Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
85 Cards in this Set
- Front
- Back
|
Stocks
|
Stocks represent shares of ownership in a public company. Examples of public companies include IBM, Microsoft, Ford, Coca-Cola, and General Mills. Stocks are the most common ownership investment traded on the market.
|
|
|
Bonds
|
Bonds are basically a chance for you to lend your money to the government or a company. You can receive interest and your principle back over predetermined amounts of time. Bonds are the most common lending investment traded on the market.
|
|
|
Mutual Funds
|
A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund.
|
|
|
Pros of Mutual Fund
|
Diversification
|
|
|
What percentage of households own mutual funds?
|
50%
|
|
|
Inflation Risk
|
the risk that the value of an investment will be eroded as inflation rates rise
|
|
|
interest-rate risk:
|
the risk that the value of an investment will decline as interest rates rise
|
|
|
credit risk:
|
he risk that an obligation will not be paid
|
|
|
Liquidity Risk
|
he risk that an investor will not be able to buy or sell an investment quickly because buying and selling opportunities are limited
|
|
|
Currency Risk
|
the risk that an investment transacted in a foreign currency will lose value due to fluctuations in the rate of exchange
|
|
|
Political Risk
|
he risk that a foreign investment will lose value due to unfavorable political or regulatory changes in that country
|
|
|
Mutual Funds: Operating Expenses
|
These are the fund's costs of doing business. They are not charged directly to you. Instead, they are paid by the fund from its assets before any earnings are distributed. These expenses are calculated as a percentage of the fund's average net assets.
|
|
|
Life Insurance: "Credit Life"
|
pays the remaining debt if the borrower dies.
|
|
|
"single premium" credit life
|
a product that's been targeted by consumer advocates so much that some lenders, such as Citigroup, have stopped selling it. Freddie Mac and Fannie Mae have banned the purchase of mortgages that have single premium credit insurance.
The single premium is supposed to be paid in a lump sum, so it's often added on to the price of the loan with the consumer paying interest on the loan and the insurance. In some cases, the insurance coverage may, for example, last only five years while the loan may take longer to repay. That means the consumer continues paying for insurance even though the purchase is no longer covered. |
|
|
Disability Income Insurnace
|
Provides a specific benefit to replace part of lost income when an insured person becomes uanble to work because of illness or injury.
|
|
|
Disability Income Insurance: Amount of Benefit
|
May be a stated dollar amount, or a percentage of your income (typically 50-70%).
|
|
|
Disability Income Insurance: How do you receive your benefit?
|
You must meet the requirements of being Totally Disabled. It is usually in 2 stages.
Stage 1: Disability prevents you from performing the essential duties of your own occupation (usually for 1 or 2 years). Stage 2: You are considered totally disabled after 2 years if you can't do a job suitable for your education. |
|
|
Benefit Period
|
The policy will specify the length of time you will receive monthly benefits. Benefit periods can range from 1, 2 years or 5 years.
|
|
|
Bodily Injury Liability (BI):
|
Covers other people's bodily injuries or death
-legal defense if another party in the accident files a lawsuit against you. Claims for bodily injury may be for such things as medical bills, loss of income or pain and suffering. In the event of a serious accident, you want enough insurance to cover a judgment against you in a lawsuit, without jeopardizing your personal assets. Bodily injury liability covers injury to people, not your vehicle. Therefore, it's a good idea (and usually a company requirement) to have the same level of coverage for all of your cars. Bodily Injury Liability does NOT cover you or other people on your policy. Coverage is limited to the terms and conditions contained in the policy. It is mandatory in most states. |
|
|
Property Damage Liability (PD):
|
Covers you if your car damages someone else's property. Usually it is their car, but it could be a fence, a house or any other property damaged in an accident. It also provides you with legal defense if another party files a lawsuit against you. It is a good idea to purchase enough of this insurance to cover the amount of damage your car might do to another vehicle or object. Coverage is limited to the terms and conditions contained in the policy.
