This document provides an overview of money and investing concepts for beginners. It covers legal disclaimers, common financial goals, risks and uncertainties in investing, guarantees about the future of social security and healthcare costs, mistakes to avoid like spending more than you earn or ignoring health, liquid versus illiquid assets, the importance of an emergency fund, using debt wisely, considerations for buying a home, investing in stocks, timing the market versus dollar cost averaging, rules for stock picking and diversification, classic investing mistakes, the power of starting to save and invest early, automating savings, maximizing tax-advantaged retirement accounts, and choosing low-fee index funds.

1. Money and Investing 101
Eric Krock

2. Legal Disclaimer
Eric Krock does not have any financial expertise, certifications, or
qualifications. He does not guarantee the accuracy, currency, or
completeness of this presentation or make any warranty, express
or implied, or assume any legal liability or responsibility for the
accuracy, completeness, or usefulness of any information or its
suitability for any purpose whatsoever. This presentation is
provided as-is for informational purposes only, is general in nature,
is not intended to be a substitute for qualified financial, tax, or legal
advice. Use is at your own risk. In no event shall Eric Krock be
liable for any direct, indirect, special, punitive, incidental or
consequential damage or any other damages whatsoever arising
out of or in connection with the use or misuse of this presentation.
For investment and retirement advice that's right for you, see a
certified financial planner! For tax advice that’s right for you, see an
accountant! For legal advice that’s right for you, see an attorney!

3. Disclaimers
• I’m not a certified anything.
• All investments have risks.
• Past performance does not guarantee
future results.
• No investment strategy is optimal in all
situations.
• I am not responsible for your choices or
their consequences. You are.

4. Disclaimers
• I’m not an accountant and can’t give you
tax advice. Get an accountant for tax
advice that’s right for you.
• I’m not a financial or retirement advisor.
• This is for informational purposes only.
• It simply expresses some of my personal
beliefs about money management and
investing.

5. What are your financial goals?
• Pay down existing debt?
• Build up liquid assets? (cash, stocks)
• Cushion against job loss?
• Tithe?
• Cushion against disability/early death?
• Buy a home?
• Have children & put through college?
• Save for retirement?

6. The Problem: Uncertainty
• Economy could tank and you could lose job for
long time
• Harder to get new jobs due to high
unemployment
• Stock market may drop
• Inflation may rise
• Home values may drop
• You could develop a short- or long-term health
problem (stroke, cancer …) that interrupts or
reduces earning power

7. Real Problem: We Can’t Predict the
Future
• Can’t predict your personal future (heart
attack? stroke? cancer? Alzheimer’s?)
• Can’t predict the global future (debt
crisis? inflation? low growth? bird flu
epidemic?)
• But you can try to prepare so you’re
better able to handle various possible
scenarios
• Learn to invest and manage risk

8. Things We CAN Guarantee
• Social Security and Medicare are
running out of money. Current tax rates
can’t pay for projected benefits.
• Therefore they HAVE TO change.
• Taxes will go up and/or retirement age
will increase and/or eligibility will be
narrowed and/or benefits will be cut.

9. Things We CAN Guarantee
• Social Security alone provides for a low
standard of living in retirement and no
cushion for emergencies.
• The older you get, the more likely you
are to need medical care.
• Lesson: Don’t rely on Social Security
alone for your retirement income, and
don’t rely on Medicare alone to cover
retirement health care expenses.

10. Things We CAN Guarantee
• U.S. can’t keep running deficits of $1.4
trillion per year indefinitely. (Debt as
percentage of GDP is rising quickly.)
• Therefore taxes will go up and/or
spending will be cut.

11. Things We CAN Guarantee
• Federal Reserve can’t lower interest
rates below 0%.
• Therefore if something else bad
happens, they can’t stimulate the
economy more this way than they are
already. No more bullets on this front.

