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Investing for Farm Families -- WORKING COPY
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Investing for Your Future for Farm Families<br /><br /><span style="font-style: italic;">(Note: This course is currently under pilot testing and requires an enrollment key to enter. If you have not been issued that enrollment key, then you are not currently authorized to enroll in this course.</span>)<br />
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<h3>Investing for Your Future Supplemental Content</h3>
<p>These 11 supplemental units provide detailed information about specific investment topics. There is a practice quiz after the 11 supplemental units, so that you can test your investment knowledge. Links to these units are contained within the 8 Investing for Farm Families lessons.</p>
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<h1>Old modules</h1>
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2
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amysite
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Amy
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amy@remote-learner.net
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Default for Investing for Your Future for Farm Families - RL DEV, DO NOT ALTER
The default category for questions shared in context 'Investing for Your Future for Farm Families - RL DEV, DO NOT ALTER'.
course
campus.extension.org+090608154431+mWHrFe
0
999
943
0
Investment Prerequisite Evaluation 1
What is the minimum number of months' worth of expenses that experts advise setting aside as an emergency fund?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820104302+3S6fJC
amy.remote-learner.net+090820110456+MdNX1d
0
1250764982
1250766296
3
3
0
2854,2855,2856,2857
1
1
abc
2854
1-3 months
0
Experts advise setting aside 3-6 months' worth of expenses for an emergency fund.
2855
3-6 months
1
Correct
2856
6-9 months
0
Experts advise setting aside 3-6 months' worth of expenses for an emergency fund.
2857
10-12 months
0
Experts advise setting aside 3-6 months' worth of expenses for an emergency fund.
944
0
Investment Prerequisite Evaluation 2
What is the purpose of an emergency cash reserve?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820104548+usigwv
amy.remote-learner.net+090820110513+ejvO79
0
1250765148
1250766313
3
3
0
2858,2859,2860,2861
1
1
abc
2858
To earn a high rate of interest on cash equivalent assets
0
The purpose of an emergency reserve is to serve as a source of cash when income is reduced or expenses increase.
2859
To serve as a source of cash when income is reduced or expenses increase.
1
Correct.
2860
To accumulate money to invest with
0
The purpose of an emergency reserve is to serve as a source of cash when income is reduced or expenses increase.
2861
To replace crop insurance
0
The purpose of an emergency reserve is to serve as a source of cash when income is reduced or expenses increase.
945
0
Investment Prerequisite Evaluation 3
What is one type of insurance protection specific to farm production?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820104802+FQvHsB
amy.remote-learner.net+090820110531+5SKDzk
0
1250765282
1250766331
3
3
0
2862,2863,2864,2865
1
1
abc
2862
Health Insurance
0
Crop insurance is specific to farm production.
2863
Life Insurance
0
Crop insurance is specific to farm production.
2864
Crop Insurance
1
Correct
2865
Liability Insurance
0
Crop insurance is specific to farm production.
946
0
Investment Prerequisite Evaluation 4
Which of the following is the most suitable investment for retirement in 15 years?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820104958+JneDwE
amy.remote-learner.net+090820110405+Cxbo1M
0
1250765398
1250766245
3
3
0
2866,2867,2868,2869
1
1
abc
2866
Money market mutual fund
1
Correct.
2867
Stock mutual fund.
0
The most suitable investment for retirement in 15 years is a money market mutual fund.
2868
Whole life insurance
0
The most suitable investment for retirement in 15 years is a money market mutual fund.
2869
Passbook savings account
0
The most suitable investment for retirement in 15 years is a money market mutual fund.
948
0
Investment Prerequisite Evaluation 6
Do you currently have personal/family insurance coverage? If so, include what type of insurance do you have? (life, health, disability, liability, property, etc.)
0
1
0
essay
1
amy.remote-learner.net+090820105832+UtPItw
amy.remote-learner.net+090820114328+HQa5oT
0
1250765912
1250768608
3
3
2870
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
949
0
Investment Prerequisite Evaluation 7
Do you have written financial goals with a target date and dollar cost (e.g. save $10,000 for a car in 5 years)? Type your answer, yes or no. You may also include an example of one of your goals.
0
1
0
essay
1
amy.remote-learner.net+090820110255+92w9lr
amy.remote-learner.net+090820114336+zxEu16
0
1250766175
1250768616
3
3
2871
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
950
0
Investment Prerequisite Evaluation 5
Do you currently have crop insurance? Type your answer, yes or no.
0
1
0
essay
1
amy.remote-learner.net+090820110710+YuesU7
amy.remote-learner.net+090820114321+T7ilRU
0
1250766430
1250768601
3
3
2872
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
951
0
First Things First Evaluation 1
What is a non-farm (a.k.a. off-farm) investment?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820111230+RrSzOS
amy.remote-learner.net+090820111230+hDzBK4
0
1250766750
1250766750
3
3
0
2873,2874,2875,2876
1
1
abc
2873
Any investment not tied to the agricultural economy.
1
Correct.
2874
Any investment partially tied to the agricultural economy
0
A non-farm investment is any investment not tied to the agricultural economy.
2875
Investing in agricultural industry stocks (e.g. tractor manufacturer)
0
A non-farm investment is any investment not tied to the agricultural economy.
2876
Investing in an ethanol plant
0
A non-farm investment is any investment not tied to the agricultural economy.
952
0
First Things First Evaluation 2
What is one of the benefits of non-farm (off-farm) investments?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820111452+rAbvRj
amy.remote-learner.net+090820111452+q4Lr5V
0
1250766892
1250766892
3
3
0
2877,2878,2879,2880
1
1
abc
2877
Farm assets are confined to one industry sector
0
The benefit of non-farm investments is that investment wealth is diversified.
2878
Investment wealth is subject to changes in the agricultural economy
0
The benefit of non-farm investments is that investment wealth is diversified.
2879
Investment wealth is diversified
1
Correct.
2880
Non-farm assets pay a guaranteed rate of return
0
The benefit of non-farm investments is that investment wealth is diversified.
953
0
First Things First Evaluation 3
What is one of the challenges of non-farm investments?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820111705+5GeXIV
amy.remote-learner.net+090820111705+HdQ9U6
0
1250767025
1250767025
3
3
0
2881,2882,2883,2884
1
1
abc
2881
Knowledge of farm markets and agriculture-related assets
0
A challenge of non-farm investments is gaining the knowledge of financial markets and available investments.
2882
Knowledge of financial markets and available investments
1
Correct.
2883
Lack of online information about investing
0
A challenge of non-farm investments is gaining the knowledge of financial markets and available investments.
2884
Farm and family finances are not connected
0
A challenge of non-farm investments is gaining the knowledge of financial markets and available investments.
954
0
First Things First Evaluation 4
How do you calculate your personal net worth?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820111939+b8wUKu
amy.remote-learner.net+090820111939+CpdeBk
0
1250767179
1250767179
3
3
0
2885,2886,2887,2888
1
1
abc
2885
Subtract your assets (what you own) from your liabilities/debts (what you owe)
0
To calculate personal net worth you must subtract your liabilities/debts (what you owe) from your assets (what you own)
2886
Subtract your liabilities/debts (what you owe) from your assets (what you own)
1
Correct.
2887
Add your liabilities/debts (what you owe) to your assets (what you own)
0
To calculate personal net worth you must subtract your liabilities/debts (what you owe) from your assets (what you own)
2888
Subtract your monthly household expenses from your assets (what you own)
0
To calculate personal net worth you must subtract your liabilities/debts (what you owe) from your assets (what you own)
955
0
First Things First Evaluation 5
How often do you and/or your spouse keep records of personal financial data? (i.e. assets, debts, etc.)
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820112353+EjsBwl
amy.remote-learner.net+090820114224+Hfj2la
0
1250767433
1250768544
3
3
2889
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
956
0
First Things First Evaluation 6
How often do you and/or your spouse adjust your investment portfolio (i.e. farm and personal finances)?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820112813+QKyZ4W
amy.remote-learner.net+090820114247+c5IT2P
0
1250767693
1250768567
3
3
2890
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
957
0
Debt and Credit Evaluation 1
What is "good debt"?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820113241+juixX6
amy.remote-learner.net+090820115011+lnGkMC
0
1250767961
1250769011
3
3
0
2891,2892,2893,2894
1
1
abc
2891
Borrowed money for products that are approved by Consumer Reports magazine
0
"Good debt" is borrowed money to finance something that appreciates over time.
2892
Borrowed money for new cars that cost less than $10,000
0
"Good debt" is borrowed money to finance something that appreciates over time.
2893
Borrowed money to finance something that appreciates over time
1
Correct.
2894
Borrowed money to finance something that depreciates over time
0
"Good debt" is borrowed money to finance something that appreciates over time.
958
0
Debt and Credit Evaluation 2
What is "bad debt"?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820113439+fCtq0F
amy.remote-learner.net+090820115048+gQIRkr
0
1250768079
1250769048
3
3
0
2895,2896,2897,2898
1
1
abc
2895
Borrowed money to finance something that appreciates over time
0
"Bad debt" is borrowed money to finance something that depreciates over time.
2896
Borrowed money to finance something that depreciates over time
1
Correct
2897
Borrowed money for new cars that cost less than $25,000
0
"Bad debt" is borrowed money to finance something that depreciates over time.
2898
Borrowed money for products that are not approved by Consumer Reports magazine
0
"Bad debt" is borrowed money to finance something that depreciates over time.
959
0
Debt and Credit Evaluation 3
What is the Uniform Commercial Code(UCC)?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820113743+Jr6ScY
amy.remote-learner.net+090820115117+Zbar4Q
0
1250768263
1250769077
3
3
0
2899,2900,2901,2902
1
1
abc
2899
A federal credit card law
0
The Uniform Commercial Code is a system that reports liens on personal property.
2900
A system that reports liens on personal property
1
Correct.
2901
A system that searches for mortgages on farm real estate
0
The Uniform Commercial Code is a system that reports liens on personal property.
2902
The password to a national Web site for small business owners
0
The Uniform Commercial Code is a system that reports liens on personal property.
960
0
Debt and Credit Evaluation 4
How often do you and/or your spouse obtain a free credit report?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820113853+A5IwD4
amy.remote-learner.net+090820114354+Oq6Wia
0
1250768333
1250768634
3
3
2903
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
961
0
Debt and Credit Evaluation 5
How often do you and/or your spouse make timely payments on debt?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820113931+a4CWaO
amy.remote-learner.net+090820114402+H3LWOJ
0
1250768371
1250768642
3
3
2904
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
962
0
Debt and Credit Evaluation 6
How often do you and/or your spouse look for investment alternatives?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820113957+1hWezv
amy.remote-learner.net+090820114412+r9mS8i
0
1250768397
1250768652
3
3
2905
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
963
0
Finding the Money Evaluation 1
What is a cash flow pattern?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820114722+jVgHXk
amy.remote-learner.net+090820114936+dMZ9Wi
0
1250768842
1250768976
3
3
0
2906,2907,2908,2909
1
1
abc
2906
The amount of money spent on household expenses excluding savings
0
Cash flow pattern is the relationship between income and expenses for several months.
2907
The amount of money spent on household expenses including savings
0
Cash flow pattern is the relationship between income and expenses for several months.
2908
The relationship between income and expenses for several months
1
Correct.
2909
The amount of income coming in to a household
0
Cash flow pattern is the relationship between income and expenses for several months.
964
0
Finding the Money Evaluation 2
What is the most realistic way to invest when you have an irregular cash flow?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820114923+YcQ3vN
amy.remote-learner.net+090820114923+YL5MVx
0
1250768963
1250768963
3
3
0
2910,2911,2912,2913
1
1
abc
2910
Invest what you can when you can
1
Correct.
2911
Invest 10% of what you make every year
0
The most realistic way to invest with an irregular cash flow is to invest what you can when you can.
2912
Invest a regular amount at regular time intervals
0
The most realistic way to invest with an irregular cash flow is to invest what you can when you can.
2913
Only invest when the farm business gets a government subsidy
0
The most realistic way to invest with an irregular cash flow is to invest what you can when you can.
965
0
Finding the Money Evaluation 3
Which example best exemplifies a method of freeing up money to invest?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820115354+oMhUJ4
amy.remote-learner.net+090820115354+1K1YKc
0
1250769234
1250769234
3
3
0
2914,2915,2916,2917
1
1
abc
2914
Cutting back on food expenses by using coupons and buying store brands
1
Correct.
2915
Buying extra food at the store this month, so next month you can invest more
0
The best example of freeing up money to invest is cutting back on food expenses by using coupons and buying store brands.
2916
Borrowing money to invest in a Roth IRA
0
The best example of freeing up money to invest is cutting back on food expenses by using coupons and buying store brands.
2917
Buying gasoline on a credit card
0
The best example of freeing up money to invest is cutting back on food expenses by using coupons and buying store brands.
966
0
Finding the Money Evaluation 4
What is the difference between a mutual fund and exchange-traded funds (ETFs)?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820115535+hCdhTS
amy.remote-learner.net+090820115535+t0wRSb
0
1250769335
1250769335
3
3
0
2918,2919,2920,2921
1
1
abc
2918
Mutual funds are better for investing relatively small regular dollar amounts while ETFs work best for large occasional dollar amounts
1
Correct.
2919
ETFs are better for investing relatively small regular dollar amounts while mutual funds work best for large occasional dollar amounts
0
Mutual funds are better for investing relatively small regular dollar amounts while ETFs work best for large occasional dollar amounts
2920
There is no difference, both accomplish the same financial goals
0
Mutual funds are better for investing relatively small regular dollar amounts while ETFs work best for large occasional dollar amounts
2921
ETFs are best for financial goals that are more than 10 years away and mutual funds are best for goals less than 5 years away
0
Mutual funds are better for investing relatively small regular dollar amounts while ETFs work best for large occasional dollar amounts
967
0
Finding the Money Evaluation 5
Which of the following is a retirement savings account that is available only to self-employed workers?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820115742+NtMfhn
amy.remote-learner.net+090902211844+rIiOLj
0
1250769462
1251926324
3
3
0
2922,2923,2924,2925
1
1
abc
2922
401(k)
0
Keogh Plan is the retirement savings account available only to self-employed workers.
2923
Social Security
0
Keogh Plan is the retirement savings account available only to self-employed workers.
2924
Keogh Plan
1
Correct.
2925
U.S. Savings Bonds
0
Keogh Plan is the retirement savings account available only to self-employed workers.
968
0
Finding the Money Evaluation 6
How often do you and/or your spouse track monthly income and expenses?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820115816+qyyDwN
amy.remote-learner.net+090820120030+gpZsUn
0
1250769496
1250769629
3
3
2926
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
969
0
Finding the Money Evaluation 7
How often do you and/or your spouse analyse monthly cash flow patterns?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820115853+ke2JMZ
amy.remote-learner.net+090820120045+P6DODH
0
1250769533
1250769645
3
3
2927
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
970
0
Finding the Money Evaluation 8
How often do you and/or your spouse consciously make an effort to reduce household spending?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820115922+lFMJrt
amy.remote-learner.net+090820120057+j4wio8
0
1250769562
1250769657
3
3
2928
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
971
0
Finding the Money Evaluation 9
How often do you and/or your spouse plan for months with lower income?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820115957+0tbWeD
amy.remote-learner.net+090820120107+VsCxAp
0
1250769597
1250769667
3
3
2929
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
972
0
Asset and Risk Evaluation 1
What is asset allocation?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820120534+9zzoVA
amy.remote-learner.net+090820120803+x1bWP5
0
1250769934
1250770083
3
3
0
2930,2931,2932,2933
1
1
abc
2930
The shifting of money from a low return investment to a high return investment
0
Asset allocation is the weighting, or proportion of assets, placed in different types of investments such as stocks, bonds, real estate, and cash.
2931
Taking all of your assets and combining them into one investment
0
Asset allocation is the weighting, or proportion of assets, placed in different types of investments such as stocks, bonds, real estate, and cash.
2932
Making a regular investment deposit at a regular time interval (e.g., $50 per month)
0
Asset allocation is the weighting, or proportion of assets, placed in different types of investments such as stocks, bonds, real estate, and cash.
2933
The weighting, or proportion of assets, placed in different types of investments such as stocks, bonds, real estate, and cash
1
Correct.
973
0
Asset and Risk Evaluation 2
What is investment risk tolerance?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820120741+7lNgVx
amy.remote-learner.net+090820120741+WqY3Sv
0
1250770061
1250770061
3
3
0
2934,2935,2936,2937
1
1
abc
2934
The percentage of stock in an investor’s portfolio
0
Investment risk tolerance is how much investment risk an investor can personally tolerate.
2935
How much investment risk an investor can personally tolerate
1
Correct.
2936
The riskiness of an investment on a scale from 1 to 10
0
Investment risk tolerance is how much investment risk an investor can personally tolerate.
2937
The volatility of an investment such as stock
0
Investment risk tolerance is how much investment risk an investor can personally tolerate.
974
0
Asset and Risk Evaluation 3
What is one benefit of farm land as an investment for farm families?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820121002+OJgNGG
amy.remote-learner.net+090820121002+O5gKnQ
0
1250770202
1250770202
3
3
0
2938,2939,2940,2941
1
1
abc
2938
Diversifies an investment portfolio
1
Correct.
2939
Depreciates in value over time
0
One benefit of farm land as an investment is that it diversifies an investment portfolio.
2940
It is usually the smallest asset on their balance sheet
0
One benefit of farm land as an investment is that it diversifies an investment portfolio.
2941
There are no financial benefits aside from farm income
0
One benefit of farm land as an investment is that it diversifies an investment portfolio.
975
0
Asset and Risk Evaluation 4
What is one major thing that can influence the value of farmland?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820121154+jzVIii
amy.remote-learner.net+090820121154+5RTWEw
0
1250770314
1250770314
3
3
0
2942,2943,2944,2945
1
1
abc
2942
Costs of livestock feed
0
One major thing that can influence the value of farmland is the location of farmland.
2943
Cell phone towers
0
One major thing that can influence the value of farmland is the location of farmland.
2944
Weather patterns
0
One major thing that can influence the value of farmland is the location of farmland.
2945
Location of farmland
1
Correct.
976
0
Asset and Risk Evaluation 5
What is a realistic option for using farmland as an income-generating retirement asset?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820121410+0twm1c
amy.remote-learner.net+090820121410+6xVi0Q
0
1250770450
1250770450
3
3
0
2946,2947,2948,2949
1
1
abc
2946
Increase your farmland acreage and take on more debt
0
A realistic option for using your farmland to generate income in retirement is to rent your farmland to another farmer.
2947
Hold onto your farmland until you die
0
A realistic option for using your farmland to generate income in retirement is to rent your farmland to another farmer.
2948
Rent your farmland to another farmer
1
Correct.
2949
All of the above.
0
A realistic option for using your farmland to generate income in retirement is to rent your farmland to another farmer.
977
0
Asset and Risk Evaluation 6
Do you consider your farmland as a valuable investment toward retirement? Type your answer, yes or no.
