Investing for your future by ravinder tulsiani
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Many financial advisers will more argue that if you look at the last twenty years Canadian stocks have seen an average growing of 6.1% per year vs Canadian real estate values
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Investing for your future by ravinder tulsiani
- 1. Investing For Your Future: A Resource For Financial Security In Later Life By Ravinder Tulsiani
- 2. 2 Investing: A Topic of Great Interest Baby boomers approaching retirement More “do it yourself” employer pensions About $7 trillion in mutual funds Almost half of U.S. households own stock directly or through funds, 401(k)s Increased media attention to investing Empirical research: investing is a topic of interest to learners
- 3. 3 History of Investing For Your Future Project Committee wanted national implementation regardless of investment knowledge and comfort level of FCS educators, subject matter responsibilities, agent & specialist vacancies, etc. Spring 2000- Print version of IFYF home study course available & online course (www.investing.rutgers.edu) introduced Summer 2000- Monthly e-mail message Fall 2000- IFYF curriculum available Fall 2001- IFYF Study Guide & Web site enhancements & research study data analysis
- 4. 4 IFYF Project Development Funded by three grants from – Rutgers Cooperative Extension – NE Regional Center For Rural Development – The Foundation For Financial Planning Developed by a team from 6 universities and two government agencies “Deliverable” for Extension Financial Security in Later Life initiative Over 1,200 registered online users
- 5. 5 Target Audience For Program Beginning investors – “20 and 30-somethings” – Older persons transitioning from savings Investors with small dollar amounts to invest at a time
- 6. 6 Home Study Course Components 11 units + glossary Starts with “the basics” Action Steps at the end of each units “Ask the Experts” on online version Optional monthly e-mail message available to registered online users Two evaluation forms: 2 months and 6 months
- 7. 7 The Second Edition of IFYF Four additional external reviewers Completely updated for 2001 tax law and other changes Professionally printed and distributed through NRAES Two-color print and glossy cover Perfect bound Very reasonable cost (much cheaper than duplicating and binding masters)
- 8. 8 IFYF Study Guide 110 pages Master copies available from Dr. O’Neill: – Send $5 for a print copy – Send a zip disk to get files (no charge) Written by Dr. Ruth Lytton, Va Tech Components: – Review Questions – Applications (e.g., problems and Web sites)
- 9. 9 Web Site Enhancements Ask the Experts Calculating What You Need to Save – Retirement – College – Other financial goals Online Extension publications (links)
- 10. 10 Class Series Components Printed copy of speaker’s notes Marketing materials Initial and follow-up evaluation forms PowerPoint slide files on a CD-ROM Completely updated in December 2001 Class series content is exactly the same as the home study course
- 11. 11 Class Session Titles Basic Concepts and Investing Pre-requisites Equity Investing Fixed-Income Investing Investing in Mutual Funds Investing Tax-deferred and With Small Dollar Amounts Getting Help and Avoiding Investment Fraud
- 12. Session 1 Basic Concepts and Investing Prerequisites
- 13. 13 Basic Building Blocks of Successful Financial Management
- 14. 14 Key Investing Concepts Difference between saving and investing Risk tolerance Risk versus rate of return Impact of time on money accumulation Asset allocation Personal factors that affect investing decisions
- 15. 15 Breaking Habits = $$ to Invest 6 Easy Steps 1. Identify habit, frequency, and cost 2. Make decision to change 3. Act immediately 4. Share your plan 5. Stick with your plan to change 6. Celebrate your success
- 17. 17 Common Stock Share of ownership in a company Elect directors Vote on other matters Two ways to earn money – value of stock increases – stock pays dividends
- 18. 18 Real Estate Options Home Rental property Crop/mineral land Land for development Real Estate Investment Trust (REIT) Real estate limited partnership
- 19. 19 To Make Money With Collectibles Keep items in top condition Focus on true value of property Document evidence of value Insure property You may have to wait for right buyer No regular income provided
