1. Selecting and
Monitoring Your
Investments
Dr. Barbara O’Neill, CFP®
Rutgers Cooperative Extension
oneill@aesop.rutgers.edu

2. Your Questions?

3. Types of Investments
All investments fall into two major categories:
 Loanership (Fixed-Income)
Lend money to a debt issuer (e.g., a city)
Receive a pre-set interest rate
Receive original principal back (assuming no default)
 Ownership (Equity)
Full or partial owner of investment
Values fluctuate
Potential higher return

4. Asset Allocation Models

5. What are Bonds? Why Own Them?
IOUs issued by corporations or government entities
 “Cushions” a stock portfolio (adds diversification)
 Addresses short- and intermediate-term goals
 Provides predictable income stream in retirement
 Affordable: face values as low as $100 (e.g., U.S. Treasury securities)
 Some pay interest semi-annually (corporate and government bonds)
 Others pay interest at maturity (e.g., EE and zero-coupon bonds)
 Some offer tax advantages (municipal bonds)
 Capital gains potential (if interest rates go down after purchase and you sell)

6. Bond Investment Risks
 Credit risk
 Interest rate risk
 Inflation risk
 Call risk

7. Bond Investor Decisions
 Decide on risk level
 Investment grade bonds: top 4 grades (BBB, A, AA, AAA)
 Junk bonds (a.k.a., high yield bonds): lower rated and
higher risk
 Decide on maturity
 Match to financial goals
 Determine the after-tax return
 Taxable versus tax-exempt

8. Bond Ratings Measure Default Risk

9. U.S. Treasury Securities
 Considered safest fixed-income investment
 Sold at periodic auctions; secondary market
 Earnings exempt from state and local tax (principle of
“reciprocal immunity”)
 $100 minimum with $100 increments
 Resource: http://www.treasurydirect.gov

10. U.S. Treasury Securities
 Types of Treasury Securities:
Bills: Maturities up to 12 months; buy at discount
Notes: 2-, 3-, 5-, 7-, and 10-year maturities
Bonds: 30-year maturities (“long bonds”)
 Can purchase through Treasury Direct
Guided Tour: http://www.treasurydirect.gov/indiv/TDTour/default.htm
 Interest is credited electronically

11. TIPS: Treasury Inflation
Protected Securities
 5-, 10-, and 30-year maturities
 Interest rate fixed for term of bond
 Principal adjusted twice a year for CPI
 Protection against deflation (will get principal back)
 Lower interest than regular Treasuries
 Resource: https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

12. U.S. Savings Bonds
 Two types: EE bonds and I bonds
 EE Bonds: Buy at 50% of face value
 I Bonds: Partly indexed for inflation; buy at full face value
 Denominations from $50 to $5,000
 Maximum of $10,000 of each type per year (electronic)
 Interest compounds semi-annually; no state taxes
 Can cash in after 12 months; lose 3 months interest if cash in
within 5 years; mature in 30 years
 Resources: https://www.treasurydirect.gov/indiv/products/prod_eebonds_glance.htm
and https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

13. Corporate Bonds
 A corporation’s pledge to repay principal and periodic interest
 Considered safer than company stocks
 Face Value
 Dollar amount bondholder receives at bond’s maturity date
 Usually $1,000
 Coupon rate
 Stated interest rate
 Interest payments made every six months
 Example: $1,000 x 5.8% = $58 (in two $29 payments)
 Maturity Date = Date that face value is repaid; generally 1 to 30 years
 Resource: https://www.sec.gov/investor/alerts/ib_corporatebonds.pdf

14. Zero-Coupon Bonds
 Pay no (zero) periodic interest
 Sold at a deep discount from face value
 Eventually grows to face value at maturity
 Very volatile as interest rates change (if sold prior to maturity)
 Advantages:
 Low up-front cost
 Predictable return
 Disadvantage:
 Annual increase in value is taxable (“phantom income”)
 Can put in an IRA or buy tax-exempt “zeros” to avoid this problem
 Resource: http://www.sec.gov/answers/zero.htm

15. Classifications of Stock
 Common and preferred stock
 Preferred Stock- a cross between a stock and a bond (income oriented);
no voting rights
 Market capitalization (“cap”)
 Share price x number of outstanding shares
 Defensive and cyclical
 Cyclical Stocks – stock from a company whose profits are greatly
influenced by changes in the economic business cycle.
 Countercyclical (or Defensive) Stocks – stock from a company that
performs well even in an environment characterized by weak economic
activity
 Growth and value
 Value Stock- Stock that is selling for < the true worth of company assets.