0
1
0
essay
1
amy.remote-learner.net+090820121517+GqXJFK
amy.remote-learner.net+090820121517+E5S572
0
1250770517
1250770517
3
3
2950
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
978
0
Asset and Risk Evaluation 7
How often do you and/or your spouse take investment risks?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820121604+H4iMAD
amy.remote-learner.net+090820121604+iQx40M
0
1250770564
1250770564
3
3
2951
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
979
0
Asset and Risk Evaluation 8
How often do you and/or your spouse calculate personal investment asset allocation weightings (e.g. 50% stock, 30% bonds, and 20% cash)?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820121748+QN67BW
amy.remote-learner.net+090820121748+LZ9NJE
0
1250770668
1250770668
3
3
2952
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
980
0
Asset and Risk Evaluation 9
How often do you and/or your spouse select investments consistent with your personal risk tolerance level?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820121849+ToDGi0
amy.remote-learner.net+090820121849+Ot6m1Y
0
1250770729
1250770729
3
3
2953
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
981
0
Asset and Risk Evaluation 10
How often do you and/or your spouse purchase non-farm investments?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820121917+h39DQw
amy.remote-learner.net+090820122127+yyKPpA
0
1250770757
1250770887
3
3
2954
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
982
0
Asset and Risk Evaluation 11
How often do you and/or your spouse sell farmland and other farm assets?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820121945+bdu37k
amy.remote-learner.net+090820122138+NO0ogC
0
1250770785
1250770898
3
3
2955
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
983
0
Investment Products/Agricultural Alternatives Evaluation 1
What is an equity investment?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820122718+lHTVHV
amy.remote-learner.net+090820122718+a5WCjX
0
1250771238
1250771238
3
3
0
2956,2957,2958,2959
1
1
abc
2956
A loan to a corporation or government entity (i.e., a bond))
0
An equity investment is an investment where something of value is owned (i.e., stocks, real estate).
2957
A type of investment sold only at banks
0
An equity investment is an investment where something of value is owned (i.e., stocks, real estate).
2958
An investment that is held 10 years or longer
0
An equity investment is an investment where something of value is owned (i.e., stocks, real estate).
2959
An investment where something of value is owned (i.e., stocks, real estate)
1
Correct.
984
0
Investment Products/Agricultural Alternatives Evaluation 2
What is a fixed-income investment?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820122929+fUQK9v
amy.remote-learner.net+090820122929+hTciBU
0
1250771369
1250771369
3
3
0
2960,2961,2962,2963
1
1
abc
2960
A type of investment sold only at banks
0
A fixed-income investment is where investors loan money to various types of borrowers (e.g., corporations and government) in exchange for periodic interest payments.
2961
Where investors loan money to various types of borrowers (e.g., corporations and government) in exchange for periodic interest payments
1
Correct.
2962
An investment that is held 5 years or less
0
A fixed-income investment is where investors loan money to various types of borrowers (e.g., corporations and government) in exchange for periodic interest payments.
2963
An investment where something of value is owned (i.e., stocks, real estate)
0
A fixed-income investment is where investors loan money to various types of borrowers (e.g., corporations and government) in exchange for periodic interest payments.
985
0
Investment Products/Agricultural Alternatives Evaluation 3
What is one benefit of a mutual fund investment?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820123143+LHeLNJ
amy.remote-learner.net+090902153803+RqGAWq
0
1250771503
1251905883
3
3
0
2964,2965,2966,2967
1
1
abc
2964
Guaranteed rates of return from dividends and capital gains
0
One benefit of a mutual fund is that it is professionally managed.
2965
Professional management
1
Correct.
2966
Investors get personalized investment advice
0
One benefit of a mutual fund is that it is professionally managed.
2967
Can be bought and sold like stocks on a stock exchange
0
One benefit of a mutual fund is that it is professionally managed.
986
0
Investment Products/Agricultural Alternatives Evaluation 4
What is one benefit of an exchange traded fund?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820123420+uBui4c
amy.remote-learner.net+090820123420+pAkhBW
0
1250771660
1250771660
3
3
0
2968,2969,2970,2971
1
1
abc
2968
Professional management
0
One benefit of an exchange traded fund is that it can be bought and sold like stocks on a stock exchange.
2969
Guaranteed rates of return from dividends and capital gains
0
One benefit of an exchange traded fund is that it can be bought and sold like stocks on a stock exchange.
2970
Can be bought and sold like stocks on a stock exchange
1
Correct.
2971
Investors get personalized investment advice
0
One benefit of an exchange traded fund is that it can be bought and sold like stocks on a stock exchange.
987
0
Investment Products/Agricultural Alternatives Evaluation 5
What is "correlation" as it applies to investing?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820123639+SyF3oG
amy.remote-learner.net+090820123639+Iuv2Dx
0
1250771799
1250771799
3
3
0
2972,2973,2974,2975
1
1
abc
2972
Degree to which movements of two variables (i.e., stocks and bonds) are related or not
1
Correct.
2973
Degree to which investment needs are similar to financial goals
0
Correlation applied to investing means the degree to which movements of two variables (i.e., stocks and bonds) are related or not.
2974
Not having “all your eggs in one basket”
0
Correlation applied to investing means the degree to which movements of two variables (i.e., stocks and bonds) are related or not.
2975
Purchasing the same type of mutual fund from two different companies
0
Correlation applied to investing means the degree to which movements of two variables (i.e., stocks and bonds) are related or not.
988
0
Investment Products/Agricultural Alternatives Evaluation 6
How often do you and/or your spouse make fixed income investments?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820123736+R0WnAT
amy.remote-learner.net+090820123736+mzaVxd
0
1250771856
1250771856
3
3
2976
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
989
0
Investment Products/Agricultural Alternatives Evaluation 7
How often do you and/or your spouse make equity investments?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820123809+bXeice
amy.remote-learner.net+090820123809+HBMG2L
0
1250771889
1250771889
3
3
2977
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
990
0
Investment Products/Agricultural Alternatives Evaluation 8
How often do you and/or your spouse compare the performance of non-farm investments to farmland?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820123850+SmzaXM
amy.remote-learner.net+090820123850+JQwBmV
0
1250771930
1250771930
3
3
2978
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
991
0
Investment Products/Agricultural Alternatives Evaluation 9
How often do you and/or your spouse invest in farm assets (e.g. farm land and equipment)?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820123943+sG3rcw
amy.remote-learner.net+090820123943+Ya3iLB
0
1250771983
1250771983
3
3
2979
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
992
0
Financial Information Sources Evaluation 1
Which of the following is NOT an investment resource?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820124421+sPVba6
amy.remote-learner.net+090820124421+ZMnXu8
0
1250772261
1250772261
3
3
0
2980,2981,2982,2983
1
1
abc
2980
Web sites
0
The Farmer's Almanac is not an investment resource.
2981
Farmer's Almanac
1
Correct.
2982
Financial magazines (e.g. Money)
0
The Farmer's Almanac is not an investment resource.
2983
Cooperative Extension
0
The Farmer's Almanac is not an investment resource.
993
0
Financial Information Sources Evaluation 2
What is one advantage of having a professional financial advisor?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820124731+xkeafY
amy.remote-learner.net+090820125401+y5iX4m
0
1250772451
1250772841
3
3
0
2984,2985,2986,2987
1
0
abc
2984
An advisor’s services are free of charge if you buy stock
0
One benefit of having a financial advisor is the financial expertise and access to investment research and asset allocation software.
2985
A higher return on your investments than if you invested yourself
0
One benefit of having a financial advisor is the financial expertise and access to investment research and asset allocation software.
2986
Financial expertise and access to investment research and asset allocation software
1
Correct
2987
All of the above
0
One benefit of having a financial advisor is the financial expertise and access to investment research and asset allocation software.
994
0
Financial Information Sources Evaluation 3
What is the definition of a Ponzi Scheme investment fraud?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820124929+tJucpS
amy.remote-learner.net+090902153909+t5p7zq
0
1250772569
1251905949
3
3
0
2988,2989,2990,2991
1
1
abc
2988
A type of fraud where “investors” are paid with money taken in from new “investors” until the scheme collapses
1
Correct.
2989
A type of fraud that involves penny stocks
0
A Ponzi Scheme is a type of fraud where “investors” are paid with money taken in from new “investors” until the scheme collapses.
2990
A type of fraud that involves victims with similar characteristics such as religion
0
A Ponzi Scheme is a type of fraud where “investors” are paid with money taken in from new “investors” until the scheme collapses.
2991
A type of fraud that uses victims’ personal information to commit a crime
0
A Ponzi Scheme is a type of fraud where “investors” are paid with money taken in from new “investors” until the scheme collapses.
995
0
Financial Information Sources Evaluation 4
Are you personally aware of examples of investment fraud and financial scams? If so, include an example.
0
1
0
essay
1
amy.remote-learner.net+090820125033+eOtbfg
amy.remote-learner.net+090820125033+r7tw52
0
1250772633
1250772633
3
3
2992
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
996
0
Financial Information Sources Evaluation 5
How often do you and/or your spouse consult with professional financial advisors?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820125126+uIU272
amy.remote-learner.net+090820125126+WpLePi
0
1250772686
1250772686
3
3
2993
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
997
0
Financial Information Sources Evaluation 6
How often do you and/or your spouse consult print or online sources of investment information?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820125214+PczR20
amy.remote-learner.net+090820125214+l8VDkh
0
1250772734
1250772734
3
3
2994
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
998
0
Financial Information Sources Evaluation 7
How often do you and/or your spouse attend local investment seminars or conferences?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820125311+m6kyF7
amy.remote-learner.net+090820125311+7YjKHd
0
1250772791
1250772791
3
3
2995
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
999
0
Retirement Investments/Farm Succession Evaluation 1
What is an individual retirement account (IRA)?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820125740+Atei8w
amy.remote-learner.net+090820125740+9EQ4fV
0
1250773060
1250773060
3
3
0
2996,2997,2998,2999
1
1
abc
2996
A bank passbook savings account for retirement
0
An IRA is a tax-deferred retirement savings account for workers with earned income.
2997
A tax-deferred retirement savings account for workers with earned income
1
Correct.
2998
A savings account provided by companies as an employee benefit
0
An IRA is a tax-deferred retirement savings account for workers with earned income.
2999
A tax-free retirement savings account for self-employed workers
0
An IRA is a tax-deferred retirement savings account for workers with earned income.
1000
0
Retirement Investments/Farm Succession Evaluation 2
What is meant by the term "farm transfer"?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820125917+iVHPY0
amy.remote-learner.net+090820125917+JjlnRM
0
1250773157
1250773157
3
3
0
3000,3001,3002,3003
1
1
abc
3000
Plans for succession of a farm
1
Correct.
3001
Plans for selling a farm
0
Farm transfer means plans for succession of a farm.
3002
Plans for moving to a new farm
0
Farm transfer means plans for succession of a farm.
3003
Plans for putting a farm in a farmland preservation program
0
Farm transfer means plans for succession of a farm.
1001
0
Retirement Investments/Farm Succession Evaluation 3
What is estate planning?
0
1
0.1
multichoice
1
amy.remote-learner.net+090820130106+FUfXT7
amy.remote-learner.net+090820130106+ugaKiZ
0
1250773266
1250773266
3
3
0
3004,3005,3006,3007
1
1
abc
3004
The process of writing a will to distribute assets following death
0
Estate planning is the process of managing, enjoying, and disposing of assets at the least possible tax cost.
3005
The process of planning to sell a farm and farm assets
0
Estate planning is the process of managing, enjoying, and disposing of assets at the least possible tax cost.
3006
The process of naming hiring a farm manager
0
Estate planning is the process of managing, enjoying, and disposing of assets at the least possible tax cost.
3007
The process of managing, enjoying, and disposing of assets at the least possible tax cost
1
Correct.
1002
0
Retirement Investments/Farm Succession Evaluation 4
How often do you and/or your spouse invest in an IRA (traditional IRA or Roth IRA)?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820130216+jaNVzQ
amy.remote-learner.net+090820130216+QNNMUs
0
1250773336
1250773336
3
3
3008
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
1003
0
Retirement Investments/Farm Succession Evaluation 5
How often do you and/or your spouse invest in a 401(k), 403(b), or other employment-based retirement savings plan?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820130337+UAaZNG
amy.remote-learner.net+090820130337+p5M332
0
1250773417
1250773417
3
3
3009
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
1004
0
Retirement Investments/Farm Succession Evaluation 6
How often do you and/or your spouse work on estate planning activities such as writing a will, family gifts, etc.?
<b>Type one of these responses:</b>
<br />
<i>Never
Rarely
Sometimes
Often
Always</i>
0
1
0
essay
1
amy.remote-learner.net+090820130417+GxMh3m
amy.remote-learner.net+090820130417+4QZ6jT
0
1250773457
1250773457
3
3
3010
<b>This question will not be graded as correct or incorrect.</b>
0
<b>This question will not be graded as correct or incorrect.</b>
176
Default for Evaluation: Investment Prerequisites
The default category for questions shared in context 'Evaluation: Investment Prerequisites'.
module
828
amy.remote-learner.net+090819235234+JlUHeW
0
999
177
Default for Evaluation: First Things First
The default category for questions shared in context 'Evaluation: First Things First'.
module
829
amy.remote-learner.net+090820110956+KBMLjB
0
999
178
Default for Evaluation: Debt and Credit
The default category for questions shared in context 'Evaluation: Debt and Credit'.
module
830
amy.remote-learner.net+090820113034+QBsB2P
0
999
179
Default for Evaluation: Finding Money to Invest
The default category for questions shared in context 'Evaluation: Finding Money to Invest'.
module
831
amy.remote-learner.net+090820114446+ZLn2rW
0
999
180
Default for Evaluation: Assets and Risks
The default category for questions shared in context 'Evaluation: Assets and Risks'.
module
832
amy.remote-learner.net+090820120327+vXFQAP
0
999
181
Default for Evaluation: Investment Products/Agricultural Alternatives
The default category for questions shared in context 'Evaluation: Investment Products/Agricultural Alternatives'.
module
833
amy.remote-learner.net+090820122529+0a3btx
0
999
182
Default for Evaluation: Financial Information Sources
The default category for questions shared in context 'Evaluation: Financial Information Sources'.
module
834
amy.remote-learner.net+090820124245+ajVTok
0
999
183
Default for Evaluation: Retirement Investments and Farm Succession
The default category for questions shared in context 'Evaluation: Retirement Investments and Farm Succession'.
module
835
amy.remote-learner.net+090820125538+3ZH2Pc
0
999
184
Default for Unit 1-11 Quiz
The default category for questions shared in context 'Unit 1-11 Quiz'.
module
842
amy.remote-learner.net+090903160339+sa7E2B
0
999
189
Investing for Your Future (5)
course
amy.remote-learner.net+090903165403+W8PxeF
133
999
826
0
Investing for Your Future Question 2
A net worth statement, or balance sheet, includes the following components:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805231531+f0dV79
amy.remote-learner.net+090903170031+2Rl6PB
0
1249514131
1251997231
8
3
0
2452,2453,2454,2455
1
1
abc
2452
Income and expenses
0
Incorrect. A balance sheet consists of assets (everything you own) and debts (everything you owe). Debts are subtracted from assets to calculate net worth. Income and expenses are not part of a net worth statement.
2453
Expenses and debts
0
Incorrect. A balance sheet consists of assets (everything you own) and debts (everything you owe). Debts are subtracted from assets to calculate net worth. Expenses are not part of a net worth statement.
2454
Assets and income
0
Incorrect. A balance sheet consists of assets (everything you own) and debts (everything you owe). Debts are subtracted from assets to calculate net worth. Income is not part of a net worth statement.
2455
Assets and debts
1
Correct. A balance sheet consists of assets (everything you own) and debts (everything you owe). Debts are subtracted from assets to calculate net worth.
827
0
Investing for Your Future Question 3
Financial planners generally recommend setting aside an emergency cash reserve equal to ___ to ___ months' living expenses.
0
1
0.1
multichoice
1
amy.remote-learner.net+090805231830+VMERIW
amy.remote-learner.net+090903170051+F2mAIm
0
1249514310
1251997251
8
3
0
2456,2457,2458,2459
1
1
abc
2456
1 to 2
0
Incorrect. Most experts recommend an emergency fund equal to 3 to 6 months' expenses. It may be a combination of cash accounts (e.g., passbook savings, short-term CDs, money market funds) and low-cost credit sources (e.g., home equity line of credit). 1 to 2 months' expenses is below the recommended amount.
2457
2 to 3
0
Incorrect. Most experts recommend an emergency fund equal to 3 to 6 months' expenses. It may be a combination of cash accounts (e.g., passbook savings, short-term CDs, money market funds) and low-cost credit sources (e.g., home equity line of credit). 2 to 3 months' expenses is below the recommended amount.
2458
3 to 6
1
Correct. Most experts recommend an emergency fund equal to 3 to 6 months' expenses. It may be a combination of cash accounts (e.g., passbook savings, short-term CDs, money market funds) and low-cost credit sources (e.g., home equity line of credit).
2459
6 to 9
0
Incorrect. Most experts recommend an emergency fund equal to 3 to 6 months' expenses. It may be a combination of cash accounts (e.g., passbook savings, short-term CDs, money market funds) and low-cost credit sources (e.g., home equity line of credit). 6 to 9 months' expenses is above the recommended amount. Some investment experts suggest this increased amount of savings, however, during severe recessions.
828
0
Investing for Your Future Question 4
Which of the following actions can help you save on income taxes?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805232047+gHrkZu
amy.remote-learner.net+090903170104+aQl9mx
0
1249514447
1251997264
8
3
0
2460,2461,2462,2463
1
1
abc
2460
Invest in an employer-sponsored retirement savings plan
1
Correct. Tax laws encourage investing in retirement savings plans, such as 401(k) plans and 403(b) plans available in the workplace as well as individual retirement accounts (IRAs). Interest on investment earnings is tax-deferred until withdrawal at a later date, typically in retirement.
2461
Pay off your credit card balances
0
Incorrect. Tax laws encourage investing in retirement savings plans, such as 401(k) plans and 403(b) plans available in the workplace as well as individual retirement accounts (IRAs). Interest on investment earnings is tax-deferred until withdrawal at a later date, typically in retirement. Paying off your credit card balance quickly is a good idea but will not impact your income tax bill.
2462
Take out a car loan
0
Incorrect. Tax laws encourage investing in retirement savings plans, such as 401(k) plans and 403(b) plans available in the workplace as well as individual retirement accounts (IRAs). Interest on investment earnings is tax-deferred until withdrawal at a later date, typically in retirement. Taking out a car loan will not impact your income tax bill.
2463
Invest in a mutual fund
0
Incorrect. Tax laws encourage investing in retirement savings plans, such as 401(k) plans and 403(b) plans available in the workplace as well as individual retirement accounts (IRAs). Interest on investment earnings is tax-deferred until withdrawal at a later date, typically in retirement. Mutual fund investing will not impact your income tax bill unless the investment is within a retirement savings plan.
829
0
Investing for Your Future Question 5
Which of the following is an example of a well-stated SMART financial goal?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805232252+YeCczU
amy.remote-learner.net+090903170115+wHASC3
0
1249514572
1251997275
8
3
0
2464,2465,2466,2467
1
1
abc
2464
Retire at age 65
0
Incorrect. SMART financial goals should include both a date and a dollar cost. That way, they are very specific. Progress toward achievement of SMART goals can be measured and the amount of savings required to achieve them can be calculated. This statement does not indicate an amount of planned savings.