- 21. 21 Two Types of Investments: Ownership – Investors own all or part of an asset – Examples include: • stock • real estate • growth mutual funds • collectibles Loanership – Investors loan money to companies, government, or financial institutions – Examples include: • bonds • money market funds • CDs
- 22. 22 Bond Ratings Ratings predict ability of a bond issuer to repay debt Investment grade: top 4 grades – Baa to Aaa from Moody’s – BBB to AAA from Standard & Poor’s Lower ratings: substandard grade (a.k.a., “junk”, “high yield”)
- 23. 23 Five Tips for Fixed-Income Investors: 1. Know the risks 2. Beware of guarantees 3. Ladder your portfolio 4. Use zero-coupon bonds to hedge stock investments 5. Match investments with goals
- 24. Session 4 Investing in Mutual Funds
- 25. 25 What Is Net Asset Value (NAV)? The NAV is the price your fund pays you per share when you sell. Value of fund Number of shares = NAV Example: $52,500,000 3,500,000 = $15 per share
- 26. 26 Match Your Goal to the Right Fund Categories with a growth objective Growth Aggressive growth Small cap Specialty (Sector) International Global Index
- 27. 27 Seven Steps to Finding the Right Fund 1) Identify type of fund that matches goal 2) Do more reading 3) Research specific funds 4) Determine selection criteria 5) Get and read the prospectus 6) Make your purchase 7) Establish a schedule to buy more
- 28. Session 5 Investing Tax-Deferred and With Small Dollar Amounts
- 29. 29 Class Topics Include: Tax-Deferred Investing – Tax-free versus tax- deferred – Employer retirement savings plans – IRAs – Plans for the self- employed Investing With Small Dollar Amounts – Employer plans – IRAs – Fixed-income assets – Equity assets – Mutual Funds – Other investments
- 30. 30 27,600 31,300 48,300 58,600 75,800 98,800 112,200 157,900 160,300 244,700 $0 $50,000 $100,000 $150,000 $200,000 $250,000 10yrs 15yrs 20yrs 25yrs 30yrs Taxable Returns (at 28%) German/Forgue, PERSONAL FINANCE, Fifth Edition, Tax-Sheltered Returns are Greater than Taxable Returns (Illustration: 8% Annual Return and $2000 Annual Contribution)
- 31. 31 Here’s What $20 a Week Adds Up To: 5% Return: – 20 Years: $36,100 – 30 Years: $72,600 – 40 Years: $131,900 10% Return: – 20 Years: $65,500 – 30 Years: $188,200 – 40 Years: $506,300
- 32. Session 6 Getting Help and Avoiding Investment Fraud
- 33. 33 What This Lesson Covers Investment resources (e.g., investment clubs, Web sites, publications) Selecting financial professionals Investment fraud and how to avoid it
- 34. 34 Questions for Financial Planners What services do you offer? What can I expect from you? What will it cost and how are you paid? Who will work with me? May I see a sample financial plan? Are you registered with state or federal regulators?
- 35. 35 Types of Fraud: “Pump and Dump” Scams Promoter urges you to “buy now or lose out” Price rises sharply Fraudsters sell at peak Price drops when the hype stops Investors lose money 0 5 10 15 20 25 30 Day 1 Day 2 Day 3 Day 4 Day 5 Stock Price
- 36. 36 Why Pyramid Schemes Collapse Levels Number of Participants 1 6 2 36 3 216 4 1,296 5 7,776 6 46,656 7 279,936 8 1,679,616 9 10,077,696 10 60,466,176 11 362,797,056 - more than U.S. Population 12 2,176,782,336 13 13,060,694,016 - more than double World Population
- 37. 37 IFYF Class Series Evaluation Post-class evaluation – Reactions to class – Usefulness of information – Demographic info about participants Follow-up evaluation – 15 specific financial behaviors- planned & actual change as a result of IFYF – Increased savings amount
- 38. 38 IFYF Class Marketing Materials Promotional flyers Radio script News release Certificate of completion Guidelines for using financial professionals as IFYF volunteers Speaker agreement form Logos
- 39. 39 IFYF Class Series is Meant to be Flexible Use individual sessions (e.g., mutual funds) as stand-alone classes Use parts of class sessions (e.g., investment fraud in Session 6) as short presentations Mix and match or delete slides, as desired
- 40. 40 Supplemental Materials Could Include: Net worth worksheet Applicable Web site information (e.g., article about decimalization of stock share prices) Applicable clipping from newspapers (e.g., The WSJ)
- 41. 41 Additional Supplements Investment books (display) Pages from Morningstar & Value Line Newspaper financial pages Clippings about current investment news (e.g., change in savings bond rates) Guest speakers Investment quizzes (financial firms) Hands-on activities (e.g., reading prospectus)