|
|
|
Comprehensive Coverage (Other Than Collision or OTC):
|
Covers your vehicle, and sometimes other vehicles you may be driving for losses resulting from incidents other than collision. For example, comprehensive insurance covers damage to your car if it is stolen; or damaged by flood, fire, or animals. Pays to fix your vehicle less the deductible you choose. To keep your premiums low, select as high a deductible as you feel comfortable paying out of pocket.
|
|
|
Collision Coverage:
|
Covers damage to your car when your car hits, or is hit by, another vehicle, or other object. Pays to fix your vehicle less the deductible you choose. To keep your premiums low, select as large a deductible as you feel comfortable paying out of pocket. For older cars, consider dropping this coverage, since coverage is normally limited to the cash value of your car. Coverage is limited to the terms and conditions contained in the policy. This is not required by a state, but if you have a loan or a lease then the lien holder will require it.
|
|
|
Top 10 Most Expensive Cars to Insure
|
1 Mitsubishi Lancer Evolution
2 Mercedes CL-Class 3 Dodge SRT-4 4 Subaru Impreza WRX 5 Jaguar XK (convertible) 6 Lexus IS 300 7 Honda S2000 8 Acura RSX 9 Nissan 350Z 10 Jaguar XJ |
|
|
Top 10 Least Expensive Cars to Insure
|
1 Volvo XC90
2 Chevrolet Malibu Maxx 3 GMC Safari 4 Buick LeSabre 5Nissan Pathfinder Armada (2004 only) 6 Pontiac Montana (standard model) 7 Mazda MPV 8 Ford Thunderbird 9 Pontiac Montana (extended model) 10 Ford Taurus (station wagon) |
|
|
Alternative minimum tax (AMT)
|
The AMT is a separate tax computation with its own rates that could boost your tax bill if you claim a lot of exemptions or deductions on your regular tax form.
|
|
|
What's the difference between a short-term gain and a long-term gain?
|
A very big difference. The law divides investment profits into different classes determined by the calendar. Short-term gains come from the sale of property owned one year or less; long-term gains come from the sale of property held more than one year.
|
|
|
$1 income vs. $1 In Net Worth
|
Better to get 1 in your 401k than 1 raise
Tax savings, plus interest, etc. |
|
|
Pretax Equivalancy Formula
|
Savings/(1-tax rate)
|
|
|
No load mutual fund means there is no...
|
service charge
|
|
|
Stocks give you
|
dividends
|
|
|
bonds make you
|
interest
|
|
|
Index Funds Vs. Mutual Funds
|
there are no management fees on index funds since they are not managed
|
|
|
Value Stock
|
stock of companies that have a low Price to Earning Ratio
|
|
|
Growth Stock
|
Stocks whose revenues and/or earnings are or will be growing faster than those of their peers
|
|
|
Price/Earnings (PE) ratio
|
Current Price per share/Earnings per share= Price/Earnings Ratio
|
|
|
What if a P/E ratio is high?
|
the company might be overvalued
|
|
|
What if the P/E is low?
|
could mean that it is a value stock
|
|
|
Diversification
|
Invest in more than one company, don't have all your eggs in one basket.
|
|
|
Historical Value Pricing
|
We take a sector of the economy (for example, technology)—the technology sector
If we take the sector on a long-time basis and look at the return that an investor would have had in that sector. It is amazingly quantifiable. It provides an amazing predictable tool. Let’s imagine that we calculate that we get a return of 13%. What would happen if we just found out that technology stock was trading at a price much higher than that which was justified by its historical return. For example, the dot-com stocks in the early 2000s. Most recently, real-estate. We see that the market can become irrationally imbalanced and stocks become substantially overpriced. We can gauge that value based on the historical rates of return. If a stock is substantially under-priced relative to its long-term annual yield, what would be a good strategy? You would buy it. THINK LONG TERM. What do we do when we get to a point where it is substantially over priced. We Sell. BUY LOW AND SELL HIGH! |
|
|
Managing the Managers:
Hulbert |
Hulbert (a guy in the 1980s) said that there were too many investment newsletters. He decided to make his own investment newsletter.
