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Investment and Financial Services: What Every Financial Educator Should Know
AN INTRODUCTION TO INVESTING
2
Today We Will Talk About…
The need to build wealth
Investment tools
How to manage risk
Not for distribution to the general public. For educational training only.
AN INTRODUCTION TO INVESTING
3
Why Invest?
Accumulate wealth for: Retirement income Education costs Major purchases like a home Health care for you and your family
AN INTRODUCTION TO INVESTING
4
The Changing Look of Retirement
Source: Standard & Poor’s. Data is from Fast Facts & Figures About Social Security, published by the Social Security Administration, September 2010. (CS000123)
Other2.7%
Private and Government
Pensions18.5%
Social Security36.5%
Earnings29.6%
Asset Income12.7%
Sources of Retirement Income
AN INTRODUCTION TO INVESTING
5
Education Costs are Rising
Anticipated College Costs
Source: Standard & Poor’s. Projections are based on 2010-2011 total costs of $36,993 for a four-year private college and $16,140 for a four-year public college (in-state rate), as reported by the College Board. (CS000113)
AN INTRODUCTION TO INVESTING
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Your Audience Should Understand
Types of investments
Choices
Strategies
AN INTRODUCTION TO INVESTING
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Help in Setting Their Investment Goals
List your goals and time frames
How much money will you need?
Gauge your tolerance for investment risk
Make sure you have emergency funds
AN INTRODUCTION TO INVESTING
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Help to Understand Types of Investments
Stocks
Bonds
Cash securities
AN INTRODUCTION TO INVESTING
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Stocks
Higher risk/higher return potential
Own part of a company
Tradeoff between risk and return
Stock investing involves risk, including loss of principal.
AN INTRODUCTION TO INVESTING
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Bonds
Mainly for income
Interest payments by bond issuer
Issuer promises to repay principal
Variety of risks
Lower risks and returns than stocks
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.
AN INTRODUCTION TO INVESTING
11
Cash
Protect principal
Treasury bills
Certificates of deposit (CDs)
Money market accounts
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, offer a fixed rate of return and fixed principal value. CDs are FDIC insured and offer a fixed rate of return if held until maturity.
AN INTRODUCTION TO INVESTING
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Low
Hig
h
Stocks
Bonds
Cash Equivalents
High Low
Ris
k P
oten
tial
Return Potential
How Investments Stack Up
AN INTRODUCTION TO INVESTING
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The Inflation Factor
Sources: Standard & Poor’s; the Federal Reserve; Barclays Capital; Bureau of Labor Statistics. For the 30-year period ended December 31, 2010. Stocks are represented by the S&P 500 index, an unmanaged index of stocks generally considered representative of the U.S. stock market. Bonds are represented by the returns of the Barclays U.S. Aggregate Bond Index. Cash is represented by a composite of yields on 3-month Treasury bills and the Barclays 3-Month Treasury Bills Index. Inflation is represented by the change in the Consumer Price Index. Investors cannot invest directly in any index. Past performance is not indicative of future results.
30-Year Historical Market Performance
Annualized Return Inflation-Adjusted Return
Stocks 10.72% 7.33%
Bonds 8.92% 5.59%
Cash 5.29% 2.07%
AN INTRODUCTION TO INVESTING
14
Mutual Funds
Pool investors’ dollars
Invest in a mix of securities (for example, stocks, bonds, cash or a combination of them)
Pursue a stated objective (for example, “growth”)
Managed by professionals
Provide diversification to help control risk
Investing in mutual funds involves risk, including possible loss of principal. Investments in specialized industry sectors have additional risks, which are outlined in the prospectus.
AN INTRODUCTION TO INVESTING
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Special Investment Vehicles
Tax-saving incentives help you accumulate funds for:
Retirement
Education
AN INTRODUCTION TO INVESTING
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Strategies for Managing Risk
Asset allocation
Diversification*
“Buy-and-hold”
Dollar-cost averaging**
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
* Diversification does not ensure against market risk.
** Dollar-cost averaging involves continuous investments in securities regardless of price fluctuations. An investor should consider their ability to continue purchasing through periods of low price levels. Dollar-cost averaging does not ensure a profit or protect against a loss in declining markets.
AN INTRODUCTION TO INVESTING
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What Does “Asset Allocation” Look Like?
Stocks Bonds Cash
For illustrative purposes only. Your situation may vary. Asset allocation does not ensure a profit or protect against a loss. A more aggressive portfolio may carry greater risk.
AN INTRODUCTION TO INVESTING
18
Put Time On Your Side
What Missing the Best Days Could Mean for You
(Initial $10,000 investment)
Source: Standard & Poor’s. For the 20-year period ended December 31, 2010. Stocks are represented by the S&P 500, an unmanaged index that is generally considered representative of the U.S. stock market. Past performance is not a guarantee of future results. The S&P 500 is an unmanaged index that may not be invested into directly. (CS000076)
AN INTRODUCTION TO INVESTING
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Dollar Cost Averaging
An Example: Dollar Cost Averaging With $50 a Month
Total Shares Purchased: 42.7
Average Price per Share: $14.17
Average Cost per Share: $14.05
Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Share Price $15 $13 $12 $14 $13 $12 $13 $14 $15 $16 $17 $16Shares Bought 3.3 3.8 4.2 3.6 3.8 4.2 3.8 3.6 3.3 3.1 2.9 3.1
Systematic investment strategies such as dollar cost averaging doesn’t assure a profit or protect against losses in declining markets. Investors should consider the risks involved in purchasing shares during declining markets. For illustrative purposes only. This example is not indicative of any particular investment. Investing in mutual funds involves risk, including possible loss of principal. Investments in specialized industry sectors have additional risks, which are outlined in the prospectus.
AN INTRODUCTION TO INVESTING
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To Summarize…
Identify your specific investment goals
Align your portfolio with these goals
Balance risk against potential return
AN INTRODUCTION TO INVESTING
21
Questions and Answers
For Training purposes only, Not to be used with the General Public.