The Process of Developing an Investment Portfolio

Transcription

1 Presentation Outline The Process of Developing an Investment Portfolio Dr. Tahira K. Hira Professor and Senior Policy Advisor to the president Iowa State University Get Ready To Invest Our values & our financial wellbeing Rules and Concepts Four Boxes, spending, magic of compounding, Investment Options, risk & return relationship Important Investment Questions Age Specific Sample Investment Portfolios Especially for students Continue to Learn A Few But Important Resources 2 Get Ready To Invest Accumulate an adequate emergency fund Get credit card debt under control Have an adequate risk management plan disability insurance coverage life insurance (appropriate amount for dependents) medical coverage property (owner/renter insurance) Have some money to invest savings! 3 The 4 boxes Net Income you bring home? Expenses you spend? you own? Assets- Liabilities- you owe? and the relationships between them! 6 1

2 Spending & Saving Rules Spend 65% Save for later spending 20% Invest 10% Share with others 5% And Know the The Magic of Compounding ($1,000 Annually savings - takes $20 a week) Interest Earned 5 Years 10 Years 15 Years 20 Years 3% $ 5, $ 11, $ 18, $ 26, % $ 5, $ 12, $ 20, $ 29, % $ 5, $ 12, $ 21, $ 33, % $ 5, $ 12, $ 23, $ 36, % $ 5, $ 13, $ 25, $ 40, % $ 5, $ 14, $ 27, $ 45, % $ 5, $ 15, $ 29, $ 51, % $ 6, $ 15, $ 31, $ 57, Risk-Return Relationship Possible Yield Large *New Business Ventures *Common Stocks *Corporate Bonds *UST Bonds Small Low High Degree of Risk 9 Saving and Investing Highest Risk- Highest Earning Lowest Risk- Lowest Earning Auto Blue Chip Common Stock B. Mutual Funds Money Market Accounts/ Mutual Funds Insured Savings/ Checking Accounts Homeowner / Renter Commodities Collectibles Real Estate Preferred Stock Municipal Bonds/ Mutual Funds US Savings Bonds Life Certificates of Deposit Penny Stock Speculative Stock, Bonds, Mutual Funds Medical/ Disability Growth Mutual Bonds Convertible Bonds Corporate Bonds/ Mutual Funds Treasury Issues Liability Important Investment Questions What is an investment goal? When to buy? What to buy? How to buy it? How to cut investment risks? Investment Goals Ready reserve to be able to do things Supplemental income Tax saving Long-term growth in assets Short-term profits (speculation) Generally we have more than one goal

3 When to Buy? Dollar Cost Averaging Taxable, or Tax free MMR, SA, CD What to Buy? Invest a set amount at regular periods Maturity, Source, Tax Status Don t invest only when market is doing well Don t liquidate when market is not doing well Company performance Industry Company size How to Buy? How to Cut Investment Risks? Direct Indirect Bonds Stocks Real estate Pay attention to the cost of investing not just return Think long term Diversify, diversify, diversify Keep investment fees to the minimum Understand the difference between speculation and investment Be realistic and not be greedy Know your risk tolerance level Invest with knowledge & not on tips or sale pressures 16 Ages: 21-30s At this age most valuable asset is time years to compound and grow Keep yourself free of credit card debt If you sock away $200/month in a retirement account you will have $1.2 mil by age 67 (@8% K, Roth IRA, IRA) Resist cashing out 401K Go full speed ahead invest 80% in stocks and 20% in Bonds (long term approach) 18 3

4 Ages: Ages: mid 40s to mid 50s You are likely to be Starting family, buying a home Map out a long term plan Save for down payment, live a realistic life style Prepare for contingencies- 6 months emergency fund Continue contributions to retirement fund as much as you can before children arrive Debt sabotages most people s financial wellbeing Stocks 75%, Bonds 25% Should have amassed some funds for various goals college tuition, retirement Approach borrowing for college judiciously Plus loans have very clear conversation with children about what you can afford After children finish college save like heck for paying off mortgage, or sell the house and downsize Save and invest -- 70% Stocks and 30% bonds Ages: mid 50s to mid 60s Avoid Common Investment Mistakes Reassess what you will spend during retirement Consider long term care insurance (protection against risk you can lose all savings in case.. ) If you can delay receiving social security income until 66 and increase your benefits by 33% Get deadly serious about saving and investing hopefully these are prime earning years Continue investing Stocks 60% and Bonds 40% Trying to catch short swings of the market Frittering away cash dividends or interests Buying, selling, holding an investment for wrong reasons Flocking in and out of the market When in School ---- Live/spend like a student Keep student loans to a minimum (don t confuse Loans with financial AID) Know and Live your reality Don t spending to impress others or drown your sorrows Avoid the credit card trap no balances Build an emergency fund Save regularly no matter how small the amount 24 4

5 After Graduation Make the best use of employee benefits (insurance policies, flex accounts, and retirement accounts) Know how taxes work Look into the pros & cons of leasing vs. buying a car Know when to rent & when to own a home Regularly monitor your credit scores AnnualCreditRepot.com Know which risks to take & wich risks to transfer to insurance company Invest wisely (no speculating, no gambling) 25 Resources: Unbiased and Trustworthy Common Characteristics of Millionaires by Stanley & Danko, 1996 The Clash of the Cultures: Investment vs. Speculation by John G. Bogle, 2012 "Investing. Getting Started. It s easier than you think." by Roy Furchgott, 1998 Kiplinger s Personal Finance The Richest Man in Babylon