Types of InvestmentsTypes of Investments

Stocks / Mutual Funds / Index FundsStocks / Mutual Funds / Index Funds

Stocks• Represent ownership of a company• You buy them when…

• you think a company will increase itsrevenue and profits (growth stock)

• you think that a stock is undervalued at the moment (value stock)

Mutual funds• A basket of stocks in one package, chosen

by a professional money manager.

Index funds• Mutual funds that invests only in the stocks

that make up an index (Dow Jones, S&P500, NASDAQ, Wilshire 5000, etc.)

Stocks / Mutual Funds / Index FundsStocks / Mutual Funds / Index Funds

Volatile and Risky

over the short term

Predictable and Profitableover the long term

1-Year Returns

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

1926 1936 1946 1956 1966 1976 1986 1996 2006

= 23 years (28%)

= 58 years (72%) Best year: 53.99%Worst year: -43.34%

3-Year Rolling Returns

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

1926-1928 1936-1938 1946-1948 1956-1958 1966-1968 1976-1978 1986-1988 1996-1998

= 9 periods (11%)

= 70 periods (89%) Best period: 33.41%Worst period: -25.55%

5-Year Rolling Returns

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

1926-1930 1936-1940 1946-1950 1956-1960 1966-1970 1976-1980 1986-1990 1996-2000

= 6 periods (8%)

= 71 periods (92%) Best period: 28.70%Worst period: -8.25%

10-Year Rolling Returns

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

1926-1935

1931-1940

1936-1945

1941-1950

1946-1955

1951-1960

1956-1965

1961-1970

1966-1975

1971-1980

1976-1985

1981-1990

1986-1995

1991-2000

1996-2005

= 0 periods (0%)

= 72 periods (100%) Best period: 21.52%Worst period: 2.51%

20-Year Rolling Returns

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

1926-1945 1931-1950 1936-1955 1941-1960 1946-1965 1951-1970 1956-1975 1961-1980 1966-1985 1971-1990 1976-1995 1981-2000 1986-2005

= 0 periods (0%)

= 62 periods (100%) Best period: 18.58%Worst period: 6.46%

30-Year Rolling Returns

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

1926-1955 1931-1960 1936-1965 1941-1970 1946-1975 1951-1980 1956-1985 1961-1990 1966-1995 1971-2000 1976-2005

= 0 periods (0%)

= 52 periods (100%) Best period: 15.35%Worst period: 10.76%

40-Year Rolling Returns

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

1926-1965 1931-1970 1936-1975 1941-1980 1946-1985 1951-1990 1956-1995 1961-2000 1966-2005

= 0 periods (0%)

= 42 periods (100%) Best period: 14.13%Worst period: 11.28%

Investment AccountsInvestment Accounts

1. Accounts without tax advantages

2. Accounts with tax advantages

• Retirement accounts

• 401(k)• Traditional IRA• Roth IRA

Asset AllocationAsset Allocation

$10,000 invested every year (1992-2006)($150,000 over 15 years)

$368,421

$10,000 invested every year (1992-2006)($150,000 over 15 years)

$368,421$331,541

$10,000 invested every year (1992-2006)($150,000 over 15 years)

difference: $36,880

Index Funds Are Great!Index Funds Are Great!

• Index funds will usually beat most actively-managed mutual funds, up to 80-90% of them.

• Index funds have lower expenses, so less of your returns are eaten up.

• Index funds have low turnover rates.

• Index funds don’t rely on a superstar fund manager.

• Index funds have a long track record.

• Target funds have a particular year as their goal – for instance, the year you plan on retiring.

• Target funds start off investing aggressively, then become more conservative over time.

Target Mutual Funds Are Great!Target Mutual Funds Are Great!

Target 2050 Fund

2010 2020 2030 2040 2050

Stocks Bonds Cash

Buying Mutual FundsBuying Mutual FundsWhat to buy?There are over 8,000 mutual funds! Which ones should you get?

• My personal suggestion: Buy index funds or targeted funds

Where to buy?There are hundreds of mutual fund companies! Which ones should you use?

* My personal suggestion: Buy from one of these three great companies:

How to InvestHow to InvestDON’T:• Invest before you’ve paid off your credit card debt

• Buy/sell individual stocks unless you really know what you’re doing

• Panic when the market drops

DO:• Start early and invest for a long time

• Use your company’s retirement plan, especially if they give you

free money!

• Make your investing regular and automatic

• Build a diverse portfolio - don’t put all your eggs in one basket

• Consider buying index funds and/or target funds

• Consider buying from Vanguard, Fidelity, or T. Rowe Price

• Buy only those mutual funds that have long, successful track records