2465
Buy a new car for $25,000
0
Incorrect. SMART financial goals should include both a date and a dollar cost. That way, they are very specific. Progress toward achievement of SMART goals can be measured and the amount of savings required to achieve them can be calculated. This statement does not indicate a timeline (date) for the goal.
2466
Pay off all credit card debt in 18 months
0
Incorrect. SMART financial goals should include both a date and a dollar cost. That way, they are very specific. Progress toward achievement of SMART goals can be measured and the amount of savings required to achieve them can be calculated. This statement does not indicate a dollar amount of debt to be repaid.
2467
Save $7,500 for a cruise in two years
1
Correct. SMART financial goals should include both a date and a dollar cost. That way, they are very specific. Progress toward achievement of SMART goals can be measured and the amount of savings required to achieve them can be calculated.
1006
0
Investing for Your Future Question 1
Put the three building blocks of the financial planning process in sequential order as they appear in the pyramid from the bottom up.
0
1
0.1
multichoice
1
amy.remote-learner.net+090903165303+TA2k85
amy.remote-learner.net+090903170017+sETJbB
0
1251996783
1251997217
3
3
0
3014,3015,3016
1
1
abc
3014
protection, accumulation, distribution of wealth
1
Correct.
3015
accumulation, protection, distribution of wealth
0
Incorrect. The three building blocks of the financial planning process from the bottom up are protection, accumulation, distribution of wealth.
3016
accumulation, distribution, protection of wealth
0
Incorrect. The three building blocks of the financial planning process from the bottom up are protection, accumulation, distribution of wealth.
190
Investing Basics (5)
course
amy.remote-learner.net+090903165817+E19gaB
133
999
830
0
Investing Basics Question 1
Which of the following is not a characteristic of investments?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805160418+BLp44O
amy.remote-learner.net+090903170140+Pvzf0D
0
1249488258
1251997300
8
3
0
2468,2469,2470,2471
1
1
abc
2468
Involve the risk of loss of principal
0
Incorrect. Investments are used to fund mid- and long-term goals and not for short-term goals. There is a chance that investors can lose the amount that they invest (i.e., their principal).
2469
Used for emergencies and short-term goals
1
Correct. Investments are used to fund mid- and long-term goals and not for short-term goals.
2470
Offer potential for appreciation (i.e., increase in value)
0
Incorrect. Investments are used to fund mid- and long-term goals and not for short-term goals. Investment products, such as stock and zero-coupon bonds, have the potential to increase in value over time.
2471
Have volatile prices in short-term time periods
0
Incorrect. Investments are used to fund mid- and long-term goals and not for short-term goals. Investment prices can experience quite a bit of volatility (ups and downs in prices) in short time periods.
831
0
Investing Basics Question 2
Based on historical performance figures, what is a reasonable average annual return that can be expected from a broadly diversified U.S. stock mutual fund over the long run?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805160807+KgTLT7
amy.remote-learner.net+090903170151+WmWDXh
0
1249488487
1251997311
8
3
0
2472,2473,2474,2475
1
1
abc
2472
5%
0
Incorrect. The average annual return on U.S. large company stocks, as measured by the Standard & Poor's 500 index from 1926 to 2007, was 10.4%. Small company stock average annual returns were a bit higher at 12.5%. A return of 5% is closer to the average annual return on long-term government bonds.
2473
7%
0
Incorrect. The average annual return on U.S. large company stocks, as measured by the Standard & Poor's 500 index from 1926 to 2007, was 10.4%. Small company stock average annual returns were a bit higher at 12.5%. A return of 7% is between the average annual return of stocks and long-term government bonds.
2474
10%
1
Correct. The average annual return on U.S. large company stocks, as measured by the Standard & Poor's 500 index from 1926 to 2007, was 10.4%. Small company stock average annual returns were a bit higher at 12.5%.
2475
15%
0
Incorrect. The average annual return on U.S. large company stocks, as measured by the Standard & Poor's 500 index from 1926 to 2007, was 10.4%. Small company stock average annual returns were a bit higher at 12.5%. A return of 15% is higher than the average annual return on stocks.
832
0
Investing Basics Question 3
The practice of investing regular amounts at regular time intervals (e.g., $50 per month) is called:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805161103+Pdc8tQ
amy.remote-learner.net+090903170206+jF3NFt
0
1249488663
1251997326
8
3
0
2476,2477,2478,2479
1
1
abc
2476
Dollar-cost averaging
1
Correct. With dollar-cost averaging, you invest a set amount of money regularly over a long period of time regardless of the price per share of the investment. You’ll, thus, acquire more shares with your fixed deposit when market prices are down and fewer shares when market prices rise.
2477
Compounding
0
Incorrect. With dollar-cost averaging, you invest a set amount of money regularly over a long period of time regardless of the price per share of the investment. You’ll, thus, acquire more shares with your fixed deposit when market prices are down and fewer shares when market prices rise. Compounding is the process of earning interest on interest.
2478
Asset allocation
0
Incorrect. With dollar-cost averaging, you invest a set amount of money regularly over a long period of time regardless of the price per share of the investment. You’ll, thus, acquire more shares with your fixed deposit when market prices are down and fewer shares when market prices rise. Asset allocation is the division of investment funds among asset classes such as stocks, bonds, and cash assets.
2479
The time value of money
0
Incorrect. With dollar-cost averaging, you invest a set amount of money regularly over a long period of time regardless of the price per share of the investment. You’ll, thus, acquire more shares with your fixed deposit when market prices are down and fewer shares when market prices rise. The time value of money is the value of a dollar in different time periods such as the past, present, and future.
833
0
Investing Basics Question 4
The return on common stocks has historically been ________ the return for fixed income securities such as U.S. government bonds.
0
1
0.1
multichoice
1
amy.remote-learner.net+090805161432+7ebuLv
amy.remote-learner.net+090903170216+qwRxKX
0
1249488872
1251997336
8
3
0
2480,2481,2482,2483
1
1
abc
2480
About the same as
0
Incorrect. The average annual return on U.S. stocks (as measured by the S&P 500 index), from 1926 to 2007, was 10.4% compared to 5.5% for long-term government bonds. Thus, stocks have had a higher average annual return.
2481
About twice as high as
1
Correct. The average annual return on U.S. stocks (as measured by the S&P 500 index), from 1926 to 2007, was 10.4% compared to 5.5% for long-term government bonds.
2482
Lower than
0
Incorrect. The average annual return on U.S. stocks (as measured by the S&P 500 index), from 1926 to 2007, was 10.4% compared to 5.5% for long-term government bonds. Thus, stocks have had a higher average annual return.
2483
More than three times as high as
0
Incorrect. The average annual return on U.S. stocks (as measured by the S&P 500 index), from 1926 to 2007, was 10.4% compared to 5.5% for long-term government bonds. Thus, stocks have had a return almost twice as high as that of fixed-income securities.
834
0
Investing Basics Question 5
Which of the following investments normally produces tax-exempt (tax-free) income?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805161652+Ej3mcM
amy.remote-learner.net+090903170226+TT7Rea
0
1249489012
1251997346
8
3
0
2484,2485,2486,2487
1
1
abc
2484
Stocks
0
Incorrect. Tax-exempt investments produce earnings that are wholly or partly free from income taxes. Roth IRAs and most municipal bonds and municipal bond mutual funds are common examples of tax-exempt investments. Earnings from stock investments are taxable or tax-deferred if held in a retirement savings plan.
2485
Corporate bonds
0
Incorrect. Tax-exempt investments produce earnings that are wholly or partly free from income taxes. Roth IRAs and most municipal bonds and municipal bond mutual funds are common examples of tax-exempt investments. Earnings from corporate bonds are taxable or tax-deferred if held in a retirement savings plan.
2486
Index funds
0
Incorrect. Tax-exempt investments produce earnings that are wholly or partly free from income taxes. Roth IRAs and most municipal bonds and municipal bond mutual funds are common examples of tax-exempt investments. Earnings from index funds are taxable or tax-deferred if held in a retirement savings plan.
2487
Municipal bonds
1
Correct. Tax-exempt investments produce earnings that are wholly or partly free from income taxes. Roth IRAs and most municipal bonds and municipal bond mutual funds are common examples of tax-exempt investments.
191
Finding Money to Invest (5)
course
amy.remote-learner.net+090903170256+OKX5Mo
133
999
855
0
Finding Money to Invest Question 1
Which one of the following items is a need and not a want?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805162017+fG60Tx
amy.remote-learner.net+090903170345+VS9nwY
0
1249489217
1251997425
8
3
0
2568,2569,2570,2571
1
1
abc
2568
A new car
0
Incorrect. Needs are items that are necessary for survival such as a place to live (shelter). Transportation to work is also a need but there are many lower cost substitutes for a new car available.
2569
A place to sleep at night
1
Correct. Needs are items that are necessary for survival such as a place to live (shelter). Transportation to work, food, and clothing are also needs but there are many lower cost substitutes available for the items included in the question.
2570
A steak dinner
0
Incorrect. Needs are items that are necessary for survival such as a place to live (shelter). Food is also a need but there are many lower cost substitutes for a steak dinner available.
2571
Designer jeans
0
Incorrect. Needs are items that are necessary for survival such as a place to live (shelter). Clothing is also a need but there are many lower cost substitutes designer clothing available.
856
0
Finding Money to Invest Question 2
The practice of treating savings like a household bill and setting money aside as soon as it is earned is called:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805162420+0bv3h6
amy.remote-learner.net+090903170355+Jvlwp1
0
1249489460
1251997435
8
3
0
2572,2573,2574,2575
1
1
abc
2572
The time value of money
0
Incorrect. Financial experts recommend treating savings like an important household bill (e.g., rent/mortgage or car loan payment) and "paying yourself first" by depositing money into a financial account as soon as it is earned. The time value of money is the value of a dollar in different time periods such as the past, present, and future.
2573
Savings optimization
0
Incorrect. Financial experts recommend treating savings like an important household bill (e.g., rent/mortgage or car loan payment) and "paying yourself first" by depositing money into a financial account as soon as it is earned. Savings optimization is a made-up phrase.
2574
Asset allocation
0
Incorrect. Financial experts recommend treating savings like an important household bill (e.g., rent/mortgage or car loan payment) and "paying yourself first" by depositing money into a financial account as soon as it is earned. Asset allocation is the division of investment funds among asset classes such as stocks, bonds, and cash assets.
2575
"Pay yourself first"
1
Correct. Financial experts recommend treating savings like an important household bill (e.g., rent/mortgage or car loan payment) and "paying yourself first" by depositing money into a financial account as soon as it is earned.
857
0
Finding Money to Invest Question 3
The _____ the interest rate on an investment and the _____ the investment time period, the more money an investor will accumulate.
0
1
0.1
multichoice
1
amy.remote-learner.net+090805162658+Gae6kr
amy.remote-learner.net+090903170406+AnrNbW
0
1249489618
1251997446
8
3
0
2576,2577,2578,2579
1
1
abc
2576
Higher, longer
1
Correct. Investments will grow the most if they earn a high rate of return over a long period of time, thereby maximizing the wealth-building capacity of compound interest.
2577
Higher, shorter
0
Incorrect. Investments will grow the most if they earn a high rate of return over a long period of time, thereby maximizing the wealth-building capacity of compound interest. Short time frames limit investment growth.
2578
Lower, longer
0
Incorrect. Investments will grow the most if they earn a high rate of return over a long period of time, thereby maximizing the wealth-building capacity of compound interest. Low rates of return limit investment growth.
2579
Lower, shorter
0
Incorrect. Investments will grow the most if they earn a high rate of return over a long period of time, thereby maximizing the wealth-building capacity of compound interest. Low rates of return and short time frames limit investment growth.
858
0
Finding Money to Invest Question 4
Which is NOT an example of unexpected "bonus" money that can be used to make an investment?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805162924+zexouA
amy.remote-learner.net+090903170415+2dq2hd
0
1249489764
1251997455
8
3
0
2580,2581,2582,2583
1
1
abc
2580
Gifts
0
Incorrect. Child support is an amount of money decided by a court of law that is supposed to be paid on a regular basis. Gifts are often not known in advance and, thus, provide a cash windfall to invest for future goals.
2581
Awards
0
Incorrect. Child support is an amount of money decided by a court of law that is supposed to be paid on a regular basis. Awards are often not known in advance and, thus, provide a cash windfall to invest for future goals.
2582
Child support
1
Correct. Child support is an amount of money decided by a court of law that is supposed to be paid on a regular basis. Gifts, awards, and overtime pay are often not known in advance and, thus, provide a cash windfall to invest for future goals.
2583
Overtime pay
0
Incorrect. Child support is an amount of money decided by a court of law that is supposed to be paid on a regular basis. Overtime pay is often not known in advance and, thus, provides a cash windfall to invest for future goals.
859
0
Finding Money to Invest Question 5
Which of the following organizations does NOT provide information about someone’s missing assets?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805163205+nMPMEi
amy.remote-learner.net+090903170426+ELj05G
0
1249489925
1251997466
8
3
0
2584,2585,2586,2587
1
1
abc
2584
State unclaimed property offices
0
Incorrect. State unclaimed property offices can help track down missing bank accounts and other unclaimed assets.
2585
Pension Benefit Guaranty Corporation (PBGC)
0
Incorrect. The PBGC can help track down unclaimed pension plan assets.
2586
Internal Revenue Service (IRS)
0
Incorrect. The IRS can provide information about unclaimed tax refunds.
2587
U.S. Securities and Exchange Commission
1
Correct. State unclaimed property offices can help track down missing bank accounts and other unclaimed assets. The PBGC can help track down unclaimed pension assets and the IRS can provide information about unclaimed tax refunds. The U.S. Securities and Exchange Commission focuses on regulation of securities firms and adequate disclosure of information about investments to the investing public.
192
Ownership Investments (5)
course
amy.remote-learner.net+090903170610+6vS6KU
133
999
835
0
Ownership Investments Question 1
If you buy one or more shares of a company's stock:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805165945+o7MpBw
amy.remote-learner.net+090903171216+GYG3yg
0
1249491585
1251997936
8
3
0
2488,2489,2490,2491
1
1
abc
2488
You have lent money to the company for a set period of time
0
Incorrect. The purchase of common stock provides investors with an ownership interest in a company. As a partial owner of the company, investors' returns will be determined by the company’s profits and losses. Fixed-income securities, such as bonds, involve lending money to a company or government for a set period of time.
2489
You are liable for the company’s unpaid debts
0
Incorrect. The purchase of common stock provides investors with an ownership interest in a company. As a partial owner of the company, investors' returns will be determined by the company’s profits and losses. An investor's losses are limited to the amount of their stock purchase.
2490
You are a part-owner of the company
1
Correct. The purchase of common stock provides investors with an ownership interest in a company. As a partial owner of the company, investors' returns will be determined by the company's profits and losses. Unlike cash assets and bonds, when purchasing stock there is no guarantee that an investor will make money.
2491
The company will return your original investment principal
0
Incorrect. The purchase of common stock provides investors with an ownership interest in a company. As a partial owner of the company, investors' returns will be determined by the company's profits and losses. Unlike cash assets and bonds, when purchasing stock there is no guarantee that an investor will make money or receive their original principal back at a future date.
836
0
Ownership Investments Question 2
Which is NOT a characteristic of growth stocks and stock-related investments such as growth funds and ETFs?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805170200+QIcE9h
amy.remote-learner.net+090903171924+zg1G2a
0
1249491720
1251998364
8
3
0
2492,2493,2494,2495
1
1
abc
2492
Price volatility
0
Incorrect. Stock returns are anything but predictable. Many factors can influence the ups and downs of stock prices, which can be extremely volatile, especially in short-term time periods.
2493
Historically high long-term rates of return
0
Incorrect. Stock returns are anything but predictable. Many factors can influence the ups and downs of stock prices. Historically, stocks have outperformed other types of investments, especially over the long term.
2494
Returns that outpace inflation
0
Incorrect. Stock returns are anything but predictable. Many factors can influence the ups and downs of stock prices. Historically, stocks have outperformed other investments and provided an inflation hedge.
2495
Predictable rates of return
1
Correct. Stock returns are anything but predictable. Many factors can influence the ups and downs of stock prices.
837
0
Ownership Investments Question 3
Stocks with prices that are currently relatively low compared to their historical earnings and asset prices are called:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805170400+N4q7w6
amy.remote-learner.net+090903171936+ZSQO09
0
1249491840
1251998376
8
3
0
2496,2497,2498,2499
1
1
abc
2496
Blue chip stocks
0
Incorrect. Value stocks are underpriced stocks relative to their intrinsic worth and/or future earning prospects. They are often sold by companies that are temporarily out of favor but are expected to rebound over time. Blue chip stocks are stocks issued by companies with long records of growth and profitability.
2497
Value stocks
1
Correct. Value stocks are underpriced stocks relative to their intrinsic worth and/or future earning prospects. They are often sold by companies that are temporarily out of favor but are expected to rebound over time.
2498
Penny stocks
0
Incorrect. Value stocks are underpriced stocks relative to their intrinsic worth and/or future earning prospects. They are often sold by companies that are temporarily out of favor but are expected to rebound over time. Penny stocks are often very speculative and are stocks that sell for $5 per share or less.
2499
Small cap stocks
0
Incorrect. Value stocks are underpriced stocks relative to their intrinsic worth and/or future earning prospects. They are often sold by companies that are temporarily out of favor but are expected to rebound over time. Small capitalization (cap) stocks are stocks of small companies with assets under $1 billion.
838
0
Ownership Investments Question 4
Common stock owners can potentially make money on stocks by receiving:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805170603+wmXAUy
amy.remote-learner.net+090903171957+G63a4e
0
1249491963
1251998397
8
3
0
2500,2501,2502,2503
1
1
abc
2500
Dividends and capital gains
1
Correct. Dividends distributed to stockholders are determined by a company’s board of directors. Capital gains are a positive increase in the value of a stock (i.e., a profit) between the time that an investor buys it and sells it.
2501
Dividends and interest
0
Incorrect. Dividends distributed to stockholders are determined by a company’s board of directors. Capital gains are a positive increase in the value of a stock (i.e., a profit) between the time that an investor buys it and sells it. Common stock investors do not receive interest.
2502
Interest and capital gains
0
Incorrect. Dividends distributed to stockholders are determined by a company’s board of directors. Capital gains are a positive increase in the value of a stock (i.e., a profit) between the time that an investor buys it and sells it. Common stock investors do not receive interest.
2503
Interest and stock splits
0
Incorrect. Dividends distributed to stockholders are determined by a company’s board of directors. Capital gains are a positive increase in the value of a stock (i.e., a profit) between the time that an investor buys it and sells it. Stock splits do not provide an increased return; the value of investors’ shares remains the same.