12. Things We CAN Guarantee:
Current Fed Policies are Unsustainable
• 0% interest rate can’t last forever, so
someday mortgage rates will go up.
(Good time to borrow at fixed rate?)
• “Quantitative Easing” can’t go on forever.
(Good time to borrow at fixed rate?)

13. … yet the Economy Is STILL Weak!
• GDP growth slowing
• Job creation slowing
• Unemployment ticking up
• Businesses sitting on cash, afraid to
invest or hire because of uncertainty
about economic future & fiscal/tax policy
• Consumers afraid to spend because of
uncertainty about jobs and income
• Huge backlog of foreclosed homes

14. Likely Things: When Stimulus Ends,
Economy Will Get Weaker Still
• Raising federal reserve interest rate will
slow home construction & purchases
• Ending quantitative easing will increase
interest rates as well
• Cutting deficit will cut some jobs and
may reduce GDP growth in short term
(but will help in longer term by
stimulating real investment and
economic activity)

15. Possible Thing: Home Values Could
Drop Another 20% … or Not!
• This could be a good time to buy a
house due to foreclosures holding down
prices and record-low interest rates.
• But, if economy softens, home values
may drop more in the short term.
• Lessons: If you buy, do so for the long
term. Be willing to stay for a long time.
Have a big cash cushion so you aren’t
forced to sell if you lose your job.

16. Likely Things
• Health care costs will continue to rise as
new, more-expensive treatments are
invented.
• Medicare benefits for the elderly will be
reduced (e.g. later eligibility age, higher
copays and premiums, etc.)
• Lesson: Don’t rely on Medicare alone to
pay for retirement health expenses.

17. Risk of Future Shocks
• European debt crisis flaring up again?
• China bubble bursting?
• Possible “Black Swan” problem:
emerging virus outbreak like SARS or
bird flu?

18. Risk of Future Malaise
• Slow growth in U.S. due to pain of resolving
unsustainable tax, spending, and interest rate
positions and impact of high debt if deficit not
slashed ASAP
• Slow growth in Europe due to debt problem,
aging population, high taxes and unemployment
• Slow growth in Japan due to 200% debt to GDP
ratio, aging & shrinking population, energy
shortage, cost of Fukushima cleanup

19. Bright Spots
• High organic growth rates will probably
continue in:
– India (rebound from decades of socialist
economic controls)
– emerging markets entering world economy
(Brazil, etc.)
– China (more socialist rebound, modulo
bubbles bursting along the way due to
speculation, lack of transparency, and
corruption)

20. Mistake #1: Spending > Income
• You can spend more than you earn in
the short run if you have savings or can
take out loans
• You cannot spend more than you earn in
the long run
• Always seek to spend less than you earn
and invest the remainder
• Corollaries: maximize your income; cut
your expenses

21. Mistake #2: Needless Spending
• Rolex watch
• Expensive car (new cars are a terrible
investment; guaranteed to lose half of
value in two years; expensive cars lose
you more money than cheap ones)
• Expensive clothes, shoes, jewelry
• Usually reflects compensation for
unresolved psychological issues

22. Mistake #3: Gambling Addiction,
Drinking Excessively, Using Drugs
• Gambling addiction, alcoholism, and
drug use are some of the most damaging
mistakes you can make.
• They lead to disastrous problems in
other areas (lost job, divorce, lost home,
DUI, arrest, prison, homelessness)
• Get help NOW if you have these
problems.

23. Mistake #4: Letting Health Slip
• Would you smoke? Of course not.
• But not exercising is more harmful to
your health than smoking.
• Would you not exercise? 60% don’t.
• Exercise regularly.
• Start easy and work up. Vigorous
walking is good start.
• Keep Body Mass Index 25 or less.
• Belly fat is LETHAL.

