Investment Principles

Investment Principles

  • Time Value of Money: Money you have now is worth more than the identical sum in the future due to its potential earning capacity.

  • Inflation: The general rise in prices from one year to the next; money loses value over time.

  • Liquidity: The ease with which an asset or security can be converted into ready cash without affecting its market price.

  • Saving: Short-term tool that helps build emergency funds or personal financial goals while keeping funds secure.

  • Investing: Long-term commitment to build wealth.

Rule of 72

  • Formula: 72 / Interest Rate = # of years to double

Rate of Return

  • Gain or loss on an investment over a specific period of time.

Interest

  • Simple Interest: Interest earned on the principal amount (X).

  • Compound Interest: Interest earned on the principal amount (X) and the interest.

Equations

  • Simple Interest: FV=PV(1+rt)FV = PV(1 + rt)

  • Compound Interest: FV=PV(1+i)nFV = PV(1 + i)^n

Investing Strategies & Concepts

  • Diversification: Don’t put all your eggs in one basket → different mix of investments.

  • Asset Allocation: Attempt to balance risk/reward by adjusting the percentage of each asset in an investment portfolio.

Investing Styles

  • Growth: “HIGH RISK = HIGH REWARD” → Invest in companies that exhibit signs of above-average growth based on P/E ratios.

  • Value: “HUNT FOR BARGAINS” → Invest in companies that appear underpriced.

  • Momentum: “WHERE THE ACTION IS” → Invest in the fastest-rising stocks and move on when the stock slows down.

  • Technical: “CHART IS WORTH 1000 WORDS” → Forecast the direction of prices through the study of past market data, primarily price and volume.

  • Income: “LONG TERM & LOW RISK” → Goal is to obtain income rather than stock price appreciation. Find stocks that pay dividends.

  • Hybrid: “CUSTOMIZE” → Create a unique style that fits you by combining various styles together.

Employer & Portfolio Management

  • Employer Contribution Plan: A retirement plan in which the employee and employer contribute to the employer’s individual acct under the plan.

  • Active Management: A portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index or target return. Generally:

    • More

    • Attempts to outperform an index

  • Passive Management: A portfolio management strategy that tracks a market-weighted index or portfolio. Generally:

    • Less expensive

    • Matches performance of an index

Risk Preference & Investment Strategies

  • Time Horizon: Amount of time you're to keep your money invested.

  • Bank Roll: Determining the amount of money you can stand to lose is another important factor in figuring out your risk tolerance.

Return on Investment (ROI)

  • Formula: ROI=(Today’s Price - Your PriceYour Price)×100ROI = \left( \frac{\text{Today's Price - Your Price}}{\text{Your Price}} \right) \times 100

Comprehensive Financial Plan

  • Determine your goal, then determine your:Time Horizon:Longer Time Horizon → more aggressive, or riskier portfolio, can be built.

    • Shorter Time Horizon → more conservative, or less risky portfolio, can be built.

    • Risk Tolerance

Strategies

  • Start Early: Take advantage of compound interest and time.

  • Anti-Emotions: Don’t make investment decisions based on emotion.

  • Style: Determine your investing style.

  • Employer: Capitalize on your employer.

  • Involvement: Decide between active and passive management.

Emotional Investing & Avoiding Losses

  • Loss Aversion: The tendency to prefer avoiding losses to acquiring equivalent gains.

  • Ways to Avoid Emotional Investing Decisions:

    • Dollar Cost Averaging: Investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase.

Trading Strategies

Swing Trading

  • Make several trades per week

  • Positions last from days to weeks

  • Part-time

  • Utilizes trends and momentum indicators

  • Uses standard brokerage accounts

  • Fewer, but more substantial gains or losses

Day Trading

  • Short term

  • Make multiple trades per day

  • Positions last from hours to days

  • Full-time job

  • Uses short-term buy and sell signals

  • Relies on state-of-the-art trading platforms and tools

  • Multiple, smaller gains or losses

Transaction (or commission) Fee

  • A fee that the broker charges to buy or sell shares of a specific investment.

Capital Gain

  • When you sell a capital asset for more than its og $.

Capital Gains Tax

  • Short-Term Capital Gains Tax: The tax you pay for selling a capital asset after owning it for one year or less → taxed as regular income.

  • Long-Term Capital Gains Tax: The tax you pay for selling a capital asset after owning it for more than one year → subject to a tax of 0%, 15%, or 20% (depending on your income).

Risk & Reward Concept

  • Higher the risk = Higher possible return

Types of Risk

  • Market: The risk of losses in positions arising from movements in market prices.

  • Concentration: The risk in a portfolio arising from concentration rather than having diversification.

  • Inflation: The risk that inflation will undermine an investment’s returns through a decline in purchasing power.

  • Liquidity: The risk that for a certain period of time, a financial asset cannot be traded quickly enough in the market without impacting the market price.

  • Credit: The risk of default on a debt that may arise from a borrower failing to make required payments (bonds).