839
0
Ownership Investments Question 5
The Standard & Poor’s 500 is an example of:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805170824+jldjW7
amy.remote-learner.net+090903172012+H9Cqz7
0
1249492104
1251998412
8
3
0
2504,2505,2506,2507
1
1
abc
2504
A mutual fund company
0
Incorrect. The Standard & Poor's 500 (S&P 500) is a widely used stock market index that is used to measure the performance of stock issued by large U.S. companies. In addition, many stock index funds track the S&P 500 index and hold the same stocks that comprise the index itself. It is not a mutual fund company.
2505
A benchmark stock market index
1
Correct. The Standard & Poor's 500 (S&P 500) is a widely used stock market index that is used to measure the performance of stock issued by large U.S. companies. In addition, many stock index funds track the S&P 500 index and hold the same stocks that comprise the index itself.
2506
An investment research company
0
Incorrect. The Standard & Poor's 500 (S&P 500) is a widely used stock market index that is used to measure the performance of stock issued by large U.S. companies. In addition, many stock index funds track the S&P 500 index and hold the same stocks that comprise the index itself. It is not an investment research company.
2507
A government regulatory agency rating
0
Incorrect. The Standard & Poor's 500 (S&P 500) is a widely used stock market index that is used to measure the performance of stock issued by large U.S. companies. In addition, many stock index funds track the S&P 500 index and hold the same stocks that comprise the index itself. It is not a government agency.
193
Fixed Income Investing (5)
course
amy.remote-learner.net+090903172053+7igq9U
133
999
860
0
Fixed Income Investing Question 1
Which of the following is the name for the type of U.S. government savings bond that is inflation adjusted?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805184316+xEjyB6
amy.remote-learner.net+090903172115+JbEdrH
0
1249497796
1251998475
8
3
0
2588,2589,2590,2591
1
1
abc
2588
EE bond
0
Incorrect. I bonds are U.S. savings bonds that pay an earnings rate that is a combination of two rates: a fixed interest rate that is set when the investor buys the bond and a semiannually adjusted variable interest rate that is tied to the inflation rate. EE bonds are a federal government bond but are not inflation-adjusted.
2589
I bond
1
Correct
I bonds are U.S. savings bonds that pay an earnings rate that is a combination of two rates: a fixed interest rate that is set when the investor buys the bond and a semiannually adjusted variable interest rate that is tied to the inflation rate.
2590
Convertible bond
0
Incorrect. I bonds are U.S. savings bonds that pay an earnings rate that is a combination of two rates: a fixed interest rate that is set when the investor buys the bond and a semiannually adjusted variable interest rate that is tied to the inflation rate. Convertible bonds are issued by corporations, not the U.S. government.
2591
Zero-coupon bond
0
Incorrect. I bonds are U.S. savings bonds that pay an earnings rate that is a combination of two rates: a fixed interest rate that is set when the investor buys the bond and a semiannually adjusted variable interest rate that is tied to the inflation rate. Zero-coupon bonds are not inflation-adjusted.
861
0
Fixed Income Investing Question 2
If you buy a company's bond:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805184643+u3dzgW
amy.remote-learner.net+090903172128+o0VbcE
0
1249498003
1251998488
8
3
0
2592,2593,2594,2595
1
1
abc
2592
You own a part of the company
0
Incorrect. Bonds are a "loanership" investment, not an "ownership" investment. Therefore, bond owners are simply lending their money to a company for a period of time. There is no partial ownership interest or ability to vote at company meetings. Bond owners simply get paid periodic interest by the bond issuer.
2593
You are liable for the company’s unpaid debts
0
Incorrect. Bonds are a "loanership" investment, not an "ownership" investment. Therefore, bond owners are simply lending their money to a company for a period of time. There is no partial ownership interest or ability to vote at company meetings. Bond owners have no liability for a bond issuer's debts.
2594
You have lent money to the company
1
Correct. Bonds are a "loanership" investment, not an "ownership" investment. Therefore, bond owners are simply lending their money to a company for a period of time. There is no partial ownership interest or ability to vote at company meetings.
2595
You can vote on proposed resolutions at the company’s annual business meeting
0
Incorrect. Bonds are a "loanership" investment, not an "ownership" investment. Therefore, bond owners are simply lending their money to a company for a period of time. There is no partial ownership interest or ability to vote at company meetings. Bond owners have no voting power over the bond issuer’s business.
862
0
Fixed Income Investing Question 3
In general, if interest rates go up, then bond prices:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805184910+GwfmPw
amy.remote-learner.net+090903172150+Wo7eB1
0
1249498150
1251998510
8
3
0
2596,2597,2598,2599
1
1
abc
2596
Go down
1
Correct. This inverse relationship between interest rates and the value of bonds is called interest rate risk and it affects the price of bonds if they are sold prior to maturity. When interest rates rise, owners of previously issued bonds that pay a lower interest rate must sell them at a discount (reduced price) prior to maturity in order to entice investors to buy them.
2597
Go up
0
Incorrect. This inverse relationship between interest rates and the value of bonds is called interest rate risk and it affects the price of bonds if they are sold prior to maturity. When interest rates rise, owners of previously issued bonds that pay a lower interest rate must sell them at a discount (reduced price) prior to maturity in order to entice investors to buy them. Thus, bond prices go down accordingly.
2598
Are not affected by interest rates one way or the other
0
Incorrect. This inverse relationship between interest rates and the value of bonds is called interest rate risk and it affects the price of bonds if they are sold prior to maturity. When interest rates rise, owners of previously issued bonds that pay a lower interest rate must sell them at a discount (reduced price) prior to maturity in order to entice investors to buy them. Thus, bond prices go down accordingly.
2599
Are determined by the Federal Reserve Bank
0
Incorrect. This inverse relationship between interest rates and the value of bonds is called interest rate risk and it affects the price of bonds if they are sold prior to maturity. When interest rates rise, owners of previously issued bonds that pay a lower interest rate must sell them at a discount (reduced price) prior to maturity in order to entice investors to buy them. Interest rate risk is not affected by Federal Reserve actions.
863
0
Fixed Income Investing Question 4
Which of the following is the best definition for a "junk bond" (also called a "high yield bond")?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805185243+kyQXcb
amy.remote-learner.net+090903172213+DoiKn9
0
1249498363
1251998533
8
3
0
2600,2601,2602,2603
1
1
abc
2600
A bond that has dramatically declined in value
0
Incorrect. Junk bonds are those rated "below investment grade" by rating agencies such as Moody's and Standard & Poor's. They generally pay higher interest rates than investment grade bonds to compensate investors for their higher risk of default. A decline in value does not indicate that a bond is a junk bond.
2601
A bond that has defaulted on its debt
0
Incorrect. Junk bonds are those rated "below investment grade" by rating agencies such as Moody's and Standard & Poor's. They generally pay higher interest rates than investment grade bonds to compensate investors for their higher risk of default. Bonds in default are a subset of all of available junk bonds.
2602
A bond that is not regulated by government authorities
0
Incorrect. Junk bonds are those rated "below investment grade" by rating agencies such as Moody's and Standard & Poor's. They generally pay higher interest rates than investment grade bonds to compensate investors for their higher risk of default. Government regulation (or not) has nothing to do with the definition of a junk bond.
2603
A bond rated as “below investment grade” by rating agencies
1
Correct. Junk bonds are those rated "below investment grade" by rating agencies such as Moody's and Standard & Poor's. They generally pay higher interest rates than investment grade bonds to compensate investors for their higher risk of default.
864
0
Fixed Income Investing Question 5
Which type of bond is considered the safest of all debt instruments?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805185511+QYWDlu
amy.remote-learner.net+090903172224+dB5rCf
0
1249498511
1251998544
8
3
0
2604,2605,2606,2607
1
1
abc
2604
U.S. Treasury bond
1
Correct. Treasury securities are backed with "the full faith and credit of the U.S. government." They are considered the safest of all debt instruments because there has never been a default by the U.S. government. On the other hand, some municipal and corporate bonds have experienced defaults over the years.
2605
Corporate bond
0
Incorrect. Treasury securities are backed with "the full faith and credit of the U.S. government." They are considered the safest of all debt instruments because there has never been a default by the U.S. government. On the other hand, some municipal and corporate bonds have experienced defaults over the years. The safety of corporate bonds depends upon the financial stability of issuing companies.
2606
Municipal bond
0
Incorrect. Treasury securities are backed with "the full faith and credit of the U.S. government." They are considered the safest of all debt instruments because there has never been a default by the U.S. government. On the other hand, some municipal and corporate bonds have experienced defaults over the years. The safety of municipal bonds depends upon the financial stability of issuing governments.
2607
Convertible bond
0
Incorrect. Treasury securities are backed with "the full faith and credit of the U.S. government." They are considered the safest of all debt instruments because there has never been a default by the U.S. government. On the other hand, some municipal and corporate bonds have experienced defaults over the years. The safety of convertible bonds depends upon the financial stability of issuing companies.
194
Mutual Fund Investing (5)
course
amy.remote-learner.net+090903172438+FAmvGf
133
999
865
0
Mutual Fund Investing Question 1
Jennifer owns a stock mutual fund, rather than specific stocks, to reduce her risk of losing money. This is called:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805185805+8dcXz1
amy.remote-learner.net+090903172920+mb9oG2
0
1249498685
1251998960
8
3
0
2608,2609,2610,2611
1
1
abc
2608
Asset allocation
0
Incorrect. A stock mutual fund's portfolio contains many stocks, often over 100 different companies. This fund feature provides diversification, which lowers investment risk. If some stocks lose money, others may increase in value and offset the loss. Asset allocation is the division of investment funds among asset classes such as stocks, bonds, and cash assets.
2609
Diversification
1
Correct. A stock mutual fund's portfolio contains many stocks, often over 100 different companies. This fund feature provides diversification, which lowers investment risk. If some stocks lose money, others may increase in value and offset the loss.
2610
Dollar-cost averaging
0
Incorrect. A stock mutual fund's portfolio contains many stocks, often over 100 different companies. This fund feature provides diversification, which lowers investment risk. If some stocks lose money, others may increase in value and offset the loss. Dollar-cost averaging is the investment of regular dollar amounts at regular time intervals (e.g., $50 per month).
2611
Compounding
0
Incorrect. A stock mutual fund's portfolio contains many stocks, often over 100 different companies. This fund feature provides diversification, which lowers investment risk. If some stocks lose money, others may increase in value and offset the loss. Compounding is the process of earning interest on interest.
866
0
Mutual Fund Investing Question 2
Matt just finished taking an investment class and has decided to invest in mutual funds because they are:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805190014+nxeRYk
amy.remote-learner.net+090903172932+bMkddn
0
1249498814
1251998972
8
3
0
2612,2613,2614,2615
1
1
abc
2612
Risk-free
0
Incorrect. Mutual funds provide full-time, professional money management. The fund manager selects the securities in the fund portfolio. This is a significant advantage because most individuals do not have the time and/or skill to select and monitor individual stocks and bonds. No investment, including any type of mutual fund (e.g., stock fund and bond fund), is risk-free.
2613
Tax-deferred
0
Incorrect. Mutual funds provide full-time, professional money management. The fund manager selects the securities in the fund portfolio. This is a significant advantage because most individuals do not have the time and/or skill to select and monitor individual stocks and bonds. Mutual funds are not tax-deferred unless they are placed within a tax-deferred retirement savings plan such as a 401(k) or IRA.
2614
Managed by experts at picking investments
1
Correct. Mutual funds provide full-time, professional money management. The fund manager selects the securities in the fund portfolio. This is a significant advantage because most individuals do not have the time and/or skill to select and monitor individual stocks and bonds.
2615
Guaranteed to earn more than bank savings accounts
0
Incorrect. Mutual funds provide full-time, professional money management. The fund manager selects the securities in the fund portfolio. This is a significant advantage because most individuals do not have the time and/or skill to select and monitor individual stocks and bonds. There are no guarantees what investors will earn in any type of mutual fund (e.g., stock fund and bond fund).
867
0
Mutual Fund Investing Question 3
Which is NOT a mutual fund suitable for an investor with a growth objective?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805190159+nnajX8
amy.remote-learner.net+090903172942+Hnw3hs
0
1249498919
1251998982
8
3
0
2616,2617,2618,2619
1
1
abc
2616
Small capitalization fund
0
Incorrect. Money market mutual funds invest in very short-term debt securities and are suitable for those with an investment objective of preservation of capital. A small capitalization (small company) fund is a type of growth-oriented stock fund.
2617
Sector fund
0
Incorrect. Money market mutual funds invest in very short-term debt securities and are suitable for those with an investment objective of preservation of capital. A sector fund is a type of growth-oriented stock fund.
2618
Maximum capital appreciation fund
0
Incorrect. Money market mutual funds invest in very short-term debt securities and are suitable for those with an investment objective of preservation of capital. A maximum capital appreciation fund is a type of growth-oriented stock fund.
2619
Money market mutual fund
1
Correct. Money market mutual funds invest in very short-term debt securities and are suitable for those with an investment objective of preservation of capital. All of the other funds that were listed are types of growth-oriented stock funds.
868
0
Mutual Fund Investing Question 4
Under current regulations, the highest percentage that a load mutual fund can charge for a front-end load is:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805190515+cUhfIg
amy.remote-learner.net+090903172953+aqfAqJ
0
1249499115
1251998993
8
3
0
2620,2621,2622,2623
1
1
abc
2620
3.5%
0
Incorrect. Load funds that assess a sales charge can deduct up to 8.5% of the amount invested for a front-end load. A 3.5% load is in the range that is typical for funds described as "low load" funds.
2621
5.5%
0
Incorrect. Load funds that assess a sales charge can deduct up to 8.5% of the amount invested for a front-end load. A 5.5% load is 3% less than the maximum load that could be charged.
2622
7.5%
0
Incorrect. Load funds that assess a sales charge can deduct up to 8.5% of the amount invested for a front-end load. A 7.5% load is high, but 1% less than the maximum load that could be charged.
2623
8.5%
1
Correct. Load funds that assess a sales charge can deduct up to 8.5% of the amount invested for a front-end load.
869
0
Mutual Fund Investing Question 5
The fee that is assessed as a percentage of shareholder assets to pay for advertising, marketing, and distribution costs is called a:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805190801+4QSS1F
amy.remote-learner.net+090903173011+z7vQxk
0
1249499281
1251999011
8
3
0
2624,2625,2626,2627
1
1
abc
2624
12b-1 fee
1
Correct. 12b-1 fees can range from 0.1% to 1.00% of fund assets and shareholders of funds with a 12b-1 fee pay a prorated share. Not every fund assesses this fee, however. For those that do, 12b-1 fees are part of the fund's overall expense ratio.
2625
Front-end load
0
Incorrect. 12b-1 fees can range from 0.1% to 1.00% of fund assets and shareholders of funds with a 12b-1 fee pay a prorated share. Not every fund assesses this fee, however. For those that do, 12b-1 fees are part of the fund's overall expense ratio. A front-end load is assessed when shares are purchased and is a percentage of the amount invested.
2626
Contingent deferred sales charge
0
Incorrect. 12b-1 fees can range from 0.1% to 1.00% of fund assets and shareholders of funds with a 12b-1 fee pay a prorated share. Not every fund assesses this fee, however. For those that do, 12b-1 fees are part of the fund's overall expense ratio. A back-end load (contingent deferred sales charge) is assessed when shares are sold and is a percentage of the value of shares that are redeemed.
2627
Management fee
0
Incorrect. 12b-1 fees can range from 0.1% to 1.00% of fund assets and shareholders of funds with a 12b-1 fee pay a prorated share. Not every fund assesses this fee, however. For those that do, 12b-1 fees are part of the fund’s overall expense ratio. Management fees pay for ongoing management by a fund manager.
195
Tax-Deferred Investments (5)
course
amy.remote-learner.net+090903173054+R9cqUr
133
999
840
0
Tax-Deferred Investments Question 1
Income that is free from taxes in the current year but subject to taxation in a future year is called:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805191051+zhR7vX
amy.remote-learner.net+090903173119+6iOX2b
0
1249499451
1251999079
8
3
0
2508,2509,2510,2511
1
1
abc
2508
Nontaxable
0
Incorrect. Tax-deferred investments postpone the taxes earned on the investment to a later date, typically during retirement. Some people are in a lower marginal tax bracket in retirement than during their working years. Even those who remain in the same tax bracket benefit from years, even decades, of tax-deferred compound interest. Nontaxable (tax-free) investments are exempt from taxation at any time.
2509
Tax-deferred
1
Correct. Tax-deferred investments postpone the taxes earned on the investment to a later date, typically during retirement. Some people are in a lower marginal tax bracket in retirement than during their working years. Even those who remain in the same tax bracket benefit from years, even decades, of tax-deferred compound interest.
2510
Taxable
0
Incorrect. Tax-deferred investments postpone the taxes earned on the investment to a later date, typically during retirement. Some people are in a lower marginal tax bracket in retirement than during their working years. Even those who remain in the same tax bracket benefit from years, even decades, of tax-deferred compound interest. Taxable income is taxed in the year that it is earned.
2511
Tax-exempt
0
Incorrect. Tax-deferred investments postpone the taxes earned on the investment to a later date, typically during retirement. Some people are in a lower marginal tax bracket in retirement than during their working years. Even those who remain in the same tax bracket benefit from years, even decades, of tax-deferred compound interest. Tax-exempt (tax-free) investments are exempt from taxation at any time.
841
0
Tax-Deferred Investments Question 2
Which of the following is a retirement savings plan designed exclusively for self employed persons and small businesses?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805191324+J2xOAg
amy.remote-learner.net+090903173130+Ybleim
0
1249499604
1251999090
8
3
0
2512,2513,2514,2515
1
1
abc
2512
Coverdell Plan
0
Incorrect. A Simplified Employee Pension (SEP) plan allows business owners to make retirement savings contributions to their own individual retirement account (IRA) and the IRAs of their employees. People with a "day job" and a sideline business can also contribute to a SEP based on their net business earnings. A Coverdell plan account is a savings plan for educational expenses.
2513
SEP Plan
1
Correct. A Simplified Employee Pension (SEP) plan allows business owners to make retirement savings contributions to their own individual retirement account (IRA) and the IRAs of their employees. People with a "day job" and a sideline business can also contribute to a SEP based on their net business earnings.
2514
Section 457 Plan
0
Incorrect. A Simplified Employee Pension (SEP) plan allows business owners to make retirement savings contributions to their own individual retirement account (IRA) and the IRAs of their employees. People with a "day job" and a sideline business can also contribute to a SEP based on their net business earnings. A Section 457 plan to an employment-based retirement savings plan for state and local government employees.
2515
Immediate Annuity
0
Incorrect. A Simplified Employee Pension (SEP) plan allows business owners to make retirement savings contributions to their own individual retirement account (IRA) and the IRAs of their employees. People with a "day job" and a sideline business can also contribute to a SEP based on their net business earnings. An immediate annuity can be purchased by all workers whether they receive a salary or self-employment earnings.
842
0
Tax-Deferred Investments Question 3
What age do workers need to be to make catch-up contributions to an IRA or employer retirement savings plan?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805191619+Bg6MPy
amy.remote-learner.net+090903173139+Emarhb
0
1249499779
1251999099
8
3
0
2516,2517,2518,2519
1
1
abc
2516
40
0
Incorrect. To be eligible for catch-up contributions, workers must be at least age 50 by the end of the tax year for which the contribution is made. 40-year old workers are too young for catch-up savings.