24. Liquid & Illiquid Assets
• Liquid & low risk: you can quickly and easily
turn into cash when you need to
– checking & savings accounts, money
market, short-term CDs
• Liquid but volatile: stocks
– what if market’s down and you have to sell?
• May be able to borrow from: permanent life
insurance cash value, current employer 401(k),
home equity loan
• Illiquid: home, real estate

25. Mistake: Ignoring Automatic
Payments
• Studies show that when people sign up
for automatic payments (e.g.
subscriptions), they stop noticing the
expense.
• Do you really want everything you’re
paying for?
• Lesson: Audit your automatic credit card
payments and bank transfers.

26. How Large a “Rainy Day Fund?”
• Old rule: have at least six months of
income in liquid assets at all times
• Eric’s new rule: have at least 12 months
of income in liquid assets at all times
• Unemployment more likely than in past
• Unemployment is longer than in past due
to high unemployment rate, low
economic growth, low job creation

27. Debt Can Be a Tool If Used Wisely
• Enable you to borrow a large amount of
money when needed at one point in time
and then pay it back over a long time
• Examples: buy a house, student loans

28. Good Debt
• Low interest rate
• Fixed interest rate; won’t go up if inflation
rises
• Pays for things that will increase your
earning power (education) or may
increase in value (home)
• Examples: federally guaranteed student
loans; 30-year fixed home mortgage

29. Bad Debt
• High interest rate
• Interest rate may go up in some
situations out of your control, e.g. if
inflation goes up or your credit rating
goes down
• Examples: credit card debt, payday
loans

30. Buying a Home
• Tax benefits (deduct mortgage interest
from taxes … for now, anyway …)
• Capital gains if home values increase
(lower tax rate than ordinary income)
• Risks of no money down
• Problem of real estate volatility

31. Buying a Home (continued)
• Home is a highly illiquid investment!
• Home is an investment that only makes
sense at certain points in your life
(stability, stay in place, etc.).
• Old rule of thumb: if you can afford to
hold for five years, you won’t lose money
• Eric’s new rule: 7-9 years? Not sure.
• If have to move, you can rent, but now
you’ve made yourself a landlord …

32. Investing in Stocks
• Over the long term, equities (stocks)
provide the best chance of growth and
the best protection against inflation.

33. If the Market is Rational, Picking
Stocks is Futile
• “Efficient Market Theory:” everyone has
perfect access to information and is
rational maximizer, so current stock price
incorporates all information about stock,
so there’s a 50% chance stock will rise
and 50% chance stock will drop.
• If you believe this, invest in low-overhead
indexed diversified Exchange Traded
Funds (ETFs) for the long term.

34. What If the Market’s Not Rational?
• NASDAQ high technology bubble
• Real estate bubble
• Prices of B of A, Citibank, AIG, financial
services index, BP during oil spill …

35. NASDAQ 1971 - 2011
Source: Yahoo! Finance

36. U.S. Housing Prices
Source: jparsons.net

37. U.S. Housing Prices vs. Rents
Source: jparsons.net

38. Gold Price: 1975 - present
Source: kitco.com

39. Beijing Residential Real Estate Price Index: 2003 –
2010: Up 788% in 8 Years!
Source: http://www.businessinsider.com/chinese-land-prices-2010-7,
citing Jing Wu, Joseph Gyouko and Yongheng Deng at NBER

40. Lessons About Bubbles
• Before capital flowed freely, bubbles
were limited to within a country or region,
so their height & duration were limited.
• Because capital now flows freely,
bubbles can draw money in from
worldwide, so they can ramp faster, go
higher, and last longer (and crash
faster).

41. Panics
Citibank price September 2008 –
September 2009
Source: Yahoo! Finance

42. Panics
BP price December 2009 – July 2011
Source: Yahoo! Finance

43. Dollar Cost Averaging
• Timing the market is difficult for anyone,
especially amateurs.
• If you invest the same amount every
month, you’ll buy more stock when the
market dips and less when it rises,
automatically giving you an edge.

44. Eric’s Rules on Stock Picking
• It’s hard to beat the market. 75% of
professional mutual fund managers who
try to do so fail! (with your money!)
• Warren Buffett has historically beat the
market. Is your name Warren Buffett?
• Picking and tracking stocks takes time.
Do you have the time & interest? If
you’re too busy, don’t try.

