Final Exam Preperation

1. Whats the difference between an IRA and a 401K
IRA- A retirement account with large tax breaks 
401K- 
2. What annual percentage of return did the S and P 500 make between May 22, 2009-> May 22, 2013

19.2%
3. What’s the most important consideration when choosing to buy a fund of any kind? Is it the turnover, commisiion or expense ratio?

Expense Ratio
4. If a fund has a frontend load, who gets it?

Broker, advisors
5. If a fund has a turnover of 50% what does that mean
6. Is it more important to pay off credit card debt, or start investing as early as possible

Pay off credit card, because high interest rate
7. What did the average US millionaires pay for their last car

30,000

8. Whats the most popular ca among US millionaires

Toyota
9. If laruen invested 200/month from age 18 to age 55, how much would she have if she earned 9% per year

675,911.48
10. The Dalbow Study shows that most investors earn large returns. Whats the biggest culprit

By high, selling low
11. When a fund charges a commission who gets that money

Stock broker/ sales agent
12. As an investor ages what asset do they usually increase in their portfolio

Bonds
13. What do 12B1 fees pay for in a actively managed fund?

Advertising
14. Since 1985 which markets have earned higher stock market returns? Fast growing economies like China? Or slow gorwing economies like the US?

Slow growing economies like the US

Investing in Virginia

First Step: Deciding on Virginia

• Virginia has quite cheap houses
• Quite Low Taxes
• My university is located in Charlottseville, Virginia

Second Step: Figuring out my Income

• http://business-schools.findthebest.com/d/a/Virginia
• according to this website the average graduate from the University of Virginia Business School is 100,839
• however this is before taxes 
• 
  

Investing in Real Estate

Class Notes:

• target retirement fund 2060:diversified portfolio within a single fund that adjusts its underlying asset mix over time

• cash flow positive real estate: two homes under one roof
• same amount of maintenance, but two sources of revenue derived from two tenants 
• finds duplex for $170,000, bank will loan 80% of the home but most provide downpayment of 20%
• 20% 170,00 = $34,000
• must pay $650 a month for 25 years
• charge renters $600 per month each, use extra money to pay a property manager
• property manager: deals with the problems that occur in the house
• Rental yield= yearly income from rent/price of property (should be 10%)

Connection with Family:

     Today we learned how financially viable buying & leasing homes are.  The important thing to do is make the renters pay more than you have to pay for the loan.  I thought this would we a awesome idea for my parents to do, and I was pleasantly surprised to find out that in fact parents were doing it!  My parents own a home in Vienna, Virginia and are renting it out. However, due to the financial crisis my parents are unable to charge the renters more than they have owe the bank.  Thus the renters are not paying for the house completely, but they are lowering the prices substantially.  I then recommended that my parents raise the price slightly so that we are paying even less, or hopefully none of our own money to the bank.  

Project:

http://charlottesville.backpage.com/HomesForSale/
According to this website Charlottesville, where my college is located, is a quite good place to invest.  This is where I am trying to buy a duplex, possibly a quadplex.  Since Charlottesville is a big college town I am looking for a cheaper place because college students will not have large incomes to spend on fancy houses.  Joshua Dawe and I are planning on hypothetically investing in a large, off campus, house that will be able to house several people.  Thus we will have several renters and several sources of revenue.  Rather than just one family, like my family is doing.

US market vs. International market

Class Notes/Questions:
1). Over the past 12 months what percentage gain did the U.S. markets make?

• Ticker:
• S&P 500: VFINX
• Total US market: VTSMX

2). Over the past 12 months what percentage gain did the International market make?

• Ticker
• International market: VGTSX

Finance Questions we Should all know the Answers to

1.  Why am I hoping the stock markets fall, rather than rise?  See Warren Buffett's quote about this, on page 77 of my book.  If you don't have your book with you, please ask the teacher to provide you one.  There are eight copies on my desk.

     Warren Buffet's quote is basically an extended version of another of his famous quotes, "be greedy when others are fearful and fearful when others are greedy.  In other words you want the stock markets to fall because then so will stock prices, allowing you to buy more individual stocks.  Such as with the hamburger metaphor, you should want to buy your hamburger, and stock, at a lower price rather than at a higher one.  Thus if the stock market would crash tomorrow many intelligent investors would rejoice because the overall price of stocks would be cheaper and then they could buy them at a lower price to see them rise later.

2.  How have I personally determined my bond allocation?  If I wanted to take more risk with my money, what might my bond allocation be?