2517
45
0
Incorrect. To be eligible for catch-up contributions, workers must be at least age 50 by the end of the tax year for which the contribution is made. 45-year old workers are too young for catch-up savings.
2518
50
1
Correct. To be eligible for catch-up contributions, workers must be at least age 50 by the end of the tax year for which the contribution is made.
2519
55
0
Incorrect. To be eligible for catch-up contributions, workers must be at least age 50 by the end of the tax year for which the contribution is made. Age 55 is five years above the minimum required age.
843
0
Tax-Deferred Investments Question 4
The type of retirement savings plan that does not require taxable distributions at age 70 ½ is a:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805192204+lXJAbc
amy.remote-learner.net+090903173151+Csmh9m
0
1249500124
1251999111
8
3
0
2520,2521,2522,2523
1
1
abc
2520
Roth IRA
1
Correct. Unlike traditional IRAs and 401(k) and 403(b) plans, investors in a Roth IRA are not subject to the required minimum distribution rules. There is no mandatory annual withdrawal required.
2521
401(k) plan
0
Incorrect. Unlike traditional IRAs and 401(k) and 403(b) plans, investors in a Roth IRA are not subject to the required minimum distribution rules. There is no mandatory annual withdrawal required. Workers with 401(k) plans are required to begin mandatory annual withdrawals at age 70 ½.
2522
403(b) plan
0
Incorrect. Unlike traditional IRAs and 401(k) and 403(b) plans, investors in a Roth IRA are not subject to the required minimum distribution rules. There is no mandatory annual withdrawal required. Workers with 403(b) plans are required to begin mandatory annual withdrawals at age 70 ½.
2523
Traditional IRA
0
Incorrect. Unlike traditional IRAs and 401(k) and 403(b) plans, investors in a Roth IRA are not subject to the required minimum distribution rules. There is no mandatory annual withdrawal required. Workers with Traditional IRAs are required to begin mandatory annual withdrawals at age 70 ½.
844
0
Tax-Deferred Investments Question 5
A 529 Plan is a tax-advantaged way to save for:
0
1
0.1
multichoice
1
amy.remote-learner.net+090805192409+wDv945
amy.remote-learner.net+090903173201+6AvFya
0
1249500249
1251999121
8
3
0
2524,2525,2526,2527
1
1
abc
2524
Retirement
0
Incorrect. 529 college savings plans are set up for a designated beneficiary. Each state offers a plan with specific characteristics such as investment options and maximum contribution amounts. Withdrawals are tax-free if made for qualified education expenses. If a named beneficiary does not attend college, 529 plan funds may be transferred to another relative. Retirement savings is not the purpose of a 529 plan.
2525
Long-term care
0
Incorrect. 529 college savings plans are set up for a designated beneficiary. Each state offers a plan with specific characteristics such as investment options and maximum contribution amounts. Withdrawals are tax-free if made for qualified education expenses. If a named beneficiary does not attend college, 529 plan funds may be transferred to another relative. Long-term care savings is not the purpose of a 529 plan.
2526
College
1
Correct. 529 college savings plans are set up for a designated beneficiary. Each state offers a plan with specific characteristics such as investment options and maximum contribution amounts. Withdrawals are tax-free if made for qualified education expenses. If a named beneficiary does not attend college, 529 plan funds may be transferred to another relative.
2527
Health care
0
Incorrect. 529 college savings plans are set up for a designated beneficiary. Each state offers a plan with specific characteristics such as investment options and maximum contribution amounts. Withdrawals are tax-free if made for qualified education expenses. If a named beneficiary does not attend college, 529 plan funds may be transferred to another relative. Health care savings is not the purpose of a 529 plan.
196
Small Dollar Investing (5)
course
amy.remote-learner.net+090903173228+y15mN6
133
999
870
0
Small Dollar Investing Question 1
Which is not an advantage of employer-sponsored retirement savings plans?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805215303+zoOupZ
amy.remote-learner.net+090903173259+J4PCsD
0
1249509183
1251999179
8
3
0
2628,2629,2630,2631
1
1
abc
2628
Tax-free income
1
Correct. Tax-free income is the correct answer because taxes will be owed at a future date. The other three answers that are listed are incorrect because they are all advantages of retirement savings plans such as 401(k) and 403(b) plans.
2629
Federal income tax write-off for the amount contributed
0
Incorrect. This answer is incorrect because a federal income tax write-off for the amount contributed is an advantage of retirement savings plans such as 401(k) and 403(b) plans. Tax-free income is the correct answer because taxes will be owed at a future date.
2630
Automatic payroll deduction at various contribution levels
0
Incorrect. This answer is incorrect because automatic payroll deduction is an advantage of retirement savings plans such as 401(k) and 403(b) plans. Tax-free income is the correct answer because taxes will be owed at a future date.
2631
Tax-deferred growth of principal and investment earnings
0
Incorrect. This answer is incorrect because tax-deferred growth of principal and investment earnings is an advantage of retirement savings plans such as 401(k) and 403(b) plans. Tax-free income is the correct answer because taxes will be owed at a future date.
871
0
Small Dollar Investing Question 2
Which type of stock purchase plan allows investors to make direct stock purchases of company stock only after they acquire an initial share elsewhere?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805215557+qPkfEh
amy.remote-learner.net+090903173312+nucqqJ
0
1249509357
1251999192
8
3
0
2632,2633,2634,2635
1
1
abc
2632
Direct purchase plan (DPP)
0
Incorrect. To purchase stock through a dividend reinvestment plan (DRIP), investors must already be "shareholders of record" and own at least one share of the stock that they plan to buy. Several services are available to help investors purchase an initial share so they can participate in a DRIP. With direct purchase plans (DPPs), investors can purchase even their initial share of stock through a participating company.
2633
Dividend Reinvestment Plan (DRIP)
1
Correct. To purchase stock through a dividend reinvestment plan (DRIP), investors must already be "shareholders of record" and own at least one share of the stock that they plan to buy. Several services are available to help investors purchase an initial share so they can participate in a DRIP.
2634
Convertible stock plan
0
Incorrect. To purchase stock through a dividend reinvestment plan (DRIP), investors must already be "shareholders of record" and own at least one share of the stock that they plan to buy. Several services are available to help investors purchase an initial share so they can participate in a DRIP. Owning convertible stock does not necessarily mean that you can purchase additional shares directly from the issuing company.
2635
Investment club
0
Incorrect. To purchase stock through a dividend reinvestment plan (DRIP), investors must already be "shareholders of record" and own at least one share of the stock that they plan to buy. Several services are available to help investors purchase an initial share so they can participate in a DRIP. Owning stock through and investment club does not necessarily mean that you can purchase additional shares directly from the issuing company.
872
0
Small Dollar Investing Question 3
The type of bond that can be purchased relatively inexpensively at a deep discount to its face value is called
0
1
0.1
multichoice
1
amy.remote-learner.net+090805215803+BTpf2z
amy.remote-learner.net+090903173320+eT8Vzt
0
1249509483
1251999200
8
3
0
2636,2637,2638,2639
1
1
abc
2636
a convertible bond.
0
Incorrect. Zero-coupon bonds are issued by various levels of government (local, state, and federal) and corporations and priced at a deep discount to face value. The longer the time to maturity and the higher the investment yield, the less money investors need to deposit up front to receive the face value (typically $1,000 per bond) at a future date. A convertible bond is one that can be exchanged for a fixed number of shares of stock and is not purchased at a deep discount.
2637
a discount bond.
0
Incorrect. Zero-coupon bonds are issued by various levels of government (local, state, and federal) and corporations and priced at a deep discount to face value. The longer the time to maturity and the higher the investment yield, the less money investors need to deposit up front to receive the face value (typically $1,000 per bond) at a future date. Discount bond is a made-up phrase.
2638
a zero-coupon bond
1
Correct. Zero-coupon bonds are issued by various levels of government (local, state, and federal) and corporations and priced at a deep discount to face value. The longer the time to maturity and the higher the investment yield, the less money investors need to deposit up front to receive the face value (typically $1,000 per bond) at a future date.
2639
an I bond.
0
Incorrect. Zero-coupon bonds are issued by various levels of government (local, state, and federal) and corporations and priced at a deep discount to face value. The longer the time to maturity and the higher the investment yield, the less money investors need to deposit up front to receive the face value (typically $1,000 per bond) at a future date. I bonds are purchased at full face value.
873
0
Small Dollar Investing Question 4
Which type of U.S. savings bond is sold for half of its face value (e.g., $25 for a $50 bond)?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805215948+4RfKLb
amy.remote-learner.net+090903173330+xMTaH0
0
1249509588
1251999210
8
3
0
2640,2641,2642,2643
1
1
abc
2640
TIP bond
0
Incorrect. Series EE bonds are sold at half their face value and grow in value over time as interest is credited to the original purchase amount. The income that is earned on U.S. savings bonds is exempt from state and local taxes. Treasury Inflation-Protected Securities (TIPs) are purchased at full face value.
2641
I bond
0
Incorrect. Series EE bonds are sold at half their face value and grow in value over time as interest is credited to the original purchase amount. The income that is earned on U.S. savings bonds is exempt from state and local taxes. I bonds are sold at their full face value.
2642
EE bond
1
Correct. Series EE bonds are sold at half their face value and grow in value over time as interest is credited to the original purchase amount. The income that is earned on U.S. savings bonds is exempt from state and local taxes.
2643
FHA bond
0
Incorrect. Series EE bonds are sold at half their face value and grow in value over time as interest is credited to the original purchase amount. The income that is earned on U.S. savings bonds is exempt from state and local taxes. FHA bond is a made-up phrase.
874
0
Small Dollar Investing Question 5
Which type of mutual fund includes several asset classes in its portfolio and grows more conservative over time?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805220314+x5LZHW
amy.remote-learner.net+090903173339+3FfzGB
0
1249509794
1251999219
8
3
0
2644,2645,2646,2647
1
1
abc
2644
Lifecycle fund
0
Incorrect. Target date funds gradually become more conservative (i.e., less stock in their portfolio) over time. They typically include a future date in their title and are increasingly being used as the "default option" in employer retirement plans. Lifecycle funds include several asset classes in one fund portfolio but do not automatically grow more conservative over time.
2645
Sector fund
0
Incorrect. Target date funds gradually become more conservative (i.e., less stock in their portfolio) over time. They typically include a future date in their title and are increasingly being used as the "default option" in employer retirement plans. Sector funds are those that invest in one industry sector such as technology or health care.
2646
Index fund
0
Incorrect. Target date funds gradually become more conservative (i.e., less stock in their portfolio) over time. They typically include a future date in their title and are increasingly being used as the "default option" in employer retirement plans. Index funds are comprised of the securities within a benchmark market index such as the Standard & Poor's 500.
2647
Target date fund
1
Correct. Target date funds gradually become more conservative (i.e., less stock in their portfolio) over time. They typically include a future date in their title and are increasingly being used as the "default option" in employer retirement plans.
197
Investing Resources (5)
course
amy.remote-learner.net+090903173416+B6Vr09
133
999
875
0
Investing Resources Question 1
What is the name of the organization that helps people set up and maintain investment clubs?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805220608+1pdJmK
amy.remote-learner.net+090903173445+OAmvBF
0
1249509968
1251999285
8
3
0
2648,2649,2650,2651
1
1
abc
2648
U.S. Securities and Exchange Commission
0
Incorrect. BetterInvesting (formerly called the National Association of Investors Corp. or NAIC) provides information to help investment clubs get organized. They also provide stock selection tools to help clubs function effectively. The U.S. Securities and Exchange Commission is a federal government agency that regulates investment sales and the disclosure of information about investments.
2649
BetterInvesting
1
Correct. BetterInvesting (formerly called the National Association of Investors Corp. or NAIC) provides information to help investment clubs get organized. They also provide stock selection tools to help clubs function effectively.
2650
The Wall Street Journal
0
Incorrect. BetterInvesting (formerly called the National Association of Investors Corp. or NAIC) provides information to help investment clubs get organized. They also provide stock selection tools to help clubs function effectively. The Wall Street Journal is a newspaper about investing and financial topics.
2651
Value Line
0
Incorrect. BetterInvesting (formerly called the National Association of Investors Corp. or NAIC) provides information to help investment clubs get organized. They also provide stock selection tools to help clubs function effectively. Value Line is a company that researches the performance of company stocks.
876
0
Investing Resources Question 2
Which of the following is not a characteristic of a typical investment club?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805220821+r2K0x5
amy.remote-learner.net+090903173454+WZsM8D
0
1249510101
1251999294
8
3
0
2652,2653,2654,2655
1
1
abc
2652
Provides an environment to learn about investing
0
Incorrect. This answer is incorrect because investor education is a characteristic of investment clubs. Investment clubs provide an environment to learn about investing.
2653
Requires relatively modest regular payments (dues) with which to purchase stock
0
Incorrect. This answer is incorrect because regular investment deposits are a characteristic of investment clubs. Investment clubs require relatively modest regular payments (dues) with which to purchase stock.
2654
Provides the potential for financial gain
0
Incorrect. This answer is incorrect because investing in stock for potential capital gains is a characteristic of investment clubs. Investment clubs provide the potential for financial gain.
2655
Generally consist of 40 to 50 members
1
Correct. This answer is correct because investment clubs do not generally consist of 40 to 50 members. The norm is typically 10 to 20 members. The other three answers that are listed are incorrect because they all refer to characteristics of investment clubs.
877
0
Investing Resources Question 3
Which of the following investing resources does not provide information about the performance of specific companies?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805221010+VtnDRo
amy.remote-learner.net+090903173503+GTCRjl
0
1249510210
1251999303
8
3
0
2656,2657,2658,2659
1
1
abc
2656
The Investment Company Institute
1
Correct. This answer is correct because The Investment Company Institute is a trade association for the mutual fund industry and provides information about mutual funds. The other three answers that are listed are incorrect because they all provide information about the performance of specific companies.
2657
Value Line Investment Survey
0
Incorrect. The Value Line Investment Survey provides information about the performance of specific companies. The Investment Company Institute is the correct answer because it is a trade association for the mutual fund industry and provides information about mutual funds.
2658
Company annual reports
0
Incorrect. Company annual reports provide information about the performance of specific companies. The Investment Company Institute is the correct answer because it is a trade association for the mutual fund industry and provides information about mutual funds.
2659
A full service stock brokerage firm
0
Incorrect. Stock brokerage firms (both full service and discount brokers) provide information about the performance of specific companies. The Investment Company Institute is the correct answer because it is a trade association for the mutual fund industry and provides information about mutual funds.
878
0
Investing Resources Question 4
Which of the following is a potential disadvantage of investing online?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805221250+9gFMkC
amy.remote-learner.net+090903173512+Iv5MtG
0
1249510370
1251999312
8
3
0
2660,2661,2662,2663
1
1
abc
2660
Investment earnings are taxed as long-term capital gains
0
Incorrect. With 24/7/365 access to account information, some online investors can find themselves trading stocks simply because they can rather than because they should. The urge to act on "hot tips" and market news can get investors in trouble. Long-term capital gains are taxed at a lower marginal tax rate than short-term gains and are, therefore, an advantage to investors.
2661
High sales commissions for stock purchases and sales
0
Incorrect. With 24/7/365 access to account information, some online investors can find themselves trading stocks simply because they can rather than because they should. The urge to act on "hot tips" and market news can get investors in trouble. Online brokerage firms often charge lower commissions than "brick and mortar" brokerage firms with offices.
2662
Addictive nature of trading and the urge to act on financial news
1
Correct. With 24/7/365 access to account information, some online investors can find themselves trading stocks simply because they can rather than because they should. The urge to act on "hot tips" and market news can get investors in trouble.
2663
Transactions are very private
0
Incorrect. With 24/7/365 access to account information, some online investors can find themselves trading stocks simply because they can rather than because they should. The urge to act on "hot tips" and market news can get investors in trouble. Privacy of account transactions is an advantage of online investing.
879
0
Investing Resources Question 5
The special computer coding that makes it nearly impossible for someone to enter unauthorized trades or access an online investor’s account is called
0
1
0.1
multichoice
1
amy.remote-learner.net+090805221501+fEAB4f
amy.remote-learner.net+090903173524+PMaID0
0
1249510501
1251999324
8
3
0
2664,2665,2666,2667
1
1
abc
2664
dual password access.
0
Incorrect. Encryption is special coding that occurs between a computer user's browser and an Internet site that is designed to prevent unauthorized use of an online account. Dual password access refers to the need for two passwords to make account trades. While helpful for security, it is not special computer coding.
2665
churning.
0
Incorrect. Encryption is special coding that occurs between a computer user's browser and an Internet site that is designed to prevent unauthorized use of an online account. Churning is the constant buying and selling of securities within an investor's account by unscrupulous financial professionals.
2666
encryption.
1
Correct. Encryption is special coding that occurs between a computer user's browser and an Internet site that is designed to prevent unauthorized use of an online account.
2667
firewalling.
0
Incorrect. Encryption is special coding that occurs between a computer user’s browser and an Internet site that is designed to prevent unauthorized use of an online account. Firewalls are an important security measure for computers but are not what is being referred to with this question.
198
Selecting Financial Professionals (5)
course
amy.remote-learner.net+090903173605+sWCVSO
133
999
845
0
Selecting Financial Professionals Question 1
Which of the following is not a significant life change that might require the advice of a financial advisor?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805221814+9eETmf
amy.remote-learner.net+090903173645+x2dqWJ
0
1249510694
1251999405
8
3
0
2528,2529,2530,2531
1
1
abc
2528
Turning 40
1
Correct. This answer is correct because turning 40 is not a significant life change that should require the advice of a financial advisor. The other three answers that are listed are incorrect because they are all significant life change that might require a financial advisor.
2529
Birth of a child
0
Incorrect. The birth of a child is a significant life change that might require the advice of a financial advisor. Turning 40 is correct because it is not a significant life change.
2530
Severe illness or disability
0
Incorrect. Severe illness or disability is a significant life change that might require the advice of a financial advisor. Turning 40 is correct because it is not a significant life change.
2531
Divorce
0
Incorrect. Divorce is a significant life change that might require the advice of a financial advisor. Turning 40 is correct because it is not a significant life change.
846
0
Selecting Financial Professionals Question 2
The best known educational credential held by professional financial advisors is the
0
1
0.1
multichoice
1
amy.remote-learner.net+090805222015+eNlfD7
amy.remote-learner.net+090903173655+5HSIRe
0
1249510815
1251999415
8
3
0
2532,2533,2534,2535
1
1
abc
2532
Chartered Financial Consultant (ChFC).
0
Incorrect. The best known credential is the CFP®, which is administered by the Certified Financial Planner Board of Standards. Chartered Financial Consultants include many who work in the insurance field.
2533
Accredited Financial Counselor (AFC).
0
Incorrect. The best known credential is the CFP®, which is administered by the Certified Financial Planner Board of Standards. Accredited financial counselors include many who provide financial education and debt counseling services.
2534
Certified Financial Planner (CFP®).
1
Correct. The best known credential is the CFP®, which is administered by the Certified Financial Planner Board of Standards.
