentals, investors can deduct deprecation and other business expenses Location, location, location is important. Saunders Learning Group, LLC, Andover, KS
    32. 32. Speculative investments A speculative investment is a high-risk investment made in the hope of earning a relatively large profit in a short time. Confine your speculative investing to a small percent of your overall investments will help reduce risks. Typical speculative investments include: • Antiques and collectibles. • Call and put options. • Derivatives. • Commodities. • Coins and stamps. • Precious metals and gemstones. Saunders Learning Group, LLC, Andover, KS
    33. 33. Step 5: Develop an Investment StrategyYour age is one of the most important aspects of creating an investment strategy.The longer the investment horizon the more time you have to balance positive and negative returns. Saunders Learning Group, LLC, Andover, KS
    34. 34. Portfolio Management and Asset Allocation How do you choose the right investment for you? You balance your desired returns vs. risk taken to get that return. Over the past 50 years average returns for stocks are 11% a year, T-bills 5% & bonds 4%. You should compare your returns to the averages. Asset allocation is the process of spreading your assets among several different types of investments, usually by percentage, to lessen risk. What asset classes do you want in your portfolio, and in what combination? Determine what percent you want in stock, bonds, CDs, and mutual funds based on your time frame and tolerance for risk.  The asset classes should be as many as possible based on your investment profile. Saunders Learning Group, LLC, Andover, KS
    35. 35. Step 6: Implement Your Strategy• Implementing your strategy involves three issues : • How to Buy - Advisors • What to buy - Fundamentals • When to Buy – Technical Analysis Saunders Learning Group, LLC, Andover, KS
    36. 36. Your Five Options When BuyingInvestments Through an investment advisor or financial planner Through broker (either full-service or discount) Through a professional money manager Through mutual fund Through an insurance company Saunders Learning Group, LLC, Andover, KS
    37. 37. When to BuyYou can use dollar cost averaging strategy to decide when to buyLet’s say you have $ 2,000 to invest. Using dollar cost averaging, you donot invest all your money at once; instead, you invest $500 per month forfour months. Saunders Learning Group, LLC, Andover, KS
    38. 38. Advantage of Dollar Cost Averaging Saunders Learning Group, LLC, Andover, KS
    39. 39. Step 7: Monitor Your Progress• Here are the general questions to ask: • Have your financial goals stayed the same? • Are you meeting your budget? • Are you earning the investment rates of return you anticipated? • To what degree is inflation affecting your finances? • Has your tax situation changed? Once you implemented your investment strategy, you need to monitor your investment ensure that they remain appropriate for your financial goals. While you should generally try to avoid frequent changes to your investments, you should at least annually assess your investment’s performance to see that it meets your expectations. Saunders Learning Group, LLC, Andover, KS
    40. 40. Questions Saunders Learning Group, LLC, Andover, KS
    41. 41. Summary of Book Figuring Out Wall Street Consumer’s Guide To Financial Markets By Floyd Saunders Publisher: Saunders Learning Group ISBN: 978-0-9824019-0-3 available from Amazon, B&N, and http://www.figuringout wallstreet.com or www.floydsaunders.com Author Contact email: floyd@floydsaunders.com Blog: www/money/floydsaunders.com Twitter @floydsaunders Facebook: Figuring Out Wall Street Sideshare: http://www.slideshare.net/FloydSaunders Book summary: From bank failures to home foreclosures and panic around the world, Figuring Out Wall Street, is the concise guide to help everyone understand how this latest crisis happened, who was responsible and what to do now to restore our financial systems. Written in an easy to understand manner, even the most complex financial concepts are easy to digest. This book provides help to monitor investments with a review of investment products, financial regulators and economic indicators. Learn how the stock market exchanges work and the world of investment banking, hedge funds, venture capital and private equity. Every chapter includes action plans for investing. Saunders Learning Group, LLC, Andover, KS
    42. 42. About the Author  Floyd Saunders has worked on Wall Street with both Bank of America and JPMorgan, where is was a vice president in global financial systems. He has worked across the industry in retail, commercial, and investment banking.  He has taught courses in Money and Banking and extensively for the American Institute of Banking and various colleges.  As a consultant, he developed and taught a wide range of banking and investing courses.  He authored three programs for the American Bankers Association: Banking on Mutual Funds and Annuities, Introduction to Securities Markets and Investing in Securities. Saunders Learning Group, LLC, Andover, KS date