Long Term Investing401K’s, IRA’s, Mutual Funds

Financial Literacy

• Bank Accounts

• Credit Cards

• Brokerage Accounts

• Stocks

• Bonds

• Student Loans

• Real Estate

Historical PerformancePerformance is the sum of 2 components:• Income (dividends or interest)• Capital Gains (price rising)

Minus any fees paid to invest & taxes owed on gains/interest

These return #’s do not account for taxes paid

Asset Allocation

Process of picking sectors to invest in

Bonds CashAccount

Stocks

no risk med. risk high risk

I thinkI’m brilliantvery high risk

$300,000 to invest ? ? ? ????

RealEstate

Mutual Funds

• professionally managed collective investment vehicle that pools money from investors to purchase securities

– Some funds can buy only stocks or only bonds

– Some funds can buy a combination of investments

Professional Managers Invest your money.

They are paid a yearlymanagement fee

Money Pooled in a specific fund

Hidden Fees on Mutual Funds

Funds have yearly management fees •You should not pay more than .75% per year

Some funds have loads (1-time fee) to buy the fund•Often these “loads” are hidden from investors•Do not buy any fund with a load!

ETF’s• ETF’s = exchange traded funds

• Similar to mutual funds, except they trade in the form of a stock.– Fees are typically lower than mutual funds

– You can trade these during any trading day (very liquid)• Examples: SPY (sp500), XLK (technology), GLD (gold)

Pick your own mutual fund

• Reading:

Brokerage Accounts

• Most financial institutions offer brokerage accounts– allow you to invest in stocks, bonds, mutual funds, commodities, etc….

• Beware: many of these firms have high fees and sell load mutual funds!

Banks vs. Brokerage Firms

Brokerage FirmSpecialize in accounts for stocks, bonds, mutual funds

BanksChecking & Savings accounts, credit cards, loans, & brokerage accounts

Types of Brokerage Accounts

There are many types of brokerage accounts:

401-KIRARoth IRA

1) Retirement:Tax deferred => no taxesuntil you take money out!

529 (college savings)2) Specific

Regular brokerage3) Taxable

Retirement Gamble PBS Video

2013 PBS special on retirement investment dangers….

http://video.pbs.org/video/2365000843/?starttime=3131000

Play 19 minutes => end day 1 block period

Brokerage Accounts are used to save money in stocks, bonds, etc…

Mutual funds are efficient ways to diversify your savings

Mutual funds range from:- low fee, index funds - high fee, load, leveraged funds

Types of accounts for retirement: IRA, Roth IRA, 401-K or Taxable Regular Savings account

Purpose of Your Stock Portfolio?

YOURPORTFOLIO OF STOCKS

SP500INDEX

Active InvestingBuy & Hold Investing

Actively manage stocks to “beat market”Often “market time” (get in, get out)

Pay higher fees, taxes, trading costsTake more risk, often underperform market

Passively manage stocks Never “market time” (get in, get out)

Pay lower fees, taxes, trading costsTake less risk, match market return

SP500MarketReturn

Reading: Just How Dumb are Investors?

Continued: Retirement Gamble PBS Video

2013 PBS special on retirement investment dangers….

http://video.pbs.org/video/2365000843/?starttime=3131000

Play part 2: start 19 minutes in => end day 2 regular period

Reading: Mistrust Your Financial Instincts

System 1 System 2

Financial Advisors are not required to act in your “best interest” (unless a fiduciary)

System 1 (fast thinking) is dangerous when making investment decisions

Confirmation Bias causes people to not learn from mistakes

BUT! Cognitive dissonance is trying to help you learn!

•research shows most people don’t!

Investment Wrap-up

. .

.When confronted with new information, most people seek to preserve their current understanding of the world by rejecting, explaining away or avoiding the information

Warren Buffet Advice

Rule of 70

70/20% = 3.5 years

70/ 10% = 7 years

70/ 5% = 14 years

in nominal terms

Money Doubles in

The Power of Compounding$10,000 invested today would be worth:

Return 15-years 30-years Per year |-------Holding Period----|

2.0% $13,459 $18,114 3.0% $15,580 $24,273 5.0% $20,789 $43,219 6.0% $23,966 $57,435 7.0% $27,590 $76,123

10.0% $41,772 $174,494 12.0% $54,736 $299,599 14.0% $71,379 $509,502 15.0% $81,371 $662,118