Hulbert said that he was going to analyze the actual performance of newsletters. He ranked investment companies and stocks. He recommended investment companies. The newsletter that had the highest circulation in the country at that time, was the worst newsletter in the whole country. |
|
|
What Top 3 Stock Newsletters will give you the best information?
|
1.Litman Gregory
2. Value Line 3. No Load Fund X |
|
|
4 Categories of investments: Catagory 1
|
No Investment
Fraud (Ponzi Scheme-You don’t even invest the money. Just get new investors in order to gain investments). Which state has per/capita more investment fraud than any other state in America. Utah by 100% |
|
|
4 Categories of investments: Catagory 2
|
Risky Investments
(Downside Risk)-Commodity option contracts etc… |
|
|
4 Categories of investments: Catagory 3
|
Appropriate Investing
—Diversification, allocation etc… |
|
|
4 Categories of investments: Catagory 4
|
Too Conservative
In CDs at the bank. There is an opportunity cost (you had the opportunity to make a lot more money than you actually did).Too conservative -opportunity cost |
|
|
Corporate Profit Dividend Formula
|
Gross Income-Cost of Goods= Gross Profit
Gross Profit-Operating Expenses= Earnings before Interest and Taxes (net profit) EBIT-Prefered share dividends-common share dividends=retained earnings |
|
|
What happens to share prices if the expenses of a company go up?
|
Share prices go down
|
|
|
If profits are down, would the company want to borrow more money?
|
No, they would want to borrow less money.
|
|
|
If things are good, would the company want to borrow more money?
|
Yes, because we need to expand.
|
|
|
If you want to lend money, but the desire to barrow is low, you should...
|
lower interest rates
|
|
|
What happens to bonds if interest rates go down?
|
Bonds go up
(since they would have the old, higher interest rate being paid to the owner of the bond) |
|
|
What happens to bonds if stocks go down?
|
Bonds go Up
|
|
|
What happens to Bonds if stocks go up?
|
Bonds go down
|
|
|
Why is it important to allocate investments properly?
|
It is important important to allocate investments properly (between stocks and bonds), because as one goes up in value, the other goes down.
|
|
|
Risk Scale Pyramid: Low Risk
|
•Cash and Cash Equivalents
•CDs, Notes, US Treasury Bills •Money Market/Bank Accounts •Government Bonds/Debt |
|
|
Risk Scale Pyramid: Medium Risk
|
•High Income Bonds (e.g., Junk Bonds)/Debt
•Large/Small Cap Stocks •Equity Mutual Funds •Real Estate |
|
|
Risk Scale Pyramid: High Risk
|
•Currency Trading. Anytime anyone is making money, somebody else is losing money. It’s a zero-sum game. If someone wins, someone loses.
•Hedge Funds (betting on which way the market will go.) You don’t own an asset. •Arbitrage is buying something off one market and selling it on another •Futures •Options •Real Estate Flipping (this is complete speculation) •12 Daily Pro |
|
|
How do you determine how much Life Insurance you need?
|
You should take your income and multiply it by 14 and then subtract your P.O.C. assets, and that is how much insurance you should have.
Income X 14 - P.O.C. Assets |
|
|
MULCE
|
M-Medical Payments to Cover self
U-Uninsured or underinsured motorist L-liability (medical and property damage of other driver) C-Collision/Comprehensive Damage to your own car E-Emergency Road Service |
|
|
Can a life insurance benefit be taxed?
|
generally NOT
NO |
|
|
As Per Notes: Homeowners Insurance covers what 3 things?
|
1.Home-damage to the home
2. Personal Property- on the premises 3. Liability- Individuals injured while on your property. One of the worst possible things you can do is hiring workers to work on your home who have their own liability coverage. |
|
|
What are the exclusions?
|
Floods and Earthquakes
|
|
|
Mutual Guarantee Association
|
-Every time you pay a premium the insurance company has to take a portion and give it to this association
-This is coverage if the company goes bankrupt. This association will back up These associations are not state funded, but they are state supervised. There is NO FEDERAL OR STATE GUARANTEE. You are insuring your insurance company. These are very efficient. |
|
|
Medicare: At what age does you start getting does the government start paying your health insurance?
|
At age 65
|
|
|
Suicide Clause
|
If you commit suicide, you need to wait at least two years before you kill yourself. If you do, then you get a death benefit
|
|
|
Aviation Exclusion
|
the death benefit is not payable if the insured dies because of certain aviation activities. Thus, you have to get a special policy to pay.
