Opportunity Cost

• According to Morning Star, the code for the average international market stock is VGTSX, which stands for Vanguard Toral Intl Stock Index Inv 

• warren buffet's montra: be greedy when others are fearful, and be fearful when others are greedy.

• re-balancing: keeping your stocks at an allocated percent: buying low, selling high
• eg. having 50% in US market and 50% in international market, when US markets grow so the percentage is more similar to 55% in the US market and 45% in the international market.  Then you sell the 5% extra in the US market and invest it in the international market.  Thus your portfolio should continually grow.

• endowment fund: a large, safe amount of money that is safe yet grows slowly: for colleges/ rich high school only

• opportunity cost: 
• eg. if you watch TV instead of movies, you can invest that money in the stock
• eg. instead of buying $300 cleats, buy only $100 cleats and investing the $200 you saved
• eg. instead of buying lunch at school everyday, bring your lunch from home and invest the saved money
• eg. instead of going to a prestigious, top university, attend a cheaper, less well known college.  And invest the money you save from tuition costs
• Opportunity cost: By taking the money you would have spent and saving it, you create more money for future use

• Family Discussion:   
• My parents whole heartily  agree with opportunity cost, especially with college 
• My parents would rather me go to a slightly less well-known college than graduate from a expensive college with thousands of dollars in student debt
• We talked about a family friend and her son
• He graduated from Duke, with some obscure major
• Thus he had thousands of dollars in student debt and couldn't find a job 
• It is all too common for college graduates to have spent so much money on their education and then end up living in their parent's basement

Conclusion:

        Opportunity cost is important in weighing the advantages and disadvantages of a decision.  The question people should ask themselves when buying or investing in something is "do I really need this? Could I be using this money more effectively some other way?"  Instead of buying a 300 dollar pair of cleats, why not simply buy a slightly cheaper pair that has the same durability.  And taking the money you would have saved and either spend it on something more worthy, or invest that money.  This applies to college in the sense that a student could save heaps of money if they attend a slightly less prestigious college rather than an expensive Ivy-League school.  We also learned about endowment funds and how the technique many colleges use when re-balancing their funds can apply to our savings.  The key to re-balancing is keeping your stocks at an allocated percentage by buying low and selling high.  Whenever one group, such as international markets or the US market, does better than the other, you should sell those stocks and buy into the other group when it is cheaper.  One problem with this technique is that it is hard for many people to sell their stocks when they are increasing in value and buying when they are decreasing.  Another problem is that it takes more upkeep than other techniques for managing stocks, but the yield can be often much higher.  

Time is your Best Friend when Investing

1. If somebody invested $10,000 in the US market 25 years ago, what would it be worth today?
       If a person invested $10,000 in the S&P 25 years ago, their money would be worth about $102,000      today.

2. What annual rate of return would they have earned during the past 25 years?

3. If somebody invested $2,000 per year at this rate of return, from the time they were 18 until they were 65, how much money would they have?

4. If somebody invested $10,000 per year at this rate of return from the time they were 40 until they were 65, how much money would they have?

Commentary:

     Overall, these examples show us how important it is to invest early.  No matter how much money you invest, you make more money if you invest early.  If you invest early, you end up not having to put as much money in, yet still earning more money overall.  

Links:

How to calculate the rate of exchange:

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

How to find the growth of the S&P 500:

http://quote.morningstar.com/fund/chart.aspx?t=VFINX&region=USA&culture=en-US

8/10

Class Notes: January 21st

• DOW: top 30 businesses in the United States
• named after John Dow, who created the list
• Old boys game: hard to get into it
• S&P 500: top 500 largest companies in the United States
• S&P: standard and pores
• past 10 years, stock market hasn't doesn't well overall
• if I invested 10,000 dollars in 2003, how much would it be worth today
• my guess: $25,000
• actual: $19,490
• if I invested 10,000 dollars in 1993, how much would it be worth today
• my guess: $30,000
• actual: $49,000
• http://quote.morningstar.com/fund/f.aspx?t=vfinx 
• What was the US market's average annual return for the last decade
• last 10 years: 6.9%
• last 20 years: 8.2%
• investing $5 a day, $150 per month, $1,800/year for 47 years will make 84,600
• but with an interest rate of 8.5 it will have increases to 1,039,895
• investing 25 a day, 750 per month, 9,000 a year for 25 years will make 225,000
• but with interest: 768, 190

First Blog - the Value of College

Today we learned about the several advantages and disadvantages of attending an Ivy League university.  While there is great name recognition for the Ivy League schools, we learned today that name recognition is not always worth the thousands of dollars the Ivy League school are charging.   If a student has the funds to afford the college, then by all means he should attend an Ivy League school if possible.  However, for those whose parents are unable to pay for the full ride of these expensive universities, it is better to go to a slightly less prestigious college.  According to the articles we read in class, what university you attend to matters less than the fact that you attend college.  The line between a top-notch universities and second tier schools has blurred; the less prestigious, but also less expensive second and third tier schools often offer just as valuable education.  It is better for a student to graduate from a less well-known college without student debt, than have gone to a school such as Harvard but have thousands of dollars of student loans.  After reading the articles, we found out that graduates from Ivy League schools and less known schools had approximately the same average income later in life.  It is the student, not the college, which determines how successful that person will be in life.  After discussing this topic with my parents, they whole-heartedly agreed.  And it is for these reasons why they decided not to pay full ride for college.  We read an article that described how people whose college is fully paid for tend to earn lower grades.  It is because for those people who how fewer funds, that they tend to value money, and their college education more than those who have everything given to them. 

College students whose parents foot more of bill for college get lower GPAs:

http://finance.yahoo.com/news/study-parental-support-sends-down-145802985.html

The Disadvantages of an Elite Education:

http://theamericanscholar.org/the-disadvantages-of-an-elite-education/