2535
Registered Investment Advisor (RIA).
0
Incorrect. The best known credential is the CFP®, which is administered by the Certified Financial Planner Board of Standards. Registered investment advisor status is a legal requirement for those who sell securities and not an educational credential.
847
0
Selecting Financial Professionals Question 3
Which type of financial planning compensation method does not include payment by clients for recommendations about specific products such as investments or insurance?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805222305+TpOSFt
amy.remote-learner.net+090903173705+M2QODF
0
1249510985
1251999425
8
3
0
2536,2537,2538,2539
1
1
abc
2536
Fee offset
0
Incorrect. Fee-only financial planners do not accept commissions or receive any other compensation for recommending specific products. Instead, they generally charge an hourly rate, a flat fee, or a percentage of assets under management. Fee-offset is a type of commission payment method.
2537
Commission only
0
Incorrect. Fee-only financial planners do not accept commissions or receive any other compensation for recommending specific products. Instead, they generally charge an hourly rate, a flat fee, or a percentage of assets under management. Commissioned salespeople receive payment for the sale of securities to clients.
2538
Fee only
1
Correct. Fee-only financial planners do not accept commissions or receive any other compensation for recommending specific products. Instead, they generally charge an hourly rate, a flat fee, or a percentage of assets under management.
2539
Fee and commission
0
Incorrect. Fee-only financial planners do not accept commissions or receive any other compensation for recommending specific products. Instead, they generally charge an hourly rate, a flat fee, or a percentage of assets under management. Fee and commission is a type of commission payment method.
848
0
Selecting Financial Professionals Question 4
Which is not a step in the six-step process of selecting a financial professional?
0
1
0.1
multichoice
1
amy.remote-learner.net+090805222457+aJTFMD
amy.remote-learner.net+090903173715+iOKP0o
0
1249511097
1251999435
8
3
0
2540,2541,2542,2543
1
1
abc
2540
Get some names
0
Incorrect. Getting the names of potential financial advisors is a step in the six-step process of selecting a financial professional. Depositing a retainer fee is correct because a fee of any type would not be paid until after an advisor is selected.
2541
Check out references
0
Incorrect. Checking out references is a step in the six-step process of selecting a financial professional. Depositing a retainer fee is correct because a fee of any type would not be paid until after an advisor is selected.
2542
Set up a face-to-face meeting
0
Incorrect. Setting up a face-to-face meeting is a step in the six-step process of selecting a financial professional. Depositing a retainer fee is correct because a fee of any type would not be paid until after an advisor is selected.
2543
Deposit a retainer fee
1
Correct. This answer is correct because a fee of any type would not be paid until after an advisor is selected. The other three answers that are listed are incorrect because they are all a step in the six-step process of selecting a financial professional.
849
0
Selecting Financial Professionals Question 5
The database that should be checked to see if a financial advisor has any disciplinary actions on file is called the
0
1
0.1
multichoice
1
amy.remote-learner.net+090805222703+a7UVfm
amy.remote-learner.net+090903173729+kfDbHv
0
1249511223
1251999449
8
3
0
2544,2545,2546,2547
1
1
abc
2544
American College.
0
Incorrect. The Central Registration Depository (CRD) will indicate if a specific financial advisor has any disciplinary actions on file and should be checked before hiring a financial advisor. The American College is the institution where financial advisors earn the ChFC credential.
2545
Central Registration Depository (CRD).
1
Correct. The Central Registration Depository (CRD) will indicate if a specific financial advisor has any disciplinary actions on file and should be checked before hiring a financial advisor.
2546
Financial Planning Association (FPA).
0
Incorrect. The Central Registration Depository (CRD) will indicate if a specific financial advisor has any disciplinary actions on file and should be checked before hiring a financial advisor. The Financial Planning Association is a professional organization for financial advisors.
2547
North American Securities Administrators Association (NASAA).
0
Incorrect. The Central Registration Depository (CRD) will indicate if a specific financial advisor has any disciplinary actions on file and should be checked before hiring a financial advisor. The North American Securities Administrators Association (NASAA) is a professional organization for securities regulators.
199
Investment Fraud (5)
course
amy.remote-learner.net+090903173759+IND2d0
133
999
850
0
Investment Fraud Question 1
The process of calling strangers on the phone to solicit potential investors as customers is called
0
1
0.1
multichoice
1
amy.remote-learner.net+090805223002+9hgEX8
amy.remote-learner.net+090903173834+etTptG
0
1249511402
1251999514
8
3
0
2548,2549,2550,2551
1
1
abc
2548
affinity fraud.
0
Incorrect. The use of the telephone to call people with whom the caller has had no previous contact is called cold calling. This technique is used by both fraudsters and honest financial professionals in an effort to solicit investment business. The term "affinity fraud" describes investment schemes that prey upon members of identifiable groups including ethnic groups and those with similar occupations.
2549
phishing.
0
Incorrect. The use of the telephone to call people with whom the caller has had no previous contact is called cold calling. This technique is used by both fraudsters and honest financial professionals in an effort to solicit investment business. The term "phishing" refers to online scams used to steal personal information from victims to commit identity theft.
2550
cold calling.
1
Correct. The use of the telephone to call people with whom the caller has had no previous contact is called cold calling. This technique is used by both fraudsters and honest financial professionals in an effort to solicit investment business.
2551
investment fraud.
0
Incorrect. The use of the telephone to call people with whom the caller has had no previous contact is called cold calling. This technique is used by both fraudsters and honest financial professionals in an effort to solicit investment business. Investment fraud is a general term that does not apply to this specific question.
851
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Investment Fraud Question 2
The type of investment fraud that involves promotion of stock online followed by fraudsters selling their shares after gullible investors become investors is called
0
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a Pyramid scheme.
0
Incorrect. With "Pump and Dump" scams, promoters aggressively tout a stock to buy and claim to have "inside information" about a company, industry, or economic indicator. In reality, the fraudsters are hoping that the share price will be "pumped up," at which time they will sell out (dump) their shares at a profit. The share price then drops and victims lose money. A pyramid scheme relies on money from new victims to make payments to early stage victims until the whole scheme collapses.
2553
a "Pump and Dump" scam.
1
Correct. With "Pump and Dump" scams, promoters aggressively tout a stock to buy and claim to have "inside information" about a company, industry, or economic indicator. In reality, the fraudsters are hoping that the share price will be "pumped up," at which time they will sell out (dump) their shares at a profit. The share price then drops and victims lose money.
2554
affinity fraud.
0
Incorrect. With "Pump and Dump" scams, promoters aggressively tout a stock to buy and claim to have "inside information" about a company, industry, or economic indicator. In reality, the fraudsters are hoping that the share price will be "pumped up," at which time they will sell out (dump) their shares at a profit. The share price then drops and victims lose money. The term "affinity fraud" describes investment schemes that prey upon members of identifiable groups including ethnic groups and those with similar occupations.
2555
phishing.
0
Incorrect. With "Pump and Dump" scams, promoters aggressively tout a stock to buy and claim to have "inside information" about a company, industry, or economic indicator. In reality, the fraudsters are hoping that the share price will be "pumped up," at which time they will sell out (dump) their shares at a profit. The share price then drops and victims lose money. The term "phishing" refers to online scams used to steal personal information from victims to commit identity theft.
852
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Investment Fraud Question 3
The type of investment fraud that involves participants making money exclusively by recruiting new participants is called
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a Pyramid scheme.
1
Correct. The classic indicator of a Pyramid scheme is the promise of sky-high returns within a short period of time for doing nothing other than handing over a sum of money to the promoter and convincing other people to do the same.
2557
a "Pump and Dump" scam.
0
Incorrect. The classic indicator of a Pyramid scheme is the promise of sky-high returns within a short period of time for doing nothing other than handing over a sum of money to the promoter and convincing other people to do the same. A "pump and dump" scheme describes frauds where investors are urged to buy a fraudulent hyped-up stock quickly, the stock's price increases, fraudsters sell their shares at a profit, and victims lose their money.
2558
affinity fraud.
0
Incorrect. The classic indicator of a Pyramid scheme is the promise of sky-high returns within a short period of time for doing nothing other than handing over a sum of money to the promoter and convincing other people to do the same. The term "affinity fraud" describes investment schemes that prey upon members of identifiable groups including ethnic groups and those with similar occupations.
2559
phishing.
0
Incorrect. The classic indicator of a Pyramid scheme is the promise of sky-high returns within a short period of time for doing nothing other than handing over a sum of money to the promoter and convincing other people to do the same. The term "phishing" refers to online scams used to steal personal information from victims to commit identity theft.
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Investment Fraud Question 4
The type of investment fraud that specifically preys upon the trust among members of identifiable groups is called
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2560
a Pyramid scheme.
0
Incorrect. Affinity fraud exploits the sense of trust and friendship that exists in groups of people who have something in common such as ethnic groups, religious communities, and professional occupations. A pyramid scheme relies on money from new victims to make payments to early stage victims until the whole scheme collapses.
2561
a "Pump and Dump" scam.
0
Incorrect. Affinity fraud exploits the sense of trust and friendship that exists in groups of people who have something in common such as ethnic groups, religious communities, and professional occupations. A "pump and dump" scheme describes frauds where investors are urged to buy a fraudulent hyped-up stock quickly, the stock's price increases, fraudsters sell their shares at a profit, and victims lose their money.
2562
affinity fraud.
1
Correct. Affinity fraud exploits the sense of trust and friendship that exists in groups of people who have something in common such as ethnic groups, religious communities, and professional occupations.
2563
phishing.
0
Incorrect. Affinity fraud exploits the sense of trust and friendship that exists in groups of people who have something in common such as ethnic groups, religious communities, and professional occupations. The term "phishing" refers to online scams used to steal personal information from victims to commit identity theft.
854
0
Investment Fraud Question 5
The U.S. Securities and Exchange Commission’s database of reports by companies that issue stock is called
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FINRA.
0
Incorrect. Using the U.S. Security and Exchange Commission's (SEC) EDGAR database, available on its web site www.sec.gov, investors can find out whether a company files with the SEC and get reports of interest about specific companies. FINRA is an acronym for the Financial Industry Regulatory Authority, a self-regulatory organization for brokerage firms.
2565
NASAA.
0
Incorrect. Using the U.S. Security and Exchange Commission's (SEC) EDGAR database, available on its web site www.sec.gov, investors can find out whether a company files with the SEC and get reports of interest about specific companies. NASAA is an acronym for the North American Securities Administrators Association, a professional organization for securities regulators.
2566
NAPFA.
0
Incorrect. Using the U.S. Security and Exchange Commission's (SEC) EDGAR database, available on its web site www.sec.gov, investors can find out whether a company files with the SEC and get reports of interest about specific companies. NAPFA is an acronym for the National Association of Personal Financial Advisors, a professional organization for fee-only financial planners.
2567
EDGAR.
1
Correct. Using the U.S. Security and Exchange Commission’s (SEC) EDGAR database, available on its web site www.sec.gov, investors can find out whether a company files with the SEC and get reports of interest about specific companies.
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Test Your Knowledge: Debt and Credit
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11 Supplemental Units Quiz
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chat
Networking Chat
<h2>Use this chat to network with other farmers from around the country. When you choose Click here to enter the chat now, you will be able to see online users in the block to the right. Share your experiences by typing instant messages back and forth with the other learners.</h2>
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Investment Risk Tolerance Quiz Score Review
<p>After completing the <b>Investment Risk Tolerance Quiz</b>, choose your score range.</p>
<p>When you click <b>Save my choice</b>, you will be able to compare your score with other farm family managers.</p>
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Resources for Debt Management and Credit Consolidation
<p>Managing debt and credit is handled in a variety of ways within farm families. If you feel comfortable giving contact information for the credit systems that you use, this can be used as a resource for all farm families to find new systems to aid their own financial management. </p><p>Please do not give any individual's personal information; instead only give information about banks, farm credit systems, farm service agencies where you have found helpful service.</p><p>To add the credit system that you use, click on the tab labeled <b>Add entry</b>.</p><p>To browse the list of entries, click on the tab labeled <b>View list</b>. </p><p>To search for a credit system in your area that other farm families recommend, click on the tab labeled <b>Search</b>. </p>
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<div class="defaulttemplate"><table cellpadding="5"><tr><td valign="top" align="right">Institution Name: </td><td>[[Institution Name]]</td></tr><tr><td valign="top" align="right">Institution Type: </td><td>[[Institution Type]]</td></tr><tr><td valign="top" align="right">Email Address: </td><td>[[Email Address]]</td></tr><tr><td valign="top" align="right">Phone Number: </td><td>[[Phone Number]]</td></tr><tr><td valign="top" align="right">Mailing Address: </td><td>[[Mailing Address]]</td></tr><tr><td valign="top" align="right">City: </td><td>[[City]]</td></tr><tr><td valign="top" align="right">State: </td><td>[[State]]</td></tr><tr><td valign="top" align="right">Zip Code: </td><td>[[Zip Code]]</td></tr><tr><td align="center" colspan="2">##edit## ##delete## ##approve##</td></tr></table></div> [[Comments]]
<div class="defaulttemplate"><table cellpadding="5"><tr><td valign="top" align="right">Institution Name: </td><td>[[Institution Name]]</td></tr><tr><td valign="top" align="right">Institution Type: </td><td>[[Institution Type]]</td></tr><tr><td valign="top" align="right">Email Address: </td><td>[[Email Address]]</td></tr><tr><td valign="top" align="right">Phone Number: </td><td>[[Phone Number]]</td></tr><tr><td valign="top" align="right">Mailing Address: </td><td>[[Mailing Address]]</td></tr><tr><td valign="top" align="right">City: </td><td>[[City]]</td></tr><tr><td valign="top" align="right">State: </td><td>[[State]]</td></tr><tr><td valign="top" align="right">Zip Code: </td><td>[[Zip Code]]</td></tr><tr><td align="center" colspan="2"></td></tr></table></div><hr />
<div class="defaulttemplate"><table cellpadding="5"><tr><td valign="top" align="right">Institution Name: </td><td>[[Institution Name]]</td></tr><tr><td valign="top" align="right">Institution Type: </td><td>[[Institution Type]]</td></tr><tr><td valign="top" align="right">Email Address: </td><td>[[Email Address]]</td></tr><tr><td valign="top" align="right">Phone Number: </td><td>[[Phone Number]]</td></tr><tr><td valign="top" align="right">Mailing Address: </td><td>[[Mailing Address]]</td></tr><tr><td valign="top" align="right">City: </td><td>[[City]]</td></tr><tr><td valign="top" align="right">State: </td><td>[[State]]</td></tr><tr><td valign="top" align="right">Zip Code: </td><td>[[Zip Code]]</td></tr><tr><td valign="top" align="right">Comments:</td><td>[[Comments]]</td></tr></table></div>
<div class="defaulttemplate"><table cellpadding="5"><tr><td valign="top" align="right">Institution Name: </td><td>[[Institution Name]]</td></tr><tr><td valign="top" align="right">Institution Type: </td><td>[[Institution Type]]</td></tr><tr><td valign="top" align="right">Email Address: </td><td>[[Email Address]]</td></tr><tr><td valign="top" align="right">Phone Number: </td><td>[[Phone Number]]</td></tr><tr><td valign="top" align="right">Mailing Address: </td><td>[[Mailing Address]]</td></tr><tr><td valign="top" align="right">City: </td><td>[[City]]</td></tr><tr><td valign="top" align="right">State: </td><td>[[State]]</td></tr><tr><td valign="top" align="right">Zip Code: </td><td>[[Zip Code]]</td></tr><tr><td align="center" colspan="2">##edit## ##delete## ##approve##</td></tr></table></div> [[Comments]]
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Institution Type
Bank
Farm Credit System
Farm Service Agency
Other
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Please do not give out any individual's private information
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City
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State
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FL
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GU
HI
ID
IL
IN
IA
KS
KY
LA
ME
MD
MA
MI
MN
MS
MO
MT
NE
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NJ
NM
NY
NC
ND
OH
OK
OR
PW
PA
PR
RI
SC
SD
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UT
VT
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VA
WA
WV
WI
WY
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Comments
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forum
news
Networking Forum
Do you have questions for your peers about the course content?
<br />Would you like share how you're doing things on your farm or your experiences with farm and non-farm investments?
<br />This is the perfect place to start a conversation that will benefit others, and increase in value over time.
Start your own discussion thread by clicking <b>Add a new topic</b>. Browse through others' posts and respond by clicking <b>Reply</b> under their posted comments.
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Organizational Challenges
<p>This is an interactive forum where you will post a response to the question below and have the opportunity to comment on other people's responses.
<p>Being organized with personal and farm finances can be an overwhelming task. The worksheets provided in this lesson can help keep your financial information clear and in order.
<p>What <b>challenges or struggles</b> have you found when organizing your personal and farm finances? Click <b>Reply</b> to type your response.
<p>Read through the challenges and struggles posted by others. If you have any advice about how to deal with the issues mentioned, post a response by clicking <b>Reply</b> under their comment.
<p>You can return to this forum later to see if anyone offered advice about the challenge that you posted.
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Financial Goals Success
<p>This is an interactive forum where you will post a response to the question below and have the opportunity to comment on other people's responses.
<p><b>What process does your family use to set financial goals?</b>
<p>Explain the way that your family sets goals to manage finances. Share any success stories about meeting your goals.
<p>Your story could help guide other farm families to setting realistic goals and successfully meeting them.
Click <b>Reply</b> to get started with your post.
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general
Finding the Money
This lesson explained several strategies for investing based on the way that your farm income works. <br />
In the posts below, find the strategies that you have used to share a story or advice about that method of investing. Click on the post where you want to contribute.
<br />
<i>Take time to read through the other strategies; you may find a new way to try investing for your own farm family.</i>
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Assest Allocation with Risk Tolerance Score
Risk tolerance is an important factor in the way that assets are allocated into bonds, stocks, and investments.<br />
Choose the discussion group that matches your score on the <b>Investment Risk Tolerance Quiz</b> to share stories and advice based on how you choose to allocate your assets. Feel free to browse the other groups' responses; you may find some helpful information to apply to your own situation. <br />
Click on the post labeled with your Risk Tolerance Score to contribute.
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Keep All Your Eggs from Ending Up in One Basket
Diversification of investments is critical to a well rounded and stable financial position. The Wisconsin Farmer Investment study showed that many farm families seem hesitant to make off-farm investments and they are even less likely to invest in non-agricultural stocks. <br /><br />Share what you have done to diversify your investments. Be sure to include any successes you may have had with an off-farm investment or non-agricultural stocks. Click <b>Reply</b> to get started.
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Challenges of Retirement and Estate Planning
#####TRUSTTEXT#####It can be overwhelming to start the process of planning for retirement and the transfer of farm responsibility. <b>What challenges are you currently facing in the plan for retirement and farm succession?</b> Click <b>Reply</b> to get started with your post.<br />
Browse through the challenges posted by others. If you have any suggestions, post a response by clicking <b>Reply</b> under their comment.