16. Common Stock
 Share of ownership in a company
 Elect directors
 Voting rights on other matters
 Proxy – written authorization given by shareholder to someone
else to represent him or her and vote his or her shares at a
stockholder’s meeting.
 Two ways to earn money
 value of stock increases (capital gain)
 stock pays dividends

17. Historically, common stocks have
out-performed all other types of investments,
over longtime periods BUT…it has not been a
smooth ride!
Historical Perspective

18. Time-Tested Stock Strategies
 Buy what you know or get to know (research)
 Buy and hold quality stocks
 Diversify among industry sectors
 Dollar-cost average
 Reinvest dividends and capital gains
 Don’t invest > 10% of total portfolio in your
own employer’s stock

19. Analyzing Stock Performance
 Earnings per share (EPS)
 Formula: Corporation’s after-tax income
divided by number of outstanding shares
of common stock
 Example: $5,000,000/10,000,000 = $0.50
 EPS increase = generally a healthy sign

20. Analyzing Stock Performance
 Price-Earnings Ratio (P/E Multiple)
 Price per share of stock ÷ firm’s earnings per share (EPS)
 Example: $10 price/0.50 EPS = a PE ratio of 20
 Tells how much investors are paying for a company’s
earning power
 P/E of 15  long-term average P/E
 Need to compare P/E of stock to firms in same industry
 Projected Earnings
 EPS and P/E based on historical data
 Future expectations more relevant

21. Common Stock Price Quotes
Last trade price = $44.37 Annual dividend = $1.68
P/E = 15.41 (44.37÷ 2.88)  Earnings per share = $2.88

22. Stock Splits
 Stock Split- when shares of stock owned by
existing shareholders are divided into a larger
number of shares; done to change (lower) price
 Example: 2:1- twice as many shares worth half as much
 Reverse Stock Split- results in smaller number of
shares; less common; often done to maintain
listing on a stock exchange (to meet minimum share price)
 Example: 1:2- half as many shares worth twice as much

23. What is a Mutual Fund?
n Portfolio of stocks, bonds, or other securities
n Collectively owned by many investors
n Managed by professional investment company

24. Mutual Fund Advantages
 Full time professional money management
 Reduced risk through diversification
 Low minimum to get started and reinvest
 Ready access to your money (liquidity)
 Shares issued and redeemed on demand
 Automatic investment and withdrawal plans
 Monitoring is easy

25. Mutual Fund Disadvantages
 If broad market drops, so goes a fund
 No guaranteed rate of return
 Unwanted taxable distributions
 High fund expenses erode returns

26. How Fund Investors Make Money
Income Dividends
 Earnings paid from dividend and interest income
 Taxed as ordinary income
Capital Gains Distributions
 Distributions when the fund buys and sells securities
 Taxed as long-term gains
Combination = Total Return
Capital Gains (or Losses)
 Capital gains (or losses) when fund investors sell shares at a price
different than price you originally paid
 Taxed as short- or long-term gains

27. Net Asset Value
 The NAV is the price your fund pays you
per share when you sell.
Value of fund
Number of shares = NAV
Example: $52,500,000
3,500,000 = $15 per share

28. Mutual Funds Versus Individual
Securities
Individual securities (e.g., stocks and bonds)
 Require time and expertise to analyze
 Usually have higher transaction costs
 Offer less probability of adequate diversification
 OK if:
 you have stock-picking expertise
 you have $20-30K to buy 10-20 stocks to diversify
 you are buying Treasury securities