- 42. 42 IFYF Research Results 195 respondents – 127 online (nationwide) of 752 usable surveys sent – 68 print version (3 states: NJ, FL, AZ) Data collected June-July 2001 Purposes of study – identify characteristics/behaviors of users – feedback on course content and format – determine knowledge gained and behavior changed
- 43. 43 The Sample Predominantly white & middle aged – 17.7% age 35 to 44 – 29.2% age 45 to 54 – 21.3% age 55 to 64 53.7% had a college degree 69.1% were married; 31.4% with dependents 51.3% had “some” prior investing experience; 28.3% had “a little”
- 44. 44 Course Ratings 45.4% “very valuable” 44.3% “valuable” Five highest ranked units (in order) – Unit 8 (Investing With Small Dollar Amounts) – Unit 6 (Investing in Mutual Funds) – Unit 2 (Investing Basics) – Unit 4 (Equity Investing) – Unit 5 (Fixed-Income Investing)
- 45. 45 Other Findings 70.2% of respondents rated course as “basic”; 27.5% as “somewhat advanced” 128 (70%) reported investing money since completing course Median amount: $1,800 (mode: $1,000) Significant variable relationships – content level rating and course rating – being a saver and demographic variables – amount of savings and demographic variables – knowledge gained and planned action
- 46. 46 Behavioral Changes Questions about 15 behavioral changes Behaviors from IFYF Action Steps Top 3 actions taken: – using new investor resources (63.4%) – learning more about investment fraud (56.1%) – investigating specific investments (48.9%) Top 3 actions planned: – determining amount needed to achieve goals (37.0%) – setting specific (date/cost) financial goals (34.5%) – increasing amount invested monthly (30.9%)
- 47. 47 Implications IFYF is positively impacting participants Diversity of audience outreach can be improved The level of course content is on target Emphasizing action steps results in action Need to help learners with planned behavior changes (e.g., goals)
Editor's Notes
- To begin, let’s look at the basic building blocks of sound financial management… These are items or tasks that need to be accomplished, or at least considered, BEFORE you begin an investment program. Visualize the financial management building blocks forming a pyramid. The wealth protection blocks on the bottom of the pyramid form a strong, secure foundation and are very important in providing stability for the wealth accumulation and wealth distribution blocks on top. Each building block relies upon the strength and stability of the personal finance strategies used in the blocks below it. Decisions made about one building block may have a definite impact on options available in adjacent blocks (e.g. an inadequate cash management plan may delay having funds available to take advantage of investment opportunities, lack of an emergency cash reserve may force use of credit to pay for unexpected expenses, overuse of credit may limit the possibility of qualifying for a mortgage to purchase a home). As you move up the pyramid to the apex, your financial life becomes more complex. This complexity, along with changes in your life, may require that you re-evaluate and change strategies used at earlier stages.
- Now that you understand the basics of financial management, it’s time to explore several basic principles of successful investing. The difference between savings and investing. These two terms are often used interchangeably; however, they really have two very different purposes. Personal risk tolerance. This refers to how much money you feel comfortable losing. Risk versus rate of return. There is an indirect relationship between these two investing concepts. You’ll learn how it works. Impact of time on money accumulation. The amount of time you have available for your money to grow before it is needed has a great influence on the amount you need to invest and appropriate investment vehicles. Asset allocation. The ideal mix of stocks, bonds and cash in your investment portfolio usually changes at different periods in the life cycle and has a lot to do with the overall success of an investment program. Personal factors that affect investing decisions. Your investment goals, your tolerance for risk, and your tax situation are just a few of the factors that will influence your investment decisions. Lets take a few minutes to discuss each of these concepts in more depth.
