Financial Education Seminar

1. Financial Education Seminar

2. Bill Reese Education: MBA Virginia Tech 1983 Ph.D. University of Arizona 1998 Research: Published in Journal of Finance, Journal of Financial Economics, Journal of Financial Education, Journal of Economics and Financial Education, Journal of Economic Education Teaching: Clinical Professor of Finance at Tulane’s A.B. Freeman School of Business Taught at Tulane since 1997 Teaches Personal Finance, Financial Management, Investments, Portfolio Theory, Fixed Income Analytics and other courses – primarily to MBA and Master of Finance students Financial Education Seminars: New Orleans Saints, New Orleans Pelicans, ExxonMobil, ConocoPhillips, Westway, Ertan Family: Married for 38 years, 2 married daughters, 2.5 grandchildren Hobbies: Running and Triathlons

3. What We Will Cover Today • Types of Investments (Stocks, Bonds, etc.) • Diversification • Mutual Funds, ETFs and Hedge Funds • Taxes • Inflation • Retirement Plans • Rules for Investing • Home and Car Purchases • Life Insurance

4. Web Site • This PowerPoint and other information can be viewed and downloaded from: https://breesept.tulane.edu/bioinnovation/

5. Debt Investments • Bank Deposits • Savings Accounts • Certificates of Deposit (CDs) • FDIC Insurance - $250,000 • Positives • Very Safe • Known Liquidity • Negatives • Very Low Return

6. Debt Investments • Bonds • Treasury Notes and Bonds • 2 years – 30 years till maturity when issued • Semiannual Interest Payments • Treasury Bills • 1month – 1 year till maturity when issued • Interest Paid at Maturity • TIPS • Interest Payments Adjusted for Inflation

7. Debt Investments • More Bonds • Corporate Bonds • Interest Payable Semiannually (or at maturity) • Varying Degrees of Risk (and Yield) • Rated by Standard & Poors and Moodys • Municipal Bonds • Interest Payable Semiannually • Interest Payments are Tax-Exempt • Varying Degrees of Risk • Also Rated

8. Bond Ratings

9. Debt Investments • Bond Risks • Repayment of Principal • Timely Interest Payments • Inflation • Bond Value Moves Inversely with Interest Rates • Reinvestment Risk • Yield to Maturity (YTM) • Measure of Expected Return on Bond

10. Interest Rates

11. Publicly Traded Stock • Ownership of a company • Large Cap vs. Small Cap Stocks • Variability of Returns vs. Long-Run Averages • Value vs. Growth • P/E Ratio • Risk vs. Return • Dividends • Capital Gains

12. Small Cap vs. Large Cap

13. Value vs. Growth

14. Stock • What Matters • Future Profits • Quality of Management • Quality of Product • Competitive Environment • The Price You Pay for those Profits (P/E) • What Doesn’t Matter • Stock Splits • Current Dividend Status • The Past

15. Would You Have Invested?

16. Appearances Can Be Deceiving

17. Other Investments • Convertible Bonds • Preferred Stock • Commodities • Real Estate • Private Equity • Tangible Businesses • Derivatives (Futures, Options, and Swaps)

18. Diversification • Don’t Put All Your Eggs in One Basket • Reduces Risk • Doesn’t Eliminate All Risk Though • Doesn’t Affect Expected Returns • Virtually Costless • Pay Attention to Correlations • Diversify Across: • Companies • Industries • Countries

19. Diversification

20. Diversification

21. Diversification

22. Beware of Bubbles!

23. Pooled Investments • Mutual Funds • Exchange Traded Funds (ETFs) • Hedge Funds

24. Pooled Investments • Advantages • Diversification (usually) • Can get started with small amount (except hedge funds) • Record Keeping done for you • Reduced Transactions Costs (for most) • Professionially Managed (perhaps an advantage) • Reasonable Fee (for some)

25. Pooled Investments • Passive • Indexed Funds • ETFs • Follow an Index – not beat it • Generally lower fees • Active • Asset Selection is done with an attempt to outperform the benchmark index • Most Mutual Funds • All Hedge Funds

26. Mutual Funds • Shares bought and sold only through fund • Share price is always NAV • Shares bought and sold only at end of day • No-load funds have no entry/exit fees • Approximately 6,000 funds to choose from • Can be Qualified (retirement plan) or Non-Qualified

27. ETFs • Virtually all are Indexed Funds • There is an index for EVERYTHING • Very low annual expenses • Buy and Sell like stocks • Price will be close to NAV • Can buy or sell anytime market is open • Pay commissions when buying and selling

28. Hedge Funds • Unregulated – only open to “accredited investors” • Large Initial Investments Required • Lockup Period • Often Illiquid Investments • Can invest in anything • Often will short-sell assets • Annual Expenses plus Performance Fee • Usually 1% plus 20% of profits • Some have strong performance history

