finlit exam2 gen

before beginning an investment program, everyone should perform a financial checkup. This includes considering the following 5 elements

- Paying your bills on time

- Work to balance your budget

- Manage your credit card debt

- Start an emergency fund

- Have access to other sources of cash for emergency needs

Why is it recommended that emergency day fund be stored in a “liquid” account?

So the money can be accessed quickly and easily in times of unexpected need.

Give examples of investment that are liquid and others that are not.

Liquid:

- Cash

- Checking or savings accounts

- High-yield savings accounts

- Money market accounts

Not liquid:

- Real estate

- Retirement accounts before age 60

- Private business ownership

- Collectibles or antiques

- Stocks or mutual funds

What are the 3 basic steps (outlined in the Powerpoint) to begin Investing?

I. Set up an investment account (like a standard brokerage account or accounts with tax benefits with some withdraw restrictions)

II. Set up automatic deposits

III. Select the investments that will be purchased (index fund, mutual fund, ETF, stock, bonds, etc.)

Shelly buy $1,000 of stocks on January 1st. She earns $50 of dividends during the year and then sells the stock on Dec. 31st for $1,070. What is her yearly return as a percent?

($70 + $50)/($1000) = 0.12 = 12%

When someone buys a ___, they are loaning a corporation or government money for a given period of time.

bond

A ___ investment is one that is high-risk and is made in hopes of earning a relatively large profit in a short period of time.

speculative

examples:

-         Options

-         Commodities

-         Derivatives

-         Precious metals and gemstones

-         Coins and stamps

-         Antiques and collectibles

Stockholders can earn profit from ___ or by an increase in ___ price.

dividends

stock price

Since the end of WWII, stocks have returned almost ___% a year.

10%

Short-term investments (held less than 1 year) are taxed as ___

Long-term investments (held more than 1 year) are typically taxed at a (higher or lower) rate than short-term investments.

ordinary income

lower

Does a stock split guarantee that the stock’s price will increase?

No

How do corporate earnings impact stock prices?

The stock prices change based on the corporations’ reported quarterly income.

What does Beta measure?

The volatility of a stock or investment relative to the overall market

What stocks can you purchase on the Secondary market

Secondary markets include the New York Stock Exchange (the Big Board), NASDAQ and AMEX.

What are the advantages and disadvantages of a Traditional “Full service” Broker (Examples include: Merrill Lynch, Edward Jones, Morgan Stanley)?

Adv:

- Can buy and sell a great variety of stocks, bonds, mutual funds.

- firm takes care of confirmations, statements, dividends, income accounting, and supplying year-end tax data.

- Offers retirement and financial planning services.

- Offers investing and tax advice and portfolio reviews.

Dis:

- higher fees, which generally run from 1% to 2% of assets managed per year.

- full-service firms may charge a commission fee every time a security is bought or sold.

What are the advantages and disadvantages of a Discount Broker (examples include: Vanguard, TD Ameritrade, Fidelity)

Adv:

- you can choose your own stocks and bonds

- Can buy and sell variety of stocks, bonds. Also can buy selection of mutual funds.

- full control

- Typically no management fee.

- Often have low or no account minimums

- Efficient trade execution through online platforms.

- Fees are typically under 1% or even commission-free, reducing long-term costs.

Dis:

- No personalized advice

- Requires time, research, and a willingness to learn investing basics.

- Limited services

- Does not offer investment advice but free research and educational tools are available.

When someone borrows money from their broker to purchase stock it is called buying on the ___.

margin

This means if the share price decreases, they will have to provide additional cash as collateral. Note: Investors can set up their brokerage accounts to decline this feature.

What types of underlying assets can a Mutual Fund hold?

Stocks, bonds, cash, foreign currencies, commodities, REITs

Does a Mutual Fund typically provide some level of diversification to an investor? Explain.                      

Yes, it pools money from many investors to purchase a diversified portfolio of securities.

Does past performance of Mutual Fund guarantee future returns?

No.

What types of underlying assets can an ETF, an Actively Managed Mutual Fund and an Index Fund hold?

ETF: mirrors an index so mostly stocks or bonds

Actively Managed Mutual Fund: stocks, bonds, or other securities chosen by a fund manager

Index fund: passively managed to match a specific market index so typically holds all the stocks or bonds in that index

What are the average Expense Ratios associated with an ETF, an Actively Managed Mutual Fund and an Index Fund?

ETF: less than .3%

Actively Managed Mutual Fund: 1%

Index Fund: less than .3%

Is a Life-Cycle Fund considered diversified and why? How does the asset mix of a Life-Cycle Fund change over time?

Yes, it is considered diversified because it typically holds a mix of asset types. It automatically becomes more conservative as the retirement date approaches.

Does the expense ratio that investors are charged matter much? Explain.

Yes. Due to compounding over time the expense ratios can significantly impact your total returns. Lower expense ratios=more money stays invested and grows.

If a mutual fund earns a return of 8.5% and has an expense ratio of 1.5% per year, the investor really earns ___% return on their investments.

