Financial Literacy Series Investing

Transcription

1 Financial Literacy Series Investing January 31, 2018 Robert Turnquest, CFA, CAIA

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4 Agenda What is investing? Types of investments Stocks Bonds Mutual funds Developing your personal portfolio Risk vs. return Human capital vs. financial capital Diversification Your Investment Policy Statement How to get started Q&A

5 What is investing?

6 Definition Invest: To put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income or appreciation in value (Dictionary.com) The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate. Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1. If you want to have better performance than the crowd, you must do things differently from the crowd.

7 Types of investments

8 Real assets vs. financial assets Real assets Physical materials used to produce goods and services E.g., land, buildings, equipment, knowledge E.g., auto manufacturing plant Financial assets Claims to the income generated by real assets Securities issued by companies as a means of funding E.g., stocks, bonds E.g., shares in the auto manufacturing company

9 Fixed income securities A form of debt, also known as: bonds, credit Stream of income payments determined by a specified formula A form of borrowing Key components include: Principal: the value the company borrows Interest: the payment to the holders of fixed income securities by the borrower, usually expressed as a percentage of principal Maturity: the date when the principal payment is due Examples include: Money market instruments: short-term, liquid, low risk investments (e.g., Treasury bills, certificates of deposit) Government bonds: fixed income securities issued by governments and usually considered to be low risk Corporate bonds: fixed income securities issued by companies

10 Risks to fixed income Credit risk / Default risk Losses in the event the borrower fails to pay interest and/or principal Interest rate risk Losses due to interest rate movements (typically upward) Inflation risk Rising prices in the economy eroding the purchasing power of principal and interest payments

11 Credit rating scale Moody's S&P Fitch Long-term Short-term Long-term Short-term Long-term Short-term Rating description Aaa AAA AAA Aa1 AA+ A-1+ AA+ Aa2 P-1 AA AA Aa3 AA AA A1 A+ A-1 A+ A2 A A A3 P-2 A A A-2 Baa1 BBB+ BBB+ Baa2 P-3 BBB BBB Baa3 BBB A-3 BBB Ba1 BB+ BB+ Ba2 BB BB Ba3 BB B BB B1 B+ B+ B2 B B B3 B B Caa1 Not Prime CCC+ CCC+ Caa2 CCC CCC C Caa3 CCC CCC CC CC Ca C C C RD D DDD F1+ F1 F2 F3 B C D Prime High grade Upper medium grade Lower medium grade Non-investment grade speculative Highly speculative Substantial risks Extremely speculative Default imminent In default Investment grade Sub-investment grade

12 Fixed income investment example

13 Equity securities Ownership interests in a company Also known as stocks or shares Receive any dividends the firm may pay Infinite life Excess market value of the firm over any indebtedness May be publicly traded or privately held

14 BISX snapshot

15 Company example

16 Drivers of a stock price Macroeconomic performance Is the economy growing faster or slower than expected? Indicators include GDP growth, unemployment rate, interest rates and sentiment Industry performance Growth Profitability Cyclicality Company fundamentals: compare with historical data and other companies Earnings/profitability (e.g., net income, return on equity) Dividend payout Book value: value of assets minus value of liabilities Valuations (e.g., P/E, P/B)

17 Mutual funds A mutual funds is a type of investment company Other types: unit trusts, commingled funds, real estate investment trusts (REITs), hedge funds Financial intermediaries that collect funds from investors and invest them in a potentially wide range of securities or other assets Each investor has a claim to the company proportionate to the amount invested Pooling money allows investors to access a larger number of securities in a potentially less costly fashion Funds can vary by investment policy Equity funds Bond funds Money market funds

18 Developing your personal portfolio

19 Return vs. risk For illustration only

20 Human capital vs. financial capital Source: Detterbeck Wealth Management

21 Diversification Diversification is a means of reducing risk But not eliminating risk! Types of diversification Asset class Sector Geography

22 Create your own investment policy statement Investment objective Return expectations for the portfolio Risk profile Tolerance for losses Constraints Time Tax Liquidity Legal / regulatory factors Unique circumstances

23 Getting started Save! Open a brokerage account Comparison shop Invest Evaluate Learn

24 Q&A

25 End notes Bloomberg, L.P. Description page for Commonwealth of the Bahamas 5.75% 1/16/24 bond. Retrieved January 28, 2018 from Bloomberg database. Bodie, Zvi, Kane, Alex and Marcus, Alan J. Investments, Seventh Edition. McGraw-Hill/ Irwin, fin_concepts.html