29. Taxes • Interest Payments • Gov Bonds – not state taxed • Muni Bonds – not fed taxed (or state if you are a resident) • Otherwise taxed as ordinary income • Dividends – taxed at dividend rates • Capital Gains • Taxed at Capital Gains rates WHEN REALIZED • Stepped-up basis at death

30. Inflation

31. The Impact of Inflation

32. Retirement Plans • Defined Benefit Plans • Benefits based on a formula • “Traditional” Pension Plan • Social Security is an Example • Formula is usually based on: • Age • Number of Years Worked • Average Earnings • Perhaps Inflation • Employer is Responsible for Funding

33. Retirement Plans • Defined Contribution Plans • No Guaranteed Benefits • 401(k) is an example • Portable from job-to-job • Can be rolled over into IRA • Employee usually has some choices of investments • Employer often contributes • Employee is Responsible for Funding

34. Retirement Plans • Regular IRA or 401(k) • Contributions are tax-deductable • Money grows tax-defered • Limits on how much you can contribute/year • Taxable when withdrawn • 10% penalty on withdrawls prior to 59.5 • Must begin withdrawls by 70.5

35. Retirement Plans • Roth IRA or 401(k) • Contributions are NOT tax deductable • Earnings are tax-free • Withdrawls are tax-free • Limits on contributions based on income • No age for mandatory withdrawls

36. Long-Run Returns

37. Long-Run Returns

38. How Much Should You Save? • Go to https://breesept.tulane.edu/bioinnovation/ Open “Retirement Planning Spreadsheet” in Excel • Fill in the Blue Cells and the rest will be filled in for you • Go to the Next Worksheet to Include Inflation

39. Reasons to Save and Invest • Short-Term Needs • Should have enough to live on for six months • Reserve fund for emergencies • Should be invested in safe, liquid securities • Children • Average cost per child (up to age 18) is $250,000 • College is expensive • Weddings are even more expensive! • Three Children through college can top $1 million

40. Reasons to Save and Invest • Retirement • Social Security will only pay $20,000 - $30,000 per year and won’t start till age 70 • Most people spend as much in retirement as they did when they were working • How many retired people do you know who wish that they had saved less?

41. Questions to Ask Before You Invest • How long do I plan to keep this money invested for? • How well can I tolerate fluctuations in value? • Do I fully understand this investment? • How much of this money am I willing to risk losing? • How is the investment provider compensated? • If I need to sell this investment sooner than expected, how much might I lose?

42. Questions to Ask Before You Invest • How liquid is the investment? How liquid do I need it to be? • How is the investment taxed? • Have I been given ALL the relevant information? • What is the expected return on this investment? • What is the chance that this investment could default on its promise to pay me back or could go out of business?

43. Basic Rules of Investing • A higher expected return and a higher risk always go hand-in-hand • Diversification is the best way to reduce risk • Over the long-term, stocks will probably outperform bonds • Don’t invest for the long-term in short-term investments unless you are very risk-averse

44. Basic Rules of Investing • Don’t overestimate your ability to choose investments. Most people tend to think they are better at things than they really are • Transaction costs and fees matter

45. Mortgages and Auto Loans • These Loans are Amortized • Same Payment Each Month • Each Payment has both Principal and Interest • Interest Portion Declines Each Month • Principal Portion Increases Each Month

46. Example • $250,000 House with 20% Downpayment • 30-year fixed rate mortgage for remaining $200,000 at 6.0% • 6% annual is really 0.5% (6/12) per month • End of first month: You owe $200,000 x 0.5% in interest. That’s $1,000 • Monthly payment is $1,199.10 • Principal Portion is $199.10 • Principal Balance is $199,800.90

47. Example • Next month, you owe $199,800.90 x 0.5% in interest. That’s $999 • Monthly Payment Doesn’t Change • Still $1,199.10 • Principal Payment is $200.10 • Go to https://breesept.tulane.edu/bioinnovation/ and look at Loan Amortization Spreadsheet

48. Suggestions for Mortgages and Car Loans • Variable Rates vs. Fixed Rates • How long do you plan to live in the home? • Where do you think interest rates will go? • Will you be able to refinance a balloon pmt? • Who do you want holding the risk: You or the bank? • Interest Payments on Mortgages (residence) are tax-deductible if you itemize • Don’t buy credit life insurance • Buy regular life insurance if you need it

49. Suggestions for Mortgages and Car Loans • Homes usually appreciate in value • Cars almost always depreciate in value • Points on a mortgage represent one percent in interest. Be aware of closing costs • Putting down > 20% on a home often means saving $$ on mortgage insurance • Paying off loans early is like a guaranteed investment at that interest rate

50. Life Insurance • What do I need Life Insurance for? • Replace lost income • Allow family to continue current lifestyle • Educate children (Tulane is expensive!) • Pay for final expenses • Pay estate taxes • Pay off loans • Provide quick cash while family looks to sell assets • Most financial planners recommend a minimum of 5x your annual income in life insurance