7.0%

when should you start saving for retirement and why?

You should start saving for retirement when you are young, so your money has more time to grow

Why does everyone need to save for retirement?

Everyone needs to save for retirement because on average, most people live an additional 16-30 years after retirement, the dollar amount received from social security and a pension will not be able to fund the type of retirement most people want, and inflation will increase the prices of your wants and needs.

Social Security typically replaces ___% of the average worker’s preretirement earnings.

Social Security benefits increase by ___% for each month past the age of 65 that an individual delays collecting Social Security benefits but only up to the age of 70.

95%

8%

What factors contribute to how much an individual receives on a monthly basis with a Defined Benefit plan?

Preretirement salary and number of years of service.

What are some examples of defined-contribution plans?

401(k), 403(b), and 457 or TSP

What factors contribute to how much an individual has in their 401(k) account when they retire?

- Investments the account holds

- Contribution amount

- Time

- Investment performance

- Fees and expenses

- Withdrawals and loans before retirement

List some of the features of an IRA account.

- The IRA contribution limit is $6,000.

- The IRA catch-up contribution limit will remain $1,000 for those age 50 and

older.

- 401(k) participants with incomes below $75,000 ($124,000 for couples) are

additionally eligible to make traditional IRA contributions.

- The Roth IRA income limit is $139,000 for individuals and $206,000 for

couples.

- The saver's credit income limit is $32,500 for individuals and $65,000 for couples

Yearly contributions to which type of IRA are typically tax deductible?

Withdraws from which type of IRA are typically taxable?

Traditional IRA

Traditional IRA

What is the 4% Rule?

The first year, individuals can withdraw 4% of their total investment balance. In following year, they can withdraw the same 4% plus the inflation rate.

Summarize the four steps that Clark Howard advises in his article on Retirement Saving.

• Live on Less Money Than You Make

• Be a Saver Before You Become an Investor

• Make Investing for Retirement Your Priority

• Enroll in Your Company’s Retirement Plan

• Start a Roth IRA if You Don’t Have Access to a Company Retirement Plan

• Put Your Money in a Target Date Fund

• Automate Your Investment Contributions

• Increase the Amount of Money You’re Investing Over Time

• Don’t Change Your Investment Plan Due to Big Swings in the Market

• Set Aside Any Extra Cash

What standard does a Financial Advisor operate under?

Brokers must only recommend suitable investments (Suitability Standard by Financial Industry Regulatory Authority (FINRA).)

What standard does a Fiduciary operate under?

Investment advisers are bound by a fiduciary standard that places their clients' interests ahead of their own. (according to the Investment Advisers Act of 1940.)

The highest legal and ethical standard in financial advising.

Why is Estate Planning important?

Estate Planning is a definite plan for the administration and disposition of one’s property during one’s lifetime and at one’s death.

What is a Last Will and who needs one?

It’s a legal document that outlines how a person's assets and property should be distributed after their death. Anyone who owns property, has children, or wants to ensure their assets are distributed according to their wishes should have a will.

What are the responsibilities of the Executor?

- Prepare an inventory of assets.

- Collect any money due and pay off any debts.

- Prepare and file all income and estate tax returns.

- Liquidate and reinvest other assets if necessary to pay claims.

- Distribute assets, based on the instructions in the will.

- Make a final accounting to beneficiaries and to the probate

- court.

Why is it important to designate a Guardian for minor children?

A guardian assumes the responsibility for providing the children with personal care and managing the estate for them.

What is a Living Will and why is it important to have one?

It provides for your wishes if you become physically or mentally disabled. It’s important because it ensures your wishes are followed, relieves burden on family, provides legal protection, and avoids unwanted intervention.

What are the responsibilities of someone designated as the Health Care Power of Attorney?

- Making healthcare decisions based on your wishes

- Communicating with doctors

- Managing health care logistics

- Handling organ donation and after-death decisions

Why is it important to have a Health Care Power of Attorney designated?

It’s important because it makes sure your wishes are honored, avoids family conflicts and court intervention, and works with a living will.

What is the benefit of having a Trust?

- Reduces or provides payment of estate taxes

- Avoid probate and transfer your assets immediately to your beneficiaries.

- Free you from managing assets.

- Provide income for a surviving spouse or other beneficiaries.

- Ensures property serves desired purpose after your death.

Why is addiction often associated with poverty?

People who are financially struggling may turn to addictive behaviors to escape their problems and find instant gratification. Addictions also tend to be expensive and can worsen financial hardship, creating a cycle where addiction leads to deeper poverty, which reinforces the addiction.

___% of child abuse and neglect cases are associated with some form of substance abuse.

80%

What is typically the largest wedding expense?

The wedding venue

What is the number one reason couples find stress in their relationships?

Finances

You should organize financial records (before, during or after) the divorce?

before

Why does a single person need to build a team?

A single person to build a team to compensate for the support system they may lack. As people age, they often rely on spouses or adult children to help with financial decisions and day-to-day support.