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lesson
Welcome and Introduction
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Welcome to Investing for Farm Families
<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$couple.png" alt="Couple on a ranch" />
<p>Welcome to Investing for Farm Families, an online investment education (OIE) course made possible with funding from the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation.</p>
<p>This course was written specifically for farm families. To find out what farmers wanted to know about investing and related topics, the OIE PROJECT team surveyed a nationally representative sample of 300 farm households using a written questionnaire. In addition, two telephone focus groups provided additional insights.</p>
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Objectives
<p>In this lesson, you will:</p>
<ul><li>Learn what farmers said about investing and retirement in response to nationally representative surveys.</li>
<li>Understand the organization and features of the Investing for Farm Families course.</li>
<li>Be introduced to three characters (Anna, Earl, and Lee Ellen) that illustrate concerns of farm families.</li>
<li>Learn about investment education resources available through eXtension and Cooperative Extension.</li></ul>
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Investment Education Concerns and Preferences
<p>Investing for Farm Families addresses the investment education concerns and preferences of those who make all or part of their household income from farming or ranching. Below are some important things that survey respondents and focus group participants told the OIE project team:</p>
<ul><li>three-quarters had at least one type of retirement savings account (e.g., IRA and 401(k) plan),</li>
<li>almost half owned investments outside of a retirement savings plan,</li>
<li>almost two-thirds indicated a need for investment education,</li>
<li>a large majority (84%) do not expect to retire (i.e. stop farming) as much as cut back their work hours,</li>
<li>many farmers have a strong emotional commitment to owning land or other farm assets,</li>
<li>many farmers are reluctant to diversify beyond their comfort zone of business-related investments,</li>
<li>lack of time is a major barrier to online investment education, and</li>
<li>investment information must be simple, convenient, unbiased, and realistic for farm families.</li></ul>
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About Investing for Farm Families
<p>In Investing for Farm Families, you'll examine the interconnected nature of farm and personal investment decisions. In addition, the 8 lessons that follow discuss investing from a farm family's perspective. Topics covered include investment pre-requisites (e.g., organized financial records and good credit), finding money to invest, asset allocation (including farm assets), a comparison of investing in farmland and stock, evaluating financial information and financial service providers, and investing for retirement and farm succession planning. The content is intentionally brief to respect your busy lifestyle.</p>
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Navigating the Course
<img valign="top" align="left" hspace="3" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$corrected_images$@SLASH@$ScaledCourseList2Screenshot.png"/>
<p>This course is composed of 8 lessons. From the main course page, links to the Welcome and Introduction and 8 lessons appear in order from top to bottom on the screen. </p>
<p>You can move through these units in any order, or you may skip content that you already know and understand. </p>
<p>Once inside a unit, you'll move forward and backward by selecting <b>Previous</b> and <b>Continue</b>, which appear below the text on the screen.</p>
<p>Select <b>Continue</b> now to proceed.</p>
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Progress Bar
<img valign="top" align="center" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$corrected_images$@SLASH@$ProgressBar_Screenshot2.png"/>
<p>A progress bar below the text area tells you how far you've come in the unit. The orange is content you've already covered, and the gray is content you have yet to cover. </p>
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Using the Lesson Menu
<img src="$@FILEPHP@$$@SLASH@$image$@SLASH@$corrected_images$@SLASH@$ScaledLessonMenu.png" align="left" vspace="5" hspace="15"/>
<p>You also can use the Lesson Menu on the left side of the screen to skip between sections in a lesson. For example, <b>Navigating the Course</b> is a page you have already viewed. If you select that text in the Lesson Menu, you'll return to that page of this course tutorial.</p>
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Questionnaires and Surveys
<img src="$@FILEPHP@$$@SLASH@$image$@SLASH@$corrected_images$@SLASH@$ScaledQuestionnaireScreenshot2.png" align="left" vspace="5" hspace="10"/><p>Throughout the course, you'll encounter multiple choice questions in the form of questionnaires and surveys. Don't worry; these questions are merely to help you think about the content or assess what knowledge you gained from the course. Your performance on these questions is not recorded and you will not receive a grade for the course. </p>
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Breadcrumbs
<img src="$@FILEPHP@$$@SLASH@$image$@SLASH@$corrected_images$@SLASH@$ScaledBreadcrumbScreenshot.png" align="center" vspace="5" hspace="15"/>
<p>If you need to return to the main course page at any time, use the breadcrumbs in the upper left corner of the site header near the top of the screen. The trail of breadcrumbs gets deeper as you navigate the site. <b>IFF Course</b> is the link back to the main course page.</p>
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Jump to...Menu
<img src="$@FILEPHP@$$@SLASH@$image$@SLASH@$corrected_images$@SLASH@$ScaledJumptoMenu.png" align="left" vspace="5" hspace="15"/>
<p>You can also use the <b>Jump to...</b> menu in the course site header to jump from one unit to another. </p>
<p>In the right side of the header above, select the <b>Jump to...</b> menu now to see the list of units in the drop-down menu. </p>
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Links
<p>Many pages in this course include links to external Web pages. Links to external web pages will have a different font color. These links will always open in a new browser window. </p>
<p>Your Web browser may consider new windows to be pop-ups, and block them. For that reason, you will have a better experience of this course if you disable pop-up blocking for this site.</p>
<p>To test how your browser behaves with pop-up windows from this site, select the link below. <b>If your browser opens a new window with Google displayed, then your pop-up settings will work for this course. If your browser attempts to block the new window, be sure to disable pop-up blockers for this site.</b>
<blockquote><a href="http://www.google.com" target="_blank">Test your pop-up blocker here.</a></blockquote></p>
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Downloads
<p>Some pages in this course contain links to documents for you to download. Most of the documents are worksheets that will help you determine your financial situation and make important calculations. When you click on these documents, you will probably receive a prompt asking whether you want to open or save the document to your computer. It's always a good idea to save a document to your Desktop, or another location on your hard drive, before you open and work with it.
</p>
<p>To see how your computer will handle file downloads, use the link below:
<blockquote><a href="$@FILEPHP@$$@SLASH@$worksheets_raw$@SLASH@$FINRA_OIE_Activity-Fifteen_Ways_to_Stretch_a_Dollar.doc" target="_blank">Try out document downloads here.</a></p>
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Flash Multimedia
<img src="$@FILEPHP@$$@SLASH@$image$@SLASH@$calculator_papers.png" align="left" hspace="10" hspace="5"/>
<p>There are audiovisual activities in this course which you cannot view without a free Flash player. </p>
<p><a href="$@FILEPHP@$$@SLASH@$html_pages$@SLASH@$detect.html" target="_blank">Use this link to check for a Flash Plugin on your browser.</a></p>
<P>If you do not have Flash, you can download it and install it for free on Adobe's Web site: http://get.adobe.com/flashplayer/ </p>
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Document File Types
<img src="$@FILEPHP@$$@SLASH@$image$@SLASH@$corrected_images$@SLASH@$ScaledDocumentScreenshot.png" align="left" vspace="5" hspace="20"/>
<p>The downloads in this course will be in 1 of 3 different file formats:
<ul>
<li>Microsoft Word DOC </li>
<li>Microsoft Excel XLS</li>
<li>Adobe Acrobat PDF</li>
</ul>
</p>
<p>To open Microsoft Word and Excel files you will need an office productivity suite. If you do not have an office productivity suite, Open Office is available for a free download: <a href="http://www.openoffice.org/" target="_blank">http://www.openoffice.org/</a>. NeoOffice is the Mac equivalent: <a href="http://www.neooffice.org/neojava/en/index.php" target="_blank">http://www.neooffice.org/neojava/en/index.php</a>. You can also view and manipulate these files using Google Docs: <a href="http://docs.google.com/" target="_blank">http://docs.google.com/</a>.</p>
<p>
To open Adobe PDF files, you will need the free Adobe Reader: <a href="http://get.adobe.com/reader/" target="_blank" >http://get.adobe.com/reader/</a>.
</p>
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Questions
If you have questions, you can find help on the right side of the screen in the block labeled <b>Technical Assistance</b>.
<br />
<p>For questions with <b>course content</b>, use the <b>Ask an Expert</b> page. </p>
<p>For questions with <b>using the Web interface</b>, use the <b>Get Technical Assistance</b> page. </p>
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Posting in Forums
<img valign="top" align="left" hspace="0" vspace="5" height="124" width="230" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$corrected_images$@SLASH@$Forum_Screenshot_3.png"/>
<p>In this course, you will find <b>interactive discussion forums</b> where you publicly respond to a given question. The top block of the forum will give you the question to answer along with directions on how to post your response.</p>
<p>When you are ready to respond to a question, you will click <b>Reply</b> in the bottom right corner of the top block.</p>
<p>A screen will appear with a line for a subject and a box for a message. You can change the subject line if you wish, but you must type your response to the question in the text box in order to post it to the forum.</p>
<p>When you have completed your answer, click the <b>Post to forum</b> button beneath the text box. Your response should appear in its own block under the main discussion forum question block.</p>
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Responding in Forums
<img valign="top" align="left" hspace="0" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$corrected_images$@SLASH@$PostResponse.png"/>
<p>Because a forum is an interactive activity, you can read through the responses of others taking the course and comment on their answers. Commenting on someone's answer is very similar to posting your original response.
<p>Find the block with the response on which you want comment, click on <b>Reply</b> in the bottom right corner. Type your response in the text box labeled "Message" and click the <b>Post to forum</b> button.
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Additional Course Materials
<p>For those who want to know more about investing, the 8 Investing for Farm Families lessons link to 11 supplemental units on basic investment topics such as terminology (e.g., diversification and dollar-cost averaging); specific types of investments (e.g., stocks, bonds, and mutual funds); investing with small dollar amounts; investing resources; and investment fraud. This information will help you understand why and how to invest and to think about investment diversification strategies "beyond the farm." </p>
<p>A third component of Investing for Farm Families is a total of 15 exercises contained within the 8 lessons. These are "hands-on" activities designed to help you apply the course information. For example, there is an exercise to calculate your family's net worth with farm and personal assets combined. You'll also find dozens of additional exercises contained within the 11 supplemental units.</p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$anna.png" alt="Anna outdoors" />
<h3>Meet Anna</h3>
<p>Anna's going to be taking this course along with you. To learn more about Anna, select the Play icon.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$00_anna$@SLASH@$0.mp3"></a></p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$00_anna$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" />
<h3>Meet Earl</h3>
<p>Earl's going to be taking this course along with you. To learn more about Earl, select the Play icon.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$00_earl$@SLASH@$0.mp3"></a></p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$00_earl$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" alt="Lee Ellen at table with laptop and paper" />
<h3>Meet Lee Ellen</h3>
<p>Lee Ellen's going to be taking this course along with you. To learn more about Lee Ellen, select the Play icon.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$00_lee_ellen$@SLASH@$0.mp3"></a></p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$00_lee_ellen$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
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Getting the Most Out of Investing for Farm Families
<p>We know that your free time is scarce and precious and you have many other things to do besides sit at a computer. Therefore, each of the 8 Investing for Farm Families lessons should take only about an hour to read. After that, when time permits, we suggest that you read the 11 supplemental investment units in any order or select only those topics that most interest you. In addition, we recommend that you complete as many exercises as possible (e.g., taking an online investment risk tolerance quiz) to "personalize" the course content. Each exercise will increase your ability to manage your investments and prepare you to work with professional advisors who can assist you in executing your plans. </p>
<p>Investing for Farm Families is a tool to help you take control of and actively participate in your financial future with investments both on and off the farm. You, of course, will need to supply the personal motivation to use it effectively and take the action required to achieve your financial goals. </p>
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eXtension: A Resource for Farm Families
<p>eXtension (pronounced ee-extension) is a Web site (www.extension.org) where Cooperative Extension educational materials on a wide range of topics are located. eXtension combines the efforts of more than 70 land-grant universities to provide a "one-stop shop" for resources developed by Extension faculty across the nation.</p>
<p>Because eXtension resources are available at any time from any Internet connection, they help solve real-life problems in "real time." Two features that are especially valuable are eXtension’s extensive bank of frequently asked questions (FAQs) and Ask an Expert (AaE), where consumers can get answers to their questions via e-mail.</p>
<p>eXtension content is developed by groups of Extension professionals called Communities of Practice or CoPs. Many CoPs produce content on agricultural topics including: beef cattle, horticulture, dairy products, meat goats, horses, organic farming, and wildlife damage management. There is also a CoP for personal finance topics at http://www.extension.org/personal_finance. </p>
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Additional Extension Investment Education Resources
<p>In addition to eXtension, your local Cooperative Extension office may have additional resources to help you make investment decisions. Extension materials and delivery methods including classes, Web sites, computerized financial analyses, newsletters, and publications (free and low-cost). Look in the "county government" section of your phone book to find the nearest Cooperative Extension office or visit http://www.csrees.usda.gov/qlinks/partners/state_partners.html to search your state’s land-grant university resources.</p>
<p>Thank you for participating in Investing for Farm Families. This course was written specifically for farm families by a team of 16 members from 11 states, the U.S. Department of Agriculture, and the Cooperative Extension Financial Security for All community (http://collaborate.extension.org/wiki/OIE_Team). We hope that you will find it to be a helpful resource on your path to achieving financial security.</p>
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OIE Recommended Links
<p>In the blocks to the right of each lesson, you will find a link to <b>Monthly Investment Messages</b>. The OIE team encourages you to visit these links frequently for monthly investment messages at the eXtension Investing For Your Future course.</p>
<p>Click the link to Monthly Investment Messages in the <b>OIE Recommended Links block</b> to the right of the screen now to read the current investment information.</p>
<p>You will also find a link to <b>Investment FAQs</b> answered by experts at the eXtension.
<p>Click the link to Investment FAQs in the <b>OIE Recommended Links block</b> to the right of the screen now to read through a list of frequently asked questions.</p>
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lesson
First Things First: Organizing Your Financial Information
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Introduction
<img valign="top" align="right" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$report_calculator245.png" alt="Report and calculator" />
<p>Good financial records are an important investment pre-requisite. Why? Because it is very helpful to see where you stand financially, today, to make wise investment decisions to reach future goals. Record-keeping is especially important for farm families, where personal and business assets are often combined. Good financial records will help you understand various aspects of your personal and farm finances such as:</p>
<p>
<ul><li>the location of important financial documents and contact information,</li>
<li>the adequacy of cash reserves,</li>
<li>the amount of debt being carried, and</li>
<li>the percentage of total household assets invested in the farm business.</li></ul></p>
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Objectives
<p>After completing this lesson, you will:</p>
<ul>
<li>Understand the importance of having organized financial records.</li>
<li>Have tools to record important household financial data including the value of assets and debts.</li>
<li>Have a better understanding of relationships between personal and farm finances.</li>
<li>Learn how non-farm investments can provide an opportunity for asset diversification.
</li>
</ul>
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Let's See What You Already Know 1
<b>Let's See What You Already Know</b>
<p>What is a non-farm (a.k.a. off-farm) investment?
Choose one answer.
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Investing in agricultural industry stocks (e.g. tractor manufacturer)
Incorrect. A non-farm investment is any investment not tied to the agricultural economy.
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Any investment not tied to the agricultural economy.
Correct
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Any investment partially tied to the agricultural economy
Incorrect. A non-farm investment is any investment not tied to the agricultural economy.
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Investing in an ethanol plant
Incorrect. A non-farm investment is any investment not tied to the agricultural economy.
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Let's See What You Already Know 2
<b>Let's See What You Already Know</b>
<p>What is one of the benefits of non-farm (off-farm) investments?
Choose one answer.
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Investment wealth is diversified.
Correct
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Non-farm assets pay a guaranteed rate of return.
Incorrect. One benefit of non-farm investments is that investment wealth is diversified.
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Investment wealth is subject to changes in the agricultural economy.
Incorrect. One benefit of non-farm investments is that investment wealth is diversified.
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Farm assets are confined to one industry sector.
Incorrect. One benefit of non-farm investments is that investment wealth is diversified.
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Let's See What You Already Know 3
<b>Let's See What You Already Know</b>
<p>What is one of the challenges of non-farm investments?
Choose one answer.
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Knowledge of farm markets and agriculture-related assets
Incorrect. A challenge of non-farm investments is knowledge of financial markets and available investments.
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Farm and family finances are not connected
Incorrect. A challenge of non-farm investments is knowledge of financial markets and available investments.
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Knowledge of financial markets and available investments
Correct.
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Lack of online information about investing
Incorrect. A challenge of non-farm investments is knowledge of financial markets and available investments.
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Let's See What You Already Know 4
<b>Let's See What You Already Know</b>
<p>How do you calculate your personal net worth?
Choose one answer.
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Add your liabilities/debts (what you owe) to your assets (what you own)
Incorrect. You calculate your personal net worth by subtracting your liabilities/debts (what you owe) from your assets (what you own).
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Subtract your assets (what you own) from your liabilities/debts (what you owe)
Incorrect. You calculate your personal net worth by subtracting your liabilities/debts (what you owe) from your assets (what you own).
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Subtract your monthly household expenses from your assets (what you own)
Incorrect. You calculate your personal net worth by subtracting your liabilities/debts (what you owe) from your assets (what you own).
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Subtract your liabilities/debts (what you owe) from your assets (what you own)
Correct.
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Let's Get Organized
<p>This lesson provides information and tools to help you organize your finances. By completing the two exercises contained within, you will have a much better understanding of your overall financial situation and the ability to evaluate household and farm business financial positions separately. In addition, you will have a document that records important financial data in one place. Good financial records can provide peace of mind and save precious time when you are trying to locate needed information.</p>
<p>This lesson will cover two key topics related to organizing farm/family financial records: 1. recording important financial information in one place and 2. using an integrated balance sheet (net worth statement) to better understand relationships between farm and personal finances. Let's start with a helpful record-keeping tool developed by Clemson University, the Financial Emergency Preparedness (FEP) worksheets.</p>
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Exercise 1: Financial Emergency Preparedness (FEP) Worksheets
<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" alt="Exercise" />
<p>Complete the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$IFF_Ex1_FEP_Worksheets.pdf" target="_blank">Financial Emergency Preparedness (FEP) Worksheets</a>. While there are only 10 pages to actually fill out, doing so may take you some time as you search for the necessary information. As you are going through your records to find this information, take the time to organize them in a way that makes sense for you (e.g., accordion folders, a desk drawer, or a file cabinet). The FEP, while originally developed to help families in the event of an emergency, is useful any time as a quick reference tool for important personal financial information (e.g., bank account and credit card numbers and insurance policy types and account numbers). Be sure to include farm related business and credit accounts also. If you need help filling out the worksheet, you can view this <a href="$@FILEPHP@$$@SLASH@$Captivate_Worksheet_Demos$@SLASH@$Ex1_FEP_demo$@SLASH@$Ex1_FEP_demo.htm" target="_blank" >Flash tutorial</a>. The tutorial will open in a new browser window. </p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$anna.png" alt="Anna outdoors" />
<h3>Anna</h3>
<p>Select the Play icon to learn how Anna is using the FEP worksheets.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$001_anna$@SLASH@$0.mp3"></a></p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$001_anna$@SLASH@$transcript.html">Read Audio Transcript</a> </p>
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Rationale for Non-Farm Investing
<p>Now let's turn our attention to relationships between farm and non-farm investments. You have goals for your farm business, and you should do no less for your family's personal finances. Personal/family investments should, ideally, compliment the farm business. The investment path for your short- and long-term financial goals is a part of your overall asset allocation strategy and provides an opportunity to diversify into non-farm investments. In other words, given the demands of the farm business to be concentrated in one class of assets, personal investment decisions can be made with a broader perspective beyond the farm. This provides an opportunity to diversify into other investments, whose performance is not tied to the agricultural economy.</p>
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Farm and Family Financial Connections
<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$family_park_happy265.png" alt="Family in a park" />
<p>Farmers and landowners face unique circumstances when it comes to the interconnected nature of farm and family finances. Since farmers often mix business and personal goals, there are many approaches to financial management and investing. A good place to start is with a thorough understanding of your farm and personal finances, including the percentage of your total household wealth in farm and off-farm investments.</p>
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Exercise 2: Integrated Business Balance Sheet and Personal Net Worth Exercise
<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" alt="Exercise" />
<p>A balance sheet (also known as a net worth statement) is prepared by subtracting liabilities/debts (what you owe) from assets (what you own). Farm operations often prepare consolidated balance sheets. This means that both personal and business assets and liabilities are included in a single balance sheet. This exercise will separate your personal assets from your business assets to better understand your overall financial picture. The endpoint of this exercise is a snapshot of your personal and business equity (i.e., ownership interest). For both personal and business finances, equity can be increased by either acquiring more assets or paying down debt.</p>
<p>Complete the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$IFF_Ex2_Integrated_Business_Balance_Sheet_Personal_Net_Worth.xls" target="_blank">Integrated Business Balance Sheet and Personal Net Worth Exercise</a>. If you need help filling out the worksheet, you can view this <a href="$@FILEPHP@$$@SLASH@$Captivate_Worksheet_Demos$@SLASH@$Ex2_Integrated_Net_Worth_demo$@SLASH@$Ex2_Integrated_Business_Personal_Net_Worth_demo.htm" target="_blank" >Flash tutorial</a>. The tutorial will open in a new browser window.