45. Eric’s Rule: Don’t Gamble More Than
You Can Afford to Lose
• Picking stocks is gambling.
• Rule: If you pick stocks, only do with a
small portion of your portfolio that you
can afford to lose.
• Rule: Core of your portfolio should be
diversified, indexed, low-overhead ETFs.

46. Classic Investing Mistakes
• Holding losers too long
• Failing to diversify out of winners (Enron)
• Buying at the top of the market in
euphoria (Dow at 14,000)
• Selling at bottom of the market in panic
(Dow at 6600)
• Lesson: Buying and holding indexed
ETFs long-term via dollar-cost averaging
reduces these problems.

47. Classic Investing Mistakes
• Excessive concentration of your portfolio
in a small number of stocks.
• Eric’s Rule: If you want to turn a big
fortune into a small one, just concentrate
it in a small number of investments!

48. Start Saving Early
(assumes 7% return per (assumes 8% return per
year reinvested) year reinvested)
Source: https://personal.vanguard.com/us/ Source: http://www.sharebuilder401k.com/
insights/saving-investing/power-of- power-of-compounding.aspx
compounding

49. Automate Your Saving
• Studies show that when you have money
taken out of your paycheck
automatically, you learn to live without it
and don’t miss it.
• Rule: Set up automatic deductions and
learn to live below your means!

50. Max Out Your 401(k) or IRA Each
Year If You Can Afford To
• Reduces your current taxes (you pay no
tax now on the money you put in
Traditional 401(k) or IRA)
• Dividends & capital gains compound tax
free in the account over time
• You only pay income tax when you
withdraw at the end (Traditional 401(k) or
IRA)
• If you pass on to heirs, it is never taxed

51. Choose Funds With Low Fees
• Fees that funds charge you are a pure
loss. You can’t even add fees to the cost
basis for the stock you bought, so they
don’t reduce your capital gains!
• If a fund charges you 2% in fees per
year, it turns a 5% annual return into a
3% annual return.

52. Buy ETFs with Low Fees, Not Mutual
Funds (at least for tax-exposed funds)
• Mutual Funds: pay out capital gains
distribution each year, which you must
pay taxes on each year, reducing your
ability to invest
• ETFs: like a stock; you only pay taxes
when you sell (defers taxes)
• Vanguard specializes in low-overhead
indexed ETFs

53. Tax Rules of Thumb
• Never risk the wrath of the IRS.
• Legally deferring taxes is good. (IRA,
401(k), ETF instead of mutual fund)
• Legally deferring taxes until after your
death (when they may pass on tax-free
to heirs in your estate) is better.
• Legally avoiding taxes completely is
best. (permanent life insurance & Roth
IRA/401(k) compounding gains)

54. Two Types of Funds
• “Actively Managed Funds:” people who
think they’re smart, try to beat the
market, fail 75% of the time, lose money
on trading costs, and charge high fees
that reduce your income even more
• “Passively Managed Index Funds:”
simply distribute your funds into an index
like the S&P 500 and leave it there

55. Use Passively-Managed “Indexed”
Funds, Not Actively-Managed Funds
• 75% of actively-managed mutual funds
do worse than the stock market average
(index) every year.
• So by choosing an indexed fund, you
automatically get a fund in the top 25%
of the performers.
• You also reduce the risk of catastrophic
losses due to asset concentration and
bad management choices.

56. Use Passively-Managed “Indexed”
Funds, Not Actively-Managed Funds
• Passively-Managed funds don’t waste
money on costs of active trading (so your
gain is higher)
• Passively-Managed funds can charge
lower fees for their service (so your gain
is higher)

57. Benefits of Diversification
• Reduce concentration and risk of
catastrophic loss (e.g. Enron
shareholders)
• Portfolios with domestic + international
outperform domestic only.
• Portfolios with 2/3 equities + 1/3 fixed
income (bonds, etc.) outperform equities
only.

