Understanding Stocks and Bonds

Understanding Stocks and Bonds

• 1. The Power of Investing in Stocks and Bonds, and Managing Risk Senator Liz Krueger’s Virtual Older Adult Roundtable Series Presented by the Financial Planning Association of Metro New York

• 2. 2 Types of Financial Professionals • Personal Banker • Broker-Dealer • Insurance Agents • Certified Public Accountant (CPA) • Certified Financial Planner® (CFP®)

• 3. 3 Questions to Ask When Choosing an Advisor • Are you a fiduciary? • What types of services do you offer? • What is your investment approach? • How are you paid?

• 4. 4 Engaging a Financial Advisor Costs: • Average fees can range from 0.5% to 1.5% of financial assets • Multiple ways of compensation • Know and be comfortable with how your advisor is compensated • Be clear on the services offered Duties Owed to Clients by a CFP®: • Fiduciary Duty • Integrity • Competence • Diligence • Disclosure of Conflicts of Interest • Sound and Objective Professional Judgment • Professionalism • Compliance with the Law • Confidentiality

• 5. 5 Financial Planning The Components of a Comprehensive Plan • Identify Goals • Analyze Cash Flow • Determine Emergency Fund • Retirement Planning • Manage Investments • Insurance • Education Funding • Tax Management • Optimize Employee Benefits • Analyze Liabilities • Estate Planning

• 6. 6 Retirement Account with TaxDeferred Assets -Required Minimum Distributions (RMD) Start at 73 -In most cases, withdrawing funds before age 59.5 will result in a penalty -All Distributions taxed at marginal income tax rate Investment Accounts Investment Account Anyone can open. Capital Gains Taxes Short Term (Less than 1 Year), taxed at marginal income tax rate Long Term (More than 1 Year), -3 Tax Tiers 0%, 15%, 20% Retirement Account with After-Tax Assets -All Distributions over age 59.5 completely tax free -No Required Minimum Distributions (RMD) Brokerage IRA/401K ROTH IRA/401K

• 7. 7 Questions to Ask What do I want this money to do for me? • Income • Future need (retirement, education, legacy/inheritance) • Emergency Fund • Wealth accumulation How much do I have available to invest? Do I need this money available in a short amount of time? Can I quantify this goal in dollars and time? E.g. “I need to $50,000 a year in income starting in 10 years.” What is my risk tolerance / comfort level? What are my investment goals and what is my time frame?

• 8. 8 Risk Tolerance • Risk in investments is often translated in volatility: the variation in price • People take a higher risk with the expectation of getting a higher return, hence they MIGHT get a higher reward • The higher the risk, there is also the higher the chance that they will NOT get the expected return • Can you tolerate seeing the value of your investments rise from $1,000 to $1,200? • Can you tolerate seeing the value of your investments drop from $1,000 to $650? • Will you still sleep well at night? • Discover your own personal tolerance for risk

• 9. 9 • Market Risk – value of investment will fluctuate • Inflation Risk – loss of purchasing power • Interest Rate Risk – if rates increase, value of existing investment may fall • Liquidity Risk – ability to sell an asset without losing a part of principal • Currency Risk – overseas investment changes value to valuation of $US Types of Risk

• 10. 10 Time Horizon Short-term goals (3 years and under) – put money in a savings account/money market Intermediate goals (3-8 years) – most likely a larger part in bonds, more conservative Long-term goals (8 years) – invest in a well-diversified portfolio suited to your risk tolerance Guidelines

• 11. 11 Types of Investments • Cash/cash equivalents • Bonds (Fixed Income) • Stocks (Equities) • Alternative Investments Asset Classes

• 12. 12 Stocks A share in a company – the investor becomes a shareholder/owner of the company and may receive a dividend • Domestic (US) • International • Developed countries • Emerging markets • Large/Mid/Small Cap • Growth and Value What is a STOCK? Types of Stocks

• 13. 13 Bonds A loan to a government or corporation where in return you get an interest payment • Government • US Federal – Treasury • Non-US - Sovereigns • Municipal (local governments) • Corporate – US and non-US companies • Investment Grade • High Yield What is a BOND? Types of Bonds

• 14. 14 Bond Characteristics Considerations • What is the interest (coupon)? • What is the maturity date (the date the loan is due to be paid back)? • Short-term/Intermediate/Long-term • What is the quality (rating)? • Taxes • US Treasuries – no state or local tax on interest • Municipal Bonds – no federal, state, or local tax on interest • Corporate & Sovereign Bonds – interest is taxed at your income tax rate

• 15. 15 Historical Returns Source: https://awealthofcommonsense.com/

• 16. 16 Putting Your Money to Work Investment Vehicles • Individual stocks and bonds • Mutual Funds • Managed (active) • Index (passive) • ETFs –Exchange Traded Funds (passive)

• 17. 17 Mutual Funds vs. ETFs Mutual Funds • Traded only once per day, after the markets close at 4pm • Could have minimum investment amount • Professional management available (+) – but – comes with higher fees (-) • Usually there are sales charges and other transaction fees • No control over investments and taxes (-) ETFs • Traded like a stocks on a stock exchange, can be bought/sold anytime during the day; prices can fluctuate drastically • Lower cost (+) • More tax efficient than actively managed mutual funds (+) • No one is picking the underlying investments – you’re invested in the whole index (-) Both • Instant diversification • Can be invested stocks, bonds, and other investment instruments • Index MFs and ETFs try to replicate the performance of an index

• 18. 18 Stocks 60% Bonds/Cash 40% Asset Allocation Stocks 80-100% Bonds/Cash 0 - 20% Stocks 40% Bonds/Cash 60% Higher Risk More Moderate Conservative • The higher the risk – the higher the potential gain and the potential loss • Investment in stocks are riskier than investments in bonds – higher expected return for stocks than bonds • Both are not guaranteed returns

• 19. 19 Diversification is Key

• 20. 20 Investing Tips Create an investment plan with a proper asset allocation to fit your goals and risk tolerance Diversify and be patient Invest systematically – automation is your friend Be mindful of fees and expenses in your investments Participate in your retirement plan. Always capture the company match. Good investing should be boring Losses will occur and are a necessary part of investing - stay disciplined through market dips and swings. Nobody will consistently beat the market The more you check in on your portfolio, the harder it may be to stay the course Actions Mindset

• 21. 21 Resources • Find a CFP® Professional through the CFP ® Board: https://www.letsmakeaplan.org/ • Investopedia for Investment Terms/Concepts/News: https://www.investopedia.com/ • Morningstar for Investment Ratings (A deeper analysis requires a paid subscription) https://www.morningstar.com/ • You can also find articles and information in the Wall Street Journal, The New York Times, Financial Times, and Yahoo Finance.

• 22. Thank you Erin Slocum, CFP® President, FPA of Metro New York Edward Hadad, CFP® Financial Planner, Financial Asset Management Corp. Email: info@fpametrony.org