|
Building Wealth - Recipe for success:
- Start with some cash…
- Earn a high rate of return…
- Add lots of time…
- How important are time and return?
- Over a 24-year period, a 9% return leads to twice the wealth of 6% returns, and 12% returns almost quadruple the wealth generated by a 6% return.
| | | | | | | | | | | | | | - Look What $10,000 Turns into
| | | | | | - With an Investment Return of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - (Note: Annual compounding is assumed.)
| | | | | - Cash Reserves
- i.e., short-term money market instruments
- U.S. Treasury bills, Savings deposits, CDs
- Commercial Paper
- Bonds
- Debt obligations over one year
- Treasury Notes, Treasury Bonds, Municipal Bonds
- Corporate Bonds
- Stocks
- Common stock is ownership of a public corporation
Historical Returns of Stocks and Bonds - Stocks have earned an average return of around 12% per year for the past 50 years.
- Depending what index is used.
- Long-term Treasury bonds have earned around 6% per year.
- 50%/50% allocation to stocks/bonds would average around 9%
- But there is a lot of volatility!
- Start with $10,000 in each asset.
- Why are you investing?
- Retirement, down payment, vacation, …
- Investment objectives are important.
- Matching goal characteristics with investment characteristics.
- Risk, return, time
Long-term Investing - Retirement plans from employers
- Defined Benefit plans
- Employer promise to pay a fixed retirement income.
- Formula driven.
- Employer does all the work and makes decisions
- Defined Contribution plans
- You save (tax deferred) from paycheck.
- Employers may contribute too.
- You make all the decisions
- Benefit depends on contributions and investment return.
- Young investors can accumulate significant wealth through regular investing of modest amounts. The longer you wait to start investing, however, the greater the cost to building significant wealth.
| | - The Long-term Payoff to Regular Investing Can Be Huge
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Key Investment Concepts - A portfolio
- Diversified (hopefully!) collection of stocks, bonds and other assets.
- Individual investments are often evaluated on how they change the characteristics of the portfolio.
- Risk
- Chance of economic loss.
- Sometimes measured as a variation in return.
- Expected Return
- Anticipated gain of a specific period of time.
- Often evaluated as compensation for taking certain types of risks.
Efficient Market Hypothesis - Idea that every security at every point in time is fairly priced.
- Implication is that prices are unpredictable
- Controversial
Investment management performance - At any point in time, many investment managers are beating the market for the month, quarter or year. A couple years later, most of these managers are no longer performing so well.
- Superstar exceptions
- Warren Buffett
- Peter Lynch
- Sir John Templeton
Valuing Assets – future value - Future Value
- Future value = Present sum × (1 + Interest rate)t
- The future value of a $5,000 investment earning 8% interest over a period of 15 years is
-
- future value = $5,000 × (1 + 0.08)15 = $15,861
- N I/Y PV PMT FV
- 15 8 -5,000 0 |
- CPT FV = $15,860.85
Valuing Assets – present value - Present Value
- Present value =
- The present value of a $15,860 to be received in 15 years with an 8% rate of return is
-
- present value = = $5,000
- N I/Y PV PMT FV
- 15 8 | 0 15,860
- CPT PV = -$5,000
Valuing Assets – payments - Future value =
- Present value =
- Over the next 30 years, an employee contributes $3,000 per year to an investment expected to earn 9% per year. After 30 years, the employee will have:
-
- future value = = $408,923
- N I/Y PV PMT FV
- 30 9 0 -3000 |
- CPT PV = $408,923
Compound Frequency - Mortgages and auto loans use monthly payments and compounding
- Dividends paid quarterly
- Bonds pay semi-annually
- Adjust the number of periods and rate
- What is the future value of a $1,000 investment 3 years from now if it receives a 9% annual return compounded (A) annually, (B) quarterly, and (C) continuously?
- Solution:
- (A) Future value = $1,000 X (1 + 0.09)3 = $1,295
- (B) Future value = $1,000 X (1 + 0.0225)12 = $1,306
- (C) Future value = $1,000 X e0.09x3 = $1,310
Behavior is important too - Psychology
- The higher the degree of uncertainty in a decision, the more emotions and psychological biases are used to help make the decision.
Getting information - Newspapers | | | - Biting market commentary once a week, portfolio analysis and databank.
| - Investor’s Business Daily
| - http://www.investors.com/default.asp
| - Founder William O’Neal dispenses stock picking, charting, and momentum strategies. Big on investor education.
| | | - http://online.wsj.com/home/us
| - The daily paper when it comes to financial news and information. Print subscribers get interactive access at a bargain price.
| | | - http://www.usatoday.com/money/front.htm
| - Don’t underestimate “McPaper’s” Money Section when it comes to business, economic, and financial news. It’s terrific!
| Getting information - Magazines | | - http://businessweek.com/index.html
| | | | - http://www.economist.com/
| - Offers analysis and opinion on the business and political events of the week.
| | | | - Terrific commentary on economics and financial markets from an all-star stable of regular columnists.
| | | - http://www.fortune.com/fortune
| - Famous for Fortune 500 company list. Interesting advice on career development.
| - Kiplinger's Personal Finance
| | - Provides practical guidance on saving, investing, planning for retirement, and major purchases.
| | | | - Interesting market commentary, company and mutual fund analysis aimed at novice investors.
| | | - http://www.smartmoney.com/
| - Serves the need for personal finance information for affluent, sophisticated, professional, and managerial Americans.
| | | - http://cbs.marketwatch.com
| - Focused on financial news and information. Individual investors can find news, commentary, advice, and stock price information.
| | | | - An online forum designed to "educate, amuse and enrich investors." A constant stream of witty investment advice on active message boards.
| | | - http://moneycentral.msn.com/home.asp
| - Investing highlights for customized portfolios, market reports, mutual fund directory, retirement and personal finance.
| | | | - A full menu of stock analysis, market commentary, and biting satire.
| - U.S. Securities and Exchange Commission
| | - This is the place to find free access to official SEC filings by individual companies, obrain information about individual brokers, or file a complaint about shady business practices
| | | - http://finance.yahoo.com/
| - A terrific web site with U.S. markets, world markets, quotes, financial news, and data.
| Investment Industry Jobs - Jobs
- Brokers
- Traders
- Portfolio managers
- Financial planners
- Investment bankers
- Security analysts
- Working at
- Commercial banks
- Savings and credit unions
- Securities firms
- Investment banks
- Companies
- Credit rating agencies
- Mutual funds
- Life insurance companies
- Securities exchanges
Objectives of the course and text - Develop a clear understanding of the many useful and practical implications of financial theory.
- Understand how the incentives of various market participants influence investor decisions and also highlight the impact of a person’s own psychology.
- Acquire a framework for understanding the returns on all financial assets, including stocks, bonds and financial derivatives.
- Gain familiarity with the institutions and language of Wall Street so as to facilitate the development of an effective personal investment strategy.
Do'stlaringiz bilan baham: |