</p>
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<img valign="top" align="left" hspace="10" vspace="5" alt="Lee Ellen at table with laptop and paper" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png"/>
<h3>Lee Ellen</h3>
<p>Lee Ellen needs to figure out the net worth of her family's dairy operation. Select the Play icon to find out what she's thinking.
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$01_lee_ellen$@SLASH@$0.mp3"></a></p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$01_lee_ellen$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a></p>
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Summary
<img valign="top" align="left" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$investment_portfolio270.png" alt="Investment portfolio cover" />
<p>Completing Exercises #1 and #2 will lay the groundwork for future investment decisions. You'll have important financial data at your fingertips and a better understanding of the current level of diversification within your overall investment portfolio (i.e., farm and personal finances). Getting this information compiled is just the first step, however. You'll also need to keep it updated over time as assets owned and their values change. Also, adjustments will have to be made to your financial plans when significant changes occur in your life, in income and/or estate tax laws, or if you change your mind about previous decisions.
</p>
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lesson
Investment Prerequisites: Laying the Groundwork
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Introduction
<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$new_growth250.png" alt=New growth in dirt in hand" />
<p>In First Things First: Organizing Your Financial Information, you learned about the importance of keeping good financial records, including using an integrated farm balance sheet and personal net worth statement to calculate how much of your wealth is held in farm and non-farm assets. This lesson continues the discussion of investment prerequisites with three more financial practices that should be in place before investing: emergency cash reserves, adequate insurance coverage, and specific financial goals with a target deadline and dollar cost (e.g., $20,000 for child's college education in 14 years). This lesson, and the three exercises associated with it, will help you identify specific actions that you can take to simultaneously increase your future financial security and lay the groundwork for successful investing.</p>
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Objectives
<p>After completing this lesson, you will:</p>
<ul>
<li>Understand three investment prerequisites (emergency fund, adequate insurance, and financial goals).</li>
<li>Determine how much money to personally set aside to create an adequate emergency reserve fund.</li>
<li>List existing insurance policies and identify potential gaps in coverage.</li>
<li>Appreciate the importance of crop insurance as both a risk management and wealth-building tool.</li>
<li>Determine specific personal/family financial goals with a date and estimated cost.</li>
<li>Be persuaded to "invest with a plan" when money becomes available to set aside for the future.</li>
</ul>
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Let's See What You Already Know 1
<b>Let's See What You Already Know</b>
<p>What is the minimum number of months' worth of expenses that experts advise setting aside as an emergency fund?
Choose one answer.
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10-12 months
Incorrect. 3-6 months is the minimum number of months' worth of expenses that experts advise setting aside as an emergency fund.
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3-6 months
Correct
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6-9 months
Incorrect. 3-6 months is the minimum number of months' worth of expenses that experts advise setting aside as an emergency fund.
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1-3 months
Incorrect. 3-6 months is the minimum number of months' worth of expenses that experts advise setting aside as an emergency fund.
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Let's See What You Already Know 2
<b>Let's See What You Already Know</b>
<p>What is the purpose of an emergency cash reserve?
Choose one answer.
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To earn a high rate of interest on cash equivalent assets
Incorrect. The purpose of an emergency reserve is to serve as a source of cash when income is reduced or expenses increase.
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To replace crop insurance
Incorrect. The purpose of an emergency reserve is to serve as a source of cash when income is reduced or expenses increase.
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To accumulate money to invest with
Incorrect. The purpose of an emergency reserve is to serve as a source of cash when income is reduced or expenses increase.
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To serve as a source of cash when income is reduced or expenses increase.
Correct
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Let's See What You Already Know 3
<b>Let's See What You Already Know</b>
<p>What is one type of insurance protection specific to farm production?
Choose one answer.
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Liability Insurance
Incorrect. Crop insurance is one type of insurance protection specific to farm production.
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Health Insurance
Incorrect. Crop insurance is one type of insurance protection specific to farm production.
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Crop Insurance
Correct.
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Life Insurance
Incorrect. Crop insurance is one type of insurance protection specific to farm production.
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Let's See What You Already Know 4
<b>Let's See What You Already Know</b>
<p>Which of the following is the most suitable investment for retirement in 15 years?
Choose one answer.
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Whole life insurance
Incorrect. The most suitable investment for retirement in 15 years is a money market mutual fund.
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Stock mutual fund
Incorrect. The most suitable investment for retirement in 15 years is a money market mutual fund.
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Passbook savings account
Incorrect. The most suitable investment for retirement in 15 years is a money market mutual fund.
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Money market mutual fund
Correct
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Exercise 3: Estimated Expenses and Emergency Cash Reserves Worksheet
<p>Unexpected things, both good and bad, happen every day and many of them cost money. For this reason, an adequate emergency fund is essential before you start investing. Why? The last thing you want to do is withdraw money from an investment (e.g., stocks or stock mutual funds) to pay for an emergency expense when market conditions are unfavorable. How much should you set aside? Experts advise a minimum of at least three month's worth of expenses. Six months of expenses is better, especially for self-employed people, like farmers, who often have irregular incomes.</p>
<p> Complete the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$IFF_Ex3_Estimated_Expenses_Emergency_Cash_Reserves-2.xls" target="_blank">Estimated Expenses and Emergency Cash Reserves Worksheet</a> to estimate your monthly expenses and calculate an appropriate emergency cash reserve to set aside in readily available (liquid) accounts such as an online savings account, money market fund, or short-term CD. If you need help filling out the worksheet, you can view this <a href="$@FILEPHP@$$@SLASH@$Captivate_Worksheet_Demos$@SLASH@$Ex_3_Est_Expenses_demo$@SLASH@$Ex3_Estimated_Expenses_Emergency_Cash_demo.htm" target="_blank" >Flash tutorial</a>. The tutorial will open in a new browser window. </p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" />
<h3>Earl</h3>
<p>Select the Play icon to learn how Earl's preparing his emergency cash reserves.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$002_earl$@SLASH@$0.mp3"></a></p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$002_earl$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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Protect Yourself with Insurance
<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$crutches.png" alt="Close-up of hands holding two crutches" />
<p>Emergency funds are one way to prepare for the unexpected. Another way is to purchase adequate insurance to cover large risks that can wipe you out financially…things like the destruction of your home and/or farm, large medical bills from an accident or major illness, an extended period of disability, the death of a family wage earner, and liability damages from a lawsuit. The latter especially applies to farm families. Many have a large amount of assets (liability lawsuits always go for "deep pockets") and the purchase of an umbrella liability policy makes a lot of sense, especially when farm assets are held in the names of individuals.</p>
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<img valign="top" align="right" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$woman_taxes.png" alt="Woman using calculator" />
<p>These days, it is easy to investigate different types of insurance, complete financial risk assessment forms, and even obtain premium price quotes online. By doing so, you can objectively determine your individual insurance needs and learn about available products (e.g., advantages and disadvantages). Once you determine the coverage you need, you're ready to shop around for the best provider and cost combination. This is a much better approach than simply asking an insurance salesperson "Do I have enough (life, health, etc.) insurance?" Their answer will inevitably be "No." The Web site www.life-line.org is a helpful resource. Under each type of insurance listed on the home page, there are buying tips and criteria for evaluating how much insurance you need. Having this information will put you in the driver's seat when approaching financial advisors and reduces the probability that you'll be sold inappropriate or inadequate amounts of insurance.
</p>
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Exercise 4: Insurance Evaluation and Goals
<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" alt="Exercise" />
<p>To list all your insurance information in one place and create an action plan to improve personal/family insurance coverage, complete the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$IFF_Ex4_Insurance_Evaluation_And_Goals.xls" target="_blank">Insurance Evaluation and Goals Worksheets</a>. Like the integrated balance sheet activity (Exercise 2 in Lesson #1), it may take an hour or two to search your records for the required information. The reward will be having a single document for reference that contains all the specifics about your insurance policies (e.g., name of insurance agency, policy coverage limits, and annual premiums) in one place. Be sure to complete the checklist on page 4 of the worksheet. It will help you identify steps to take to plan for future needs and/or improve your present insurance coverage. If you need help filling out the worksheet, you can view this <a href="$@FILEPHP@$$@SLASH@$Captivate_Worksheet_Demos$@SLASH@$Ex4_Insurance_Eval_Goals_demo$@SLASH@$Ex4_Insurance_Eval_Goals_demo.htm" target="_blank" >Flash tutorial</a>. The tutorial will open in a new browser window. </p>
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Crop Insurance
<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$barley_green_field265.png" alt="Field of green barley" />
<p>While we're talking about insurance, don't underestimate the importance of crop insurance as a tool for both risk reduction tool and building wealth. Crop insurance guarantees some level of income, in the event of weather-related crop losses, so that household debt is not increased or invested assets depleted. Check with your insurance advisor, county agricultural agent, or Farm Service Agency office for additional information.</p>
<p>For further information about crop insurance, see www.cropinsurance.org. </p>
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The Importance of Financial Goals
<img valign="top" align="right" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$future280.png" alt="Daily planner with header labelled THE FUTURE" />
<p>Investment success is much more likely if you're able to visualize an ultimate goal. In other words, what do you want to do with the money that you're setting aside and when do you need it? Knowing what you're investing for will help you make wise investment decisions. For example, a money market mutual fund paying a low rate of return is a poor choice for financial goals that are decades away (e.g., retirement). Conversely, stocks or stock mutual funds are a poor choice for short-term goals such as the purchase of a car in two or three years.</p>
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Exercise 5: Financial Goal-Setting Worksheet
<img valign="top" align="left" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" alt="Exercise" />
<p>Complete the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$IFF_Ex5_Financial_Goal_Setting.xls" target="_blank">Financial Goal-Setting Worksheet</a> to put a price and target date on your short-term (under 3 years), medium-term (3 to 10 years), and long-term (over 10 years) financial goals. Once you know the date and dollar cost, calculate what you need to invest monthly during the time remaining until the deadline for your goals. Note that most financial advisors recommend avoiding stocks for goals that are less than 5 years away. This is due to the risk of being caught in a market downturn at the time you need the money.</p>
<p>If you need help filling out the worksheet, you can view this <a href="$@FILEPHP@$$@SLASH@$Captivate_Worksheet_Demos$@SLASH@$Ex5_Financial_Goal_Setting_demo$@SLASH@$Ex5_Financial_Goal_Setting_demo.htm" target="_blank" >Flash tutorial</a>. The tutorial will open in a new browser window. </p>
<p>For additional information on financial goals select this link to the <a href="$@LESSONVIEWBYID*854@$&pageid=7305" target="_blank">11 Supplemental Units</a>.</p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$anna.png" alt="Anna outdoors" />
<h3>Anna</h3>
<p>Select the Play icon to find out Anna's financial goals.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$01_anna$@SLASH@$0.mp3"></a></p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$01_anna$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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Learn More About Investing
<p>The eight Investing for Farm Families lessons are intentionally short because a nationally representative survey and focus groups of farmers told us that your free time is extremely limited and that this online investment education (OIE) course needs to be "brief and to the point." We listened to you and have structured Investing for Farm Families accordingly. However, we also recognize that some course users might want additional information about investing. Not to worry. The OIE team also created a second course that delves into the nuts and bolts of investing. At various points throughout these eight lessons, there will be links to the 11 units that comprise that secondary course. This is one of those places.</p>
<p>To learn more about investment prerequisites, access the supplemental content in <a href="$@LESSONVIEWBYID*854@$&pageid=7285" target="_blank">Unit 1: Basic Building Blocks of Successful Financial Management</a>.</p>
<p>To learn more about basic investment characteristics and terminology, access the supplemental content in <a href="$@LESSONVIEWBYID*854@$&pageid=7331" target="_blank">Unit 2: Investing Basics</a>.</p>
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Summary
<p>It's been said that "people don't plan to fail…they fail to plan." No investment strategy can provide the "peace of mind" that comes from knowing that your personal financial situation is cushioned with emergency cash reserves and adequate insurance protection against catastrophe. Successful investors know what they're investing for so they can match the time frame for their financial goals to the characteristics of various types of investments. This advice is especially pertinent for farm families. Why? Many farmers fall victim to "collector's syndrome," especially with farm equipment. Continually placing excess cash into depreciating assets (even if this strategy does have immediate tax benefits) may not always be the wisest investment decision for building long-term wealth. Instead, determine your future financial goals and invest with a plan. The remaining six lessons of Investing for Farm Families will give you additional information and tools to do this.</p>
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140
lesson
Debt Management and Credit Considerations for Farm Families
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Introduction
<img valign="top" align="left" hspace="10" vspace="10" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$combine_harvesting.png" alt="Combine harvesting field" />
<p>Along with clearly-stated financial goals, emergency cash reserves, and adequate insurance, the wise use of credit is another important investment prerequisite. A typical farming operation earns and spends several hundred thousand dollars per year. For some farmers, annual receipts over a million dollars are not uncommon. The irregular nature of farm income and expenditures, and heavy reliance on borrowed funds to acquire necessary farm business assets, make financing considerations critical to the success of a farm business.</p>
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Objectives
<p>After completing this lesson, you will:</p>
<ul><li>Understand the essential role that debt and credit play in agricultural businesses.</li>
<li>Be able to distinguish between "good debt" and "bad debt." </li>
<li>Understand the importance of regularly examining your personal credit report.</li>
<li>Become familiar with the most commonly available sources for farm credit.</li>
<li>Know how to access information that describes liens that exist against personal property commonly bought and sold in agriculture.</li></ul>
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<p>The use of credit to finance a farm operation presents a number of critical decisions:</p>
<ul><li>How much should be invested in the farm business versus other investment alternatives?</li>
<li>How much debt can be realistically handled?</li>
<li>Where are good sources of credit (lenders) to obtain financing?</li>
<li>What is an appropriate mix of equity and debt?</li>
<li>What credit rates and terms should be negotiated?</li></ul>
<p>Making good financial decisions about the use of debt (e.g., amount of debt and repayment terms) is often the difference between a prosperous, growing farm business and one that is always reliant on a bumper crop for financial survival.</p>
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Let's See What You Already Know 1
<b>Let's See What You Already Know</b>
<p>What is "good debt"?
Choose one answer.
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Borrowed money for new cars that cost less than $10,000
Incorrect. Good debt is borrowed money to finance something that appreciates over time.
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Borrowed money to finance something that appreciates over time
Correct
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Borrowed money for products that are approved by Consumer Reports magazine
Incorrect. Good debt is borrowed money to finance something that appreciates over time.
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Borrowed money to finance something that depreciates over time
Incorrect. Good debt is borrowed money to finance something that appreciates over time.
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Let's See What You Already Know 2
<b>Let's See What You Already Know</b>
<p>What is "bad debt"?
Choose one answer.
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Borrowed money to finance something that appreciates over time
Incorrect. Bad debt is borrowed money to finance something that depreciates over time.
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Borrowed money to finance something that depreciates over time
Correct
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Borrowed money for products that are not approved by Consumer Reports magazine
Incorrect. Bad debt is borrowed money to finance something that depreciates over time.
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Borrowed money for new cars that cost less than $25,000
Incorrect. Bad debt is borrowed money to finance something that depreciates over time.
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Let's See What You Already Know 3
<b>Let's See What You Already Know</b>
<p>What is the Uniform Commercial Code(UCC)?
Choose one answer.
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The password to a national Web site for small business owners
Incorrect. UCC is a system that reports liens on personal property.
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A system that searches for mortgages on farm real estate
Incorrect. UCC is a system that reports liens on personal property.
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A system that reports liens on personal property
Correct
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A federal credit card law
Incorrect. UCC is a system that reports liens on personal property.
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The Nature of Agricultural Businesses
<img valign="top" align="left" hspace="5" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$farm_crop.png" alt="Farm buildings and crop" />
<p>The nature of agricultural businesses requires a large percentage of financial resources dedicated to costly capital intensive assets, such as land, equipment, and farm buildings. Farm operators have two ways of investing in these assets: using their own financial resources or borrowing money from other sources. Debt in the form of land, equipment, and operating notes is a topic that generates differing perspectives among agricultural producers. How much debt is too much? How much debt is too little? What levels of debt will not restrict business activity or disrupt personal financial solvency? These are all questions that every farm business and family must decide. </p>
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<p>A typical comment from agricultural producers, when asked about non-farm investments, is "If I have extra money to invest, I can get a guaranteed return by paying down debt." Alternatively, farmers ask, "Why would I want to invest money in other asset classes when I'm paying interest on farm debts?" There is no doubt that paying down high interest-rate debt (e.g., credit card balances) as quickly as possible is a smart financial move. However, the merits of paying down relatively lower-interest rate debts (especially those that provide business tax deductions) should be weighed against other options. The appropriate level of debt that facilitates regular farm activities and, at the same time, does not create personal worries is unique for each individual and farming operation.</p>
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Debt Management and the Business Strategy of the Farm Business
<p>The maturity and business strategy of a farming operation has implications for the likely level of debt that is appropriate for the farm business and family. If the farm business or operator is just starting out, a higher level of debt is typical until equity can be built over time. During this phase, the focus of the farm and family investment plan is usually centered on paying down debt and reducing expenses associated with interest payments on borrowed funds. In many cases, off-farm investment opportunities take a