29. Bonds vs. Bond Mutual Funds
 Individual bonds:
 Semi-annual income stream
 Return of principal at maturity
 Ability to “ladder” maturities
 Bond mutual funds:
 Diversification-owns 100+ bonds
 Dividends paid out monthly
 Low minimum to purchase
 Liquidity
 Subject to interest rate risk

30. Actively Managed Funds
Versus Index Funds
 Managed Fund  fund manager makes
decisions regarding what securities are
included in the fund’s portfolio
 Index Fund  securities held by the fund
replicate those contained in a specific index
like the Standard & Poor’s (S&P) 500

31. Stock Funds
Long-term
Funds
Stock Funds Bonds Funds Other Funds
Growth
Equity income
Price growth vs.
Dividend Income
Aggressive Growth
Socially responsible
Invest in socially
responsible firms
Economic SectorsSector funds
Company Size
Regional
Index funds Match index holdings
% U.S. vs.
International
Small-cap
Mid-cap
Global
International
Large-cap
Source: Kapoor, Dlabay, &
Hughes. Focus on Personal
Finance (2008)

32. Bond Funds
Long-term Funds
Stock Funds Bonds Funds Other Funds
High-yield
Intermediate
Corporate bonds
Intermediate U.S.
Gov't bonds
Long-term
corporate bonds
Long-term U.S.
gov't bonds
Municipal bonds
Short-term
corporate bonds
Short-term
U.S.gov't bonds
Source: Kapoor,
Dlabay, & Hughes.
Focus on Personal
Finance (2008)

33. Other Funds
Long-term
Funds
Stock Funds Bonds Funds Other Funds
Money Market Funds
Asset Allocation Funds
Balanced Funds
Lifecycle Funds
Fund of Funds
Source: Kapoor,
Dlabay, & Hughes.
Focus on Personal
Finance (2008)

34. Balancing Risk and Return
Source: Garman and Forgue.
Personal Finance (2008)

35. Mutual Fund Fees
 Sales Charges/Loads- Charged to buy and sell shares
 Operating Expenses
 Management fee- Charged yearly (.25%-1.5% of average NAV) to pay fund manager
 12(b)1 Fee- Annual fee to defray advertising and marketing costs; cannot exceed 1% of assets
 Operating Expenses- Charged for shareholder services
 Expense Ratio
 Total expenses associated with management fees and operating costs of the fund
 Avoid above-average fund expense ratios
 Stock funds > 1.4%
 Bond funds > 1.00%
 Money market funds > 0.5%

36. Typical Mutual Fund Fees
Source: Kapoor, Dlabay,
& Hughes. Focus on
Personal Finance (2008)

37. Steps to Buying a Mutual Fund
 Identify type of fund that matches goal
 Research specific funds
 Family of Funds: One investment company
manages a group of mutual funds portfolios
 Get and read the prospectus
 Prospectus: Required legal document that states a
mutual fund’s investment objectives and policies
 Make your purchase
 Establish a schedule to buy more shares

38. Sources of Investment Information
 Stock and Mutual Fund Annual Reports
 Financial Publications
 Business Week, Forbes, Kiplinger's Personal Finance, WSJ, and Money
 Quality Ratings
 Bonds -- Standard & Poor’s, Moody’s
 Annuities -- Standard & Poor’s, Moody’s, Duff & Phelps, Weiss Research,
A.M. Best
 Stocks -- Value Line Investment Survey, Standard & Poor’s Stock Guide
 Mutual Funds -- Morningstar Many of these are available at
public libraries and/or online

39. Action Steps
 Get started now
 Know your risk tolerance
 Match investments to your goals
 Know that the biggest risk in investing is not investing --
inflation is the real enemy
 Reinvest dividends and capital gains
 Compare results to market benchmarks
 Take a long view and hold on

40. Questions and Comments?
Barbara O'Neill, Ph.D., CFP®, CRPC
Extension Specialist in Financial Resource Management
and Professor II
Rutgers University
Phone: 848-932-9126
E-mail: oneill@aesop.rutgers.edu
Internet: http://njaes.rutgers.edu/money/
Twitter: http://twitter.com/moneytalk1