red laser from the physics lab is marked as producing632.8-nm light. When light from this laser falls on twoclosely spaced slits, an interference pattern formed on a wallseveral meters away has bright fringes spaced 5.00 mm apartnear the center of the pattern. When the laser is replaced bya small laser pointer, the fringes are 5.14 mm apart. What isthe wavelength of light produced by the pointer?
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. One of the best ways to invest. 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 COMMON STOCK TERMS Ticker symbol- Stock market abbreviation for company Last (or close)- Last markey price from previous day. Hi/low- Highest and lowest market prices during the trading session. Change- Yesterday’s closing price minus previous day’s closing price. Sales (1000s)- Trading volume for that stock (shares) 52 Week Hi/Low- Highest/lowest prices during the past year. Div Yield (Dividend Yield)- Total annual dividend/current price or quarterly dividend/current price. o Income stocks have high dividend yields. o Growth stocks have no/low dividend yields. o Can fluctuate, set on annual basis. o You want dividend in your portfolio. DRIPs- Dividend reinvestment plans. Take dividends in stock rather than cash. o Instead of getting a check every quarter, it is automatically reinvested and you get more shares. Beta- Measure of volatility (risk). o Market beta is 1 (the average risk) o High beta=higher risk Typically between .5 and 2 Can be negative o Slope of the regression line for a firm’s stock return plotted against market return o Beta=Cov Firm,Marketriance Market o General rule: 1-age in percentage of stocks in portfolio Stock split- Attempt by firm to manipulate stock price o Convert existing shares into “new” shares Ex: 2 for 1, 3 for 1, 1 for 2 2 for 1 split means you will receive two shares of “new” stock for each share of “old” stock you own If you own 100 shares before the split you will own 200 shares after the split o Changes your tax basis per share PICKING STOCK Earnings history- what did they make Have they made money o At least 5-10 year history Price/Earnings Ratio per share o Market has averaged about 15-20 Dividend Yield (Quarterly Dividends) o (Dividend per share/price per share) x 4 Beta o Measure of volatility (average= 10 52 week high/low o Where is the current price in relation Invest in companies you know and understand! BUYING STOCK Purchase through broker, financial planner, directly from company Typically pay a commission on purchase and sale o Up to 2% of stock value Register in your name or “Street name” o Recommend street name o You get a stock certificate if you register in your name, have to jump through hoops to sell DRIPs recommended MUTUAL FUNDS Very popular investment assets “Pool” of money invested by a manager o Specific investment goal/strategy 1000s of mutual funds to choose from o Very safe to very risky Choose one that matches your investment goal! Morningstar box o Large cap fund- “Blue chip”. Greater than $10 billion. Big companies. o Mid cap fund- $2-$10 billion o Small cap fund- $300 million to $2 billion o Market capitalization Never buy a standard mutual fund with an expense ratio greater than 1 or 1.1% o Higher the expense ratio, less money in your pocket Always read the prospectus before investing. MAIN TYPES OF MUTUAL FUNDS Money market Capital preservation Income Growth International Specialty Balanced Asset Allocation o Relatively new group of mutual funds. Picking a fund that corresponds with the date you are gonna retire. MUTUAL FUND LOADS AND FEES Front-end load- A-share. Upfront fee you pay when you purchase. CDSC (contingent deferred sales charge- B-share. Going away by law. Fee you pay when you sell shares of a MF. 12b-1 fees- Fees to cover marketing expenses. Operating fees- Fees associated with managing the MF. Lower fees for index or passive funds. Actively managed MF have higher fees. Typically .25-2% per year. TYPE OF SHARES Class A- Pay a front load fee. Lower annual operating expenses. Class B- Pay a CDSC. Higher operating expenses than A shares, may convert to A shares after 7-10 years. Class C- Constant load funds. Highest operating expenses. Not converted to A or B shares over time. CHOOSING A MUTUAL FUND Match stated goal of MF to your goal Look at the historical returns o 5 year, 10 year, since inception Look at expense ratio and loads o Lower the better, under 1.5% or so Look at manager and management tenure Different classes of MF shares (A, B, C) o A and B for longer term, C for shorter BASIC INVESTMENT STRATEGIES Dollar Cost Averaging (DCA) o Investing the same dollar amount each period. o Great to do through automatic paycheck deductions. Never see it, not tempted to spend it first. o Brainless, painless o Common sense in action When asset prices are high, your money buys less When asset prices are low, your money buys more o A good way to do this when you graduate: Fill out the form! Max $18,000 per year for 401k/403b Recommended: 10% Try and invest in the 401k, even if it’s just $50/month. SHORTER TERM INVESTMENT < 3 years, keep it safe. o Savings, MMA, MMMF, FCs o Conservative bond mutual fund (capital preservation funds) 5-10 years, you can take more risk. o Keep a portion safe- CDs, bond MFs o Invest a portion for growth and/or income Balanced MFs, Index MF o As your goal approaches (<2-3 years), move to safer investments BIG AL’S ASSET ALLOCATION For long term investments (retirement) 100-Age= % of portfolio in equities o Stocks, stock MF, real estate o Young folks can take more risk than older folks Remaining portion invested in fixed income o Safer assets, but with lower returns For the “equities” aspect of the portfolio o Spread your money around Different sized firms, different assets, different industries, different economies Keep your time horizon and risk tolerance in mind. You don’t want more than 6% in your precious metals. Those only help in hard times. REALLOCATION Reallocation refers to changing the target percentages for stocks vs. bonds over time. o 2 parts: Reallocate your existing portfolio Reallocate your future contributions (DCA) Rebalancing brings your existing portfolio back into the target percentages. o Reduces your risk exposure. o Sells the winners, buys the “losers” on sale. AAEC 2104 RETIREMENT INTRODUCTION 22% of working Americans are confident they will have enough money saved for retirement. Starting point o 80% of living expenses Taxes Planned vacations Life expectancy Retirement age o Financial Planner Lay out retirement goals Get advice Amount to save How to save Options o 401k o Traditional IRA o Roth IRA Do not plan on having Social Security. RETIREMENT PLANNING PROCESS Determine your retirement goals o When do you want to retire o How long do you plan on being retired o What do you want to be able to do during retirement How much will this lifestyle cost What income will you have during retirement Determine how much you need to invest o Retirement planning worksheet Determine where to invest for retirement RETIREMENT INCOME No social security “Corporate” retirement plans o Pensions o 401k, 403b, 457 o Keogh, SIMPLE, SEP – small business Personal retirement plans o IRAs Continued employment Other income o Sale/lease of assets