8-Personal Investing

PV=Present value, r=Interest rate, t=years, FV=future calue

 
 

  1. About
    1. Supply of financial capital is Inelastic, depending mostly on habits and cultural customs than fluctuations in the markets or the like
      1. Can make people uneasy or queasy at the thought of it, or,
      2. Can be banned altogether as in a lot of Muslim countries
    2. “Most powerful force in all the universe is compound interest”-Albert Einstein
    3. Formula for calculating compound interest:PV(1+r)T=FV

       
       

$1000

5%

10%

15%

10yrs

$1628

$2594

$4046

25yrs

$3386

$10835

$$32919

40yrs

$&7039

$45259

$$267864

 
 

  1. Investment considerations[RoR, Risk, liquidity, tax]
    1. RoR-expressed, usually as a %/year. Some are fixed rates, some adjust
    2. Risk-Probability and extent the expected return is volatile. Can be offset by diversification
    3. Liquidity-How easy it is to get the money out of the investment. All things being equal, the more liquidity the better
    4. Tax status-EG mortgage tax breaks or capital gains taxes
  2. Investment choices
    1. Bank accounts-RoR very low, no real risk, very liquid
    2. Money market account-Better return, nominal risk, A little less liquid
    3. CD’s-Contract to leave money with bank for a certain amount of time: Higher RoR then money market account, little risk involved, but there are penalties for early withdrawl
    4. Funds-RoR higher, more of a risk though how much depends on the typr of fund. Usually market based
    5. Diversified portfolio of blue chip stocks-Better RoR, but more risk is involved, liquidity is relatively high.
    6. Diversified growth stocks- RoR higher(this is where 15% is possible, but these are non-established companies so risk is much higher though handicapped through diversification. Can be highly liquid though could suddenly become unsellable
    7. Real Estate investing-Highly variable RoR, could be highly risky(see “housing Crisis” of 2008). Very low liquidity, most people believe their home is an investment but I consider it in most cases to be an expense(with an asterisk for tax breaks)
    8. Buying gold/precious metals-“Better left to true professionals”:Involves timing and high risk tolerance
  3. How to decide
    1. Time horizon-Need money in the near term/long term
    2. Risk tollerance-Longer time horizon gives risk a chance to offset and give you a handsome reward for the risk taken
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