- As noted earlier, some of the items we buy are needs - items that are necessary for survival. Other purchases are wants - all the things we think we need, but could do without. Buying items to satisfy our wants can become a habit. Before we know it, we are spending lots of money on these items. Find money to improve your financial situation by identifying some of your money habits, then break those habits or at least reduce the number of times you enjoy the habit each day, week, or month. For example, if your family drinks iced tea instead of a 2-liter soda for the evening meal, you can probably save at least $5 (estimated difference between tea and soda) in a week or $260 ($5x52=$260) a year. By drinking tap water instead of other beverages, you can save $7 (estimated cost between water and tea/soda) a week or $364 ($7x52=$364) a year. Let’s look at those who feed the soda machines at work. By bringing soda from home ($.30 each) instead of feeding the machine ($.75 each), a person who drinks two sodas per day could save $234 over the course of a year ($.75-$.30 = $.45x2/day = $.90x5 days/week = $4.50x52 weeks = $234). Changing or adjusting a few habits can result in big savings for you and your family. By following six easy steps, you can gain better control of your financial resources and increase the money available for investing. Put this six-step plan to work for you and your family.
- Investors buy shares of stock in a company. Those who own stock elect directors, who hire the people who manage the company on a day to day basis (e.g., company President or CEO). Owners may also vote on other issues that come before the directors, generally either in person at a stockholders meeting or through a proxy vote (usually done via U.S. mail and, increasingly, online). When a stock is worth more when you sell it than when you bought it, you have a capital gain. If it is worth less, you have a capital loss. Boards of directors may reinvest money earned in the company, hopefully increasing its value, or pay dividends to stockholders quarterly or annually.
- Besides single family homes, other real estate investment options include: * rental houses/buildings * raw land for agricultural crops, mineral rights, future housing or commercial development * REITs - Real estate investment trusts (pronounced: REETs) * Real estate limited partnerships REITs and real estate limited partnerships provide indirect (passive) ownership of real estate, as opposed to direct (active) ownership of land or property. REITs trade like stock on major exchanges and are diversified, professionally managed portfolios of real estate investments (e.g., office buildings, shopping centers, and apartment complexes). Real estate limited partnerships are available through brokers. A general partner oversees the partnership’s real estate assets (e.g., commercial buildings) and investors share proportionately in partnership gains or losses (to the extent of the amount of their principal investment).
- Generally you cannot use or handle collectibles regularly and may need protective storage. On-going maintenance may be necessary (e.g., antique cars) Be sure you buy a collectible for its true value, not for the pleasure you get from an item Keep an appraisal of the value Purchase insurance as needed (e.g., floaters on homeowner’s insurance personal property coverage) Storage costs, appraisal costs, and other costs reduce the gain you make When you decide to sell, you may have to wait a while and/or pay someone else to find a buyer. There is no regular or periodic income from collectibles. You need to sell them to realize a profit.
- Ownership Assets: Investors own all or part of an asset (e.g., real estate, collectibles, corporation) Value of principal and investment earnings fluctuate with market conditions Examples include: stock real estate (home, rental property, REITs) growth mutual funds commodities (e.g., pork bellies) and collectibles (e.g., fine art) Loanership Assets: Investors loan money to a government entity (e.g., state), corporation, or financial institution (e.g., bank , insurance company, credit union). No equity (ownership) interest; investors simply receive interest income for specified period with no potential for growth (profit from company earnings). Examples include: bonds money market mutual funds (fund containing short-term debts) certificates of deposit (CDs) Fixed-income investing is the topic of this class session. Class objective: To increase familiarity with characteristics of fixed-income assets.
- Bond ratings tell the capacity of a bond issuer to repay its debt as perceived by an independent rating firm that studies its creditworthiness. The two most widely-quoted bond rating firms are Moody’s and Standard & Poor’s. “Investment Grade” bonds are considered the safest (highest quality) and consist of bonds earning the top four grades from each bond rating firm: Baa, A, Aa, and Aaa from Moody’s (in ascending order) BBB, A, AA, and AAA from Standard & Poor’s Lower ratings are called “substandard grade” and indicate less financially sound bond issuers: Ba, B, Caa, Ca, C from Moody’s (in descending order) BB, B, CCC, CC, C, DDD, DD, and D from Standard & Poor’s “Substandard Grade” bonds or bond funds can often be recognized by the words “junk” or “high yield” in their title.