The policy will only pay if -You are a fare paying passenger, and -You are on a regularly scheduled commercial airline |
|
|
Group Vs. Individual Life Insurance
|
Group good for people with poor health (substandard)
Individual good for good health |
|
|
Why does cash value life insurance not good?
|
Behaviorally Inefficient. High cancellation rates (Lapse Rates) 80% are cancelled in the first 5 years.
If you cancel within the first 3 years you lose all the money It takes 23-25 years before you have no surrender penalties Affordability- High Cost Objective Advisors Avoid this investment High expenses |
|
|
Income
|
wages+interest+dividends+capital gain income+IRA and 401k distributions
|
|
|
Tax Exempt Interest
|
Tax exempt interest is interest from municipal debt. This is interest paid on a bond paid on a governmental entity that is not the federal government.
|
|
|
Can you realize a capitol loss on items purchased for personal reasons? (home or car)
|
No...but you do pay taxes on capitol gains
|
|
|
If you buy an asset for investment purposes, and realize a capitol loss, can you realize a capitol loss on your taxes?
|
Yes
|
|
|
Annuity
(When is it taxed?) |
What is an annuity?—a variable annuity works exactly like a mutual fund. It is the exact same thing! However, there is something, though, that is kind of cool about an annuity. An annuity allows your income to be tax deferred (unlike a mutual fund). The income from an annuity, unlike a mutual fund, is ONLY TAXED AS YOU ARE PULLING THE MONEY OUT!!! The sad thing, though, is that this money has to be taxed as ordinary income, not at the capital gains rate. Every objective advisor will tell you to stay clear from annuities, because every year there are lots of fees that lessen your income.
|
|
|
What are the 3 Adjustments?
(These are things we get to subtract from our income before calculating the tax) Adjustment 1 |
HSA
The first one is a Health Savings Account Deduction (these are the contributions you put into your HSA). You subtract this out from your income. |
|
|
What are the 3 Adjustments?
Adjustment 2 |
Self-Employed Pension Plan (SEP)
These are 401k accounts for self-employed people. You also subtract this. |
|
|
What are the 3 Adjustments?
Adjustment 3 |
IRA CONTRIBUTIONS
|
|
|
What is the standardized deduction for a married couple?
|
$10,000
|
|
|
4 Federal Transfer Taxes: 1
|
Income Tax
-Ordinary and Capital Gain |
|
|
4 Federal Transfer Taxes: 2
(what percentage of people pay more FICA TAX than Fedral Income Tax?) |
FICA
Social Security Tax -75% |
|
|
4 Federal Transfer Taxes: 3
|
Estate Tax
(Tax when you die) (only 1% comes from estate tax and _______tax) |
|
|
4 Federal Transfer Taxes: 4
|
Gift Tax
|
|
|
Tax Basis
|
For example, if I invest money in stock, the tax basis is the amount I already paid tax on. Previous taxed dollars + Sell amount (distribution of an asset)-Tax Basis=Amount reportable for Tax Purposes
|
|
|
Capital Gains vs. Ordinary Income Tax
|
a. In tax today, we have different tax brackets. The capital gains tax rates are way less! If you have a choice, capital gain income is better because you don’t pay as much tax on it.
|
|
|
‘Like-Kind’ Exchange
|
For example, if you sell a home and buy another one, you don’t have to pay tax on the money.
|
|
|
“Stepped Up” Basis
|
a. When someone passes away, some assets in their estate likely have a lower tax basis then when they bought them.
b. The nice thing is that any asset that transfers through your estate receives a step-up in cost basis. The cost basis becomes the fair market value on the date the person who owned the estate passes away. |
