AAEC 2104 Week 10: Investing
AAEC 2104 Week 10: Investing AAEC 2104
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This 4 page Class Notes was uploaded by Mara DePena on Sunday April 3, 2016. The Class Notes belongs to AAEC 2104 at Virginia Polytechnic Institute and State University taught by Dr. White in Spring 2016. Since its upload, it has received 17 views. For similar materials see Personal Financial Planning in Agricultural & Resource Econ at Virginia Polytechnic Institute and State University.
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Date Created: 04/03/16
AAEC 2104 INVESTING KEY POINTS Know your goals and risk tolerance. o Are you investing to get cash? Because you don’t want to lose money? What? o How much risk are you willing to take? Pay yourself first. o Save 10% of your gross income. Brainless, painless investing o Dollar Cost Averaging One of the easiest, painfree, powerful investment strategies. Invest the same dollar amount every period. Extremely important. Don’t put all your eggs in one basket o Diversification o Asset allocation Review and revise your investments periodically o Rebalance o Reallocate ALEX’S 3 MAIN QUESTIONS Why do you want to invest? o What is your goal? When will you need the money? o The sooner you need it, the less risk you can take. How much risk are you comfortable taking? MUST KNOW YOUR GOALS Meet your basic needs first. o Liquidity, savings, debt management Match your investments to your goals o If your goal is security, invest in safe assets (money market accounts, savings) o If your goal is income, invest in “fixed income” (dividend paying stocks, bonds, rental property) o If your goal is growth (selling something for a higher price than you got it), invest in “equities” (general stock market) UNDERSTAND your investments RISK TOLERANCE Risk tolerance quiz (on scholar) If you lose sleep over your investments, reduce the level of risk. Main determinant is time o ST investments- Use safe assets o LT investments- Incorporate riskier assets. MAIN ASPECTS OF INVESTMENTS Safety o Every aspect has some level of safety Income o Does it generate cash for you on a regular basis? Growth o Does it go up in value? o Primarily stock market, real estate as well o Need to sell to get that value Tax implications o Taxable, tax deductible, tax deferred, tax free o You are taxed on dividends o You are taxed on shares o You are taxed on growth if you sell o If you open an IRA and buy stocks, you are not taxed on those dividends o Traditional IRA- tax deductible investments o 401K- reduces taxable income (pre-tax, essentially tax deductible) o Tax deferred- Pushing taxes off until the future (as long as money is in retirement account). o Tax free- Roth IRA or Roth 401K. RETURNS FROM INVESTING Income Interest o Bonds pay you semiannually o CDs Dividends o Cash o Stock (DRIP- Dividend reinvestment plan. You get shares instead of cash.) Taxable as well You want to buy low and sell high o Semi-annually or quarterly basis o Taxable the year you receive it Capital gains o Capital gain = selling price – purchase price o Purchase price=tax basis o Either not taxed at all or taxed at a 10% level “Paper gains” o When you own stocks or an investment and it goes up in value but you haven’t sold it yet. o Unrealized gains. HISTORICAL RETURNS High risk, high return T-bills, treasury bills- Risk free short term investments from the government. Keeps at right about the rate of inflation. Very low risk, very low return. More variation, more risk, higher return. DIVERSIFICATION Attempt to reduce your risk exposure. Investing in different assets within: o Different industries o Different economies Theory is that by spreading your investments over a wide range, you aren’t impacted when one investments goes south o Reduces the impact of extremes Reduces your risk exposure o Expected impact on returns? Key to diversifying: o Negative correlations o Invest in different industries o Invest in different assets (stocks vs bonds) SO WHAT CAN YOU INVEST IN? Individual stocks o Risky Bonds o Fairly safe CDs o Bad long term investment, barely keep up with inflation Mutual funds (active) o Most retirement plans. Nothing more than a group of people pooling their money together and somebody investing that money. That person has a set strategy they have to follow- they think they can beat the overall market. Actively trying to reach a certain goal. More you buy and sell, more expenses, less money you earn. Index mutual funds (passive) o Al likes these. Try to match one of the main investment indexes out there. Setting up mutual funds to mimic overall index and let it sit. Cheap. Asset allocation mutual funds o Have a date in their title. Year in that title is the endpoint of your goal. Relatively risky for next several years but more conservative as you get closer to your goal. Typically used with retirement. Real estate o Hold onto land about 7 years before you can make any money. o Rental properties are a different story. Depend on economy and location. Business assets o Invest in a small business. Collectibles o Nah. Most of the time you don’t make money. STOCKS Corporate stocks o Piece of ownership of the company You can vote and have a say o Higher risk investment, higher return Stock market has averaged about 10-12% per year over time Making money o Dividends o Capital gains
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