- Five Tips For Fixed-Income Investors Know the Risks: All investments- even fixed-income securities- have risks. Example: junk bonds- to earn a high return, an investor generally needs to consider bonds from a less creditworthy issuer (less than BBB grade). Beware of Guarantees: Don’t believe promises that you “can never lose principal.” Even with a portfolio of ultra-safe Treasury securities, an investor could lose principal prior to maturity via interest rate risk. Ladder Your Portfolio: Stagger the purchase of bonds, Treasury securities, and CDs. This spreads out the tax owed on investment earnings and exposes only a portion of your portfolio to interest rate changes at any one time. Use Zero-Coupon Bonds to Hedge Stock Investments: Buy a zero-coupon bond to guarantee the return of principal (i.e., a bond that will grow to the amount of your original investment) and use the balance of principal to invest in ownership assets (e.g., stock). Even if you lose your entire stock investment, you’ll get your principal back (less the effects of inflation). Match Investments With Goals: Always invest with a goal in mind. Example: a 2-year Treasury note for an upcoming car purchase or an 8-year zero-coupon bond for a child’s college education.
- Net Asset Value Defined: The net asset value or NAV of a mutual fund is the price your fund pays you per share when you sell shares. When investors purchase a mutual fund, they own a piece of an investment portfolio. They share in the gains, losses, and expenses in proportion to the amount they have invested in the fund. Calculating NAV: At the close of every trading day, a mutual fund company adds up the value of all the securities in its portfolio and subtracts its expenses (e.g., management fees, administrative expenses, advertising costs). The balance is divided by the number of shares owned by shareholders to arrive at the dollar value of one share of the mutual fund. For example, a fund is valued at $52,500,000 (total assets minus expenses). There are 3,500,000 outstanding shares owned by investors. $52,500,000 divided by 3,500,000 shares equals an NAV of $15 per share.
- A fund’s objective should match an investor’s objective. Funds with a growth objective are appropriate for long-term goals. Suppose your goal is retirement in 25 years. There are several types of growth funds to choose from: Growth funds invest for the long term. Share prices can fluctuate considerably. They buy stocks of profitable, well-established companies that expect above-average earnings growth. Aggressive growth funds use riskier investment techniques (e.g., options, short selling) and/or invest in stocks of smaller, less-proven companies. They can be very volatile, but the tradeoff is a high potential for capital appreciation. Small capitalization funds invest in stocks of small companies with assets under $1 billion and are riskier than larger capitalization stock funds (over $5 billion in assets). (Capitalization means number of shares outstanding multiplied by the price per share.) Specialty or Sector funds limit investments to a specific industry (e.g., health care, biotechnology, financial services). International funds invest in stocks of countries outside the United States. Global funds invest in securities worldwide including the U.S. Index funds invest in stocks of one of the major broadly based market indexes such as the S&P 500 (large companies), Russell 2000 (small companies) or Europe, Australia, Far East (EAFE) (international). Refer to chart in home study course (page 6-6) and personalize with class members’ goals. (Discussion)
- Now that you are familiar with the various types of mutual funds, here are some specific guidelines for picking them. 1) Identify type of fund that matches goal. What are you trying to accomplish? What type of fund will get you there? 2) Do more reading. Become more informed about mutual funds. Reading reinforces knowledge. 3) Research specific funds. Learn how to analyze funds and compare to others. 4) Determine selection criteria. You’ll be able to narrow down the mutual fund field to a manageable number. 5) Get and read the prospectus. The legal selling document spells out a fund’s particulars. 6) Make your purchase. After doing your homework, it’s time to take the plunge. 7) Establish a schedule to buy more. Determine that you’ll begin a regular investing program. Having clear objectives simplifies the process. You’ll find a lot of funds can be eliminated immediately. Now, let’s go over each step in more detail.