58. Diversify
• Asset Category (Stocks, Real Estate,
Bonds)
• Geography (U.S., Europe, Asia,
Emerging Markets)
• Asset Class (Small Cap, Mid Cap, Large
Cap)

59. Assume Reasonable Rates of Return
• Studies show that people overestimate
the annual return their stocks will get
(e.g. 10% per year)
• Long-term historical average of U.S.
stock market: 5-7% / year

60. Things I Don’t Know About
• Pensions (I’ll never have one)
• Real Estate (so I own a home)
• Fixed Income Investing (so I have
permanent life insurance)
• Commodities (so I don’t invest in them)

61. Problems with Real Estate as an
Investment
• Property taxes and insurance every year
• What if you don’t get tenants?
• What if you do and they’re from hell?
• Requires active management and time if
you own and manage the property
yourself.
• Illiquid
• You must know what you’re doing

62. Eric’s Rules
• Never invest with a friend.
• Avoid dual relationships. (family and
business, loaning to business partner)
• No “get rich quick.”
• No hiding money overseas from the
government.
• No speculative real estate investment.
• No commodities.

63. Eric’s Rules to Avoid Looking Like an
Idiot
• Warren Buffett: Never invest in
something you don’t understand.
• No oil and gas
• No hedge funds
• No real estate (except house; maybe
REITs someday …)

64. Eric’s Rules to Avoid Wasting Money
• Avoid overpriced financial managers
• Avoid anything with high expenses
• Avoid anything with up-front fees (“front-
end load”)

65. Eric’s Rules to Avoid Catastrophic
Losses
• Never invest in anything that sounds too
good to be true (“high returns, no risk!”)
• Avoid complicated or exotic investments
• Never make an investment where you
can lose more money than you put in
– selling stocks short
– unlimited liability partnerships

66. Eric’s Rules to Avoid Catastrophic
Losses (cont’d)
• Never co-sign a loan with anyone for any
reason. If they can’t get a loan
themselves, there’s a good reason!!!
– Refer them to a financial advisor.
– Don’t be an enabler.
– Don’t make their problem your problem.
– Read Boundaries by Cloud & Townsend.

67. Eric’s Rules for Taxes
• Have an independent CPA prepare your
taxes for you. S/he will save you time,
money, frustration, examinations, audits,
and penalties.
• Never risk the wrath of the IRS.
– Never do anything fancy!
– When in doubt, overestimate your tax
liability.

68. A Diversified Portfolio
• Own home as real estate investment & for tax
benefits
• Traditional & Roth IRA
• ETFs for tax-exposed investing
• Stocks diversified by geography, asset class
• Money in the bank for short-term needs
• Permanent life insurance to cover risk of death,
diversify into bonds, tax benefit
• Disability and (maybe) long-term care insurance
for risk coverage

69. Don’t Be Overwhelmed
• You can’t transform your financial
situation overnight
• You can’t completely guard against all
risks
• But you can make your situation a little
better each month and year
• Ten years later, you’ll be much better off
• Start changing things for the better now!

70. Action Items
• Check your 401(k) & IRA investments
• Pay down credit card debt
• Optimize your investment allocation
• Get life insurance

71. Future Discussions
• Retirement 101
• Insurance 101
• Real Estate 101 (guest speaker!)
• Company Stock 101

72. For Further Reading
• The Black Swan by Nicholas Nassim
Taleb
• 100 Questions Every First-Time Home
Buyer Should Ask
• Boundaries by Cloud & Townsend
• Subscribe to Wall Street Journal,
Fortune, and Forbes

73. For more information:
http://www.vanguard.com/
http://www.nmfn.com/
Company names used for identifying
purposes only. Neither Vanguard nor
Northwestern Mutual nor Aflac nor any
other company has seen or endorsed this
presentation.