Investment Guidelines
Prof. Thornton Lecture
KSU 11/16/00

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• All people perform basic financial transactions
• CHECKING ACCOUNTS
• Real Low Balances
• Overdraft Checks, Monthly Fees and PerTransaction Fees
  =Profitability for the Bank
• Desired Checking Account
• No Fees, Interest Bearing, Don't Keep Large Balances
• Real High Balances
• Also highly profitable for the bank, avoid keeping high balances in checking!
• CREDIT CARDS
• Convenience Users (1/3 of all credit card holders)
• Pay off balance each month
• Balance Rollers (2/3 of all credit card holders)
• Do not pay off cards, interest charges each month
• Highly profitable for the bank
• ***Desired Credit Card has
• No Fees
• No Interest Charges
• BORROWING MONEY
• With Credit Card is very, very bad: High Interest Cost to Borrow
• Loans are generally good for Long Term Assets
• Cars
• Homes
• Home Equity Line of Credit (HELOC)
• Generally a good way to borrow funds
• Equivalent to a 2nd Mortgage
• Advantages
• Able to Borrow Large Amounts
• Lower Rate of Interest than Credit Card
• Interest on Home Loans is Tax Deductible
• Disadvantages
• Lose your Home if you default
• STUDENT LOANS
• Usually very low interest rate
• Usually good idea to not pay off early, invest your money elsewhere
• INSURANCE
• Need to Get
• Homeowners Insurance (Fire, Flood, etc...)
• Auto
• Medical
• Normally Not Needed
• Life Insurance (especially if single, no dependants)
• Extended Warranty on Purchases (Usually your money is better spent elsewhere)




***Before beginning to invest, recommend following the checklist below first:

Build Liquidity CushionSave either 2 or 3 months Take Home Pay But where to put the savings? Preferrably Low Risk/High Return/Very Liquid Money Market Mutual Funds are good

Tax Advantage Investment (through job)401 K--no taxes on money YOU put in (just when funds removed)-a portion "matched" by employer IRA, however no employer matching

Pay Off Credit Card Debt

Purchase Things On Sale (in bulk?)

Time to Invest!!!(beyond 401 K)See Next Table for Investment Choices





***Integral Steps in Investing Funds

DiversifyMinimize Risk 401 K: invest as little as possible in YOUR company stock Diversity guarantees to minimize losses but also minimizes chance for a "home run" Diversify across Asset Classes (stocks, bonds, U.S., Int'l, etc...)

Take Risk!Do not put ALL funds in Money Market Mutual Funds Invest in some stocks

Low Costs are Good High Costs are Bad

Excess Trading is BadIncreased Costs Increased Taxes






• INVESTMENT STRATEGY
• ***Start with Mutual Funds
• Indexing Approach
• S & P 500/500 large companies
• Bonds, Stocks, etc...each have their own indexes
• Low Fees $
• Minimal Thinking Required,
  Average of Index=Return
• Select High Performance Mutual Funds (Non-index)
• ?? Good Mutual Funds Repeat their good behavior ??
• ***Bad Mutual Funds always repeat their bad behavior***



• FINALLY, if you have a LARGE amount of funds to invest
• Buy individual stocks/bonds
• Increase Costs for Individual Stocks/Bonds
• Decreased Transaction Costs
• "Time" your sell-off: Sell Losers to recognize Tax Benefit, Keep Gainers to avoid paying Capital Gains Tax



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