- There are two topics that will be discussed in this session: Tax-Deferred Investing The difference between tax-free (e.g., municipal bonds) and tax-deferred (e.g., 401(k)s and IRAs) investments Types and characteristics of employer retirement plans Individual retirement accounts (IRAs) Plans for the self-employed (e.g., SEPs and Keoghs) Investing With Small Dollar Amounts Contrary to popular belief, it is possible to invest “on a shoestring” with amounts of $1,000 or less. Some investments can be purchased for as little as $25 or $50. This portion of the class will discuss specific investment products for the small investor: employer plans IRAs fixed-income assets equity assets mutual funds other investments
- Comparison of a Tax-Deferred Retirement Investment with a Nontax-Deferred Investment Graph compares investment of $2,000 per year of after- tax income invested at 8 % to an investment where taxes are paid on earnings. The assumed tax rate is 28%. An advantage of tax-deferred earnings is that they grow faster - instead of paying tax on the interest earned, it is deferred and continues to compound until an investment is sold. Taxes are paid at the time of the sale. Over time, the gap between the value of a taxable account and a tax-deferred account, earning the same rate of interest, increases sharply.
- Here’s What $20 a week Adds Up To: These figures on the slide are provided in the 1998 Retirement Confidence Survey report prepared by the Employee Benefit Research Institute (EBRI). At a 5% rate of return, an investor would have $36,100 more than they would otherwise have in 20 years, $72,600 more in 30 years, and $131,900 in 40 years. At a 10% rate of return, the accumulations are even more dramatic: $65,500 in 20 years, $188,200 in 30 years, and over a half million dollars ($506,300) in 40 years. The longer that money is invested, and the higher its rate of return, the more that an investor will accumulate. The following quote from the EBRI report says it all: “The message is clear that seemingly small amounts of money saved on a regular basis over long periods of time can accumulate into a nest egg that would make a difference at retirement.”
- Objective of this lesson: To highlight three ways individual investors can learn more about investing: 1. Investment clubs 2. Using the computer to go online and get information about investing from the Internet 3. General reading material as well as Internet sites
- What services do you offer? For example, will the planner make recommendations and let you fill out the paperwork and make the purchases? Or does the planner complete the entire transaction and only ask for your signature? What can I expect from you? This is related to the question about how you will work together. You can get a good sense of this by talking to references. What will it cost and how are you paid? As discussed previously, the options are salary, fees, commission, or a fee/commission combination. Who will work with me? Are there assistants in the office that will be working on your account in additional to the planner? May I see a sample financial plan? Beware of cookie-cutter, computer-generated plans that are not adapted to your particular goals and situation. Are you registered with state and federal regulators? Depending on the amount of assets under management, financial planners will be registered with either the U.S. Securities & Exchange Commission or a state securities regulatory agency.
- It’s common to see messages posted on the Internet that urge readers to buy a stock quickly or to sell before the price goes down. Cold callers often call using the same sort of pitch. Often the promoters will claim to have “inside” information about an impending development or an “infallible” combination of economic and stock market data to pick stocks. In reality, they may be insiders or paid promoters who stand to gain by selling their shares after the stock price is pumped up by gullible investors. Once these fraudsters sell their shares and stop hyping the stock, the price typically falls and investors lose their money. Fraudsters frequently use this ploy with small, thinly-traded companies because it’s easier to manipulate a stock when there’s little or no information available about the company.
- This chart shows how pyramid schemes can become impossible to sustain. For example, let’s say a promoter tells you that “all” you need to do to win big is recruit 6 friends or family members to participate in the program. They, in turn, must also find 6 new “investors.” In short order, you’d need billions and billions of people to keep the scheme alive. Suggested Learning Activity: In a group of 50 or more: Ask 6 volunteers from the group to stand. Ask each of them to find 6 people to participate and stand next to them. Ask all 42 people standing to find 6 more people each. You’d need 252 people, but you only have 8 left! For smaller groups, use a smaller number – perhaps 3 volunteers, who must each recruit 3 new participants, and so on.