Mr. Hallam has determined his bond allocation by his age, so it is 38%.  Bond produce lower returns, but they act as a parachute when the stock market crashes and you end up losing less money.  After the stock prices have lowered you will be able to quickly take money out of your bond index and invest in the stock index when it is at a lower price.  And if you wanted to be riskier you would have less bonds and more stocks.  Thus your portfolio would have a higher potential for earning profit, however there is also a greater possibility that you can lose money.

3.  Why am I buying bonds right now, instead of stocks?  Hint.. it has nothing to do with my "predictions" about the stock market's short term direction, nor anything to do with current PE ratios.

Because the price of the stock index he is invested in is rising he is rebalancing to to keep his money balanced.  As his stock index increases the overall percentage of his money in the stock will increase past to what he has previously allocated.  The value of his stock will increase so that more than 62% of his money is in stocks, both international and Canadian.  Thus, to reallocate his funds he must sell some of his stocks and invest in bonds to keep his percentage at his set percentage.  This keeps him true to buying when others are selling and selling when other are buying.

4.  Why don't I invest in actively managed funds?

Actively managed funds have much higher expense costs than passively managed funds.  The best predictor of the success of a fund is how low it's expense ratio is, and passively managed index's cost less than actively managed funds.  Also, those who try to predict the future and beat the system often actually perform worse than an index fund.

5.  What is the typical expense ratio for the average actively managed mutual fund in the U.S.?  (See table 3.2 on page 54).

The average expense ratio for the typical actively managed mutual fund in the U.S is 1.53%.

6.  Notice my two stock market holdings:

VTI:  U.S. total stock market index (purchased as an ETF)

VEA:  The international stock market index (purchased as an ETF)

Within each of these indexes, there are thousands of individual stocks.  What is the average expense ratio for each of these exchange traded funds? 

The average expense ratio for the U.S. total stock market index is only 0.06% and the international stock market index is a bit higher at 1.2%.  However both of these index's are significantly lower than the U.S. actively managed stock market mutual funds.

Choosing a Fund to Invest in

Class Notes:

• time and preparation is key when it comes to investing
• as Warren Buffet says "Noah did not start building the ark when it was raining"
• noah principle: start early
• compound effect: how your investment increases with each year and is able to produce even more returns
• snowball effect: your money slowly builds up and is able to collect even more snow
• best way to invest your money is to take an allotted amount out of your earnings as soon as you receive it rather than after you've spent money
• this allowing to stick to your budget and will end my making you invest more
• DO NOT invest if you have credit card debt
• most credit card companies charge around 18-20 percent while the average stock will only provide you with a 10% return.  Thus you are simply losing 8%
• margin  accounts: when you borrow money to invest

Home Discussion/ Project Research:

    After further discussing I have decided not to take my one thousand dollars out of gift account and I will only invest the four hundred and thirty five dollars I made over summer.  And since I do not have the thousand dollars minimum required for the Roth IRA vanguard stock index I will have to research another source of investment where the minimum is lower; possibly a passively managed stock index.  I might, however invest in the Vanguard Windsor II, and even though this is actively managed the expense ratio is very low.  

Roth IRA

Class Notes

• Good Time to buy stocks:
• when economy is doing poor-share prices are low
• when a overall strong company has a temporary setback
• when others are fearful- others are selling
• asbestos in wall boards caused cancer: found out in 80's & 90's
• Americans sued the companies, companies lost money, share price dropped
• perfect time to invest in the company
• Bill Miller: one of greatest fund manager of all time
• had beaten S&P 500 15 times in a row
• Best way to predict success of actively managed funds
• the ones with the lowest expense ratios-costs
• bond index are useful because you can sell them at any time
• you can re-balance and sell bonds to buy into stocks

Further Research:

Project/Home Discussion:

      I am still unable to decide which type of fund to invest in because almost all the investment funds need a minimum of $1,000.  And because I actually want to start investing rather than simply pretending to, I need to find a investment fund that has a much lower minimum.  Preferably around $400.  If, however, I am unable to find one with such a low minimum,  I might have to borrow from the $10,000 that I will earn once I turn 18.  I have offered the idea to my parents that instead of earning the $10,00 when I turn 18, I will take out $1,000 now to invest in a stock index Roth IRA and then only receive $9,000 once I turn 18.  I have decided to invest in Vanguard Windsor II Fund because not only does it have the highest return but also because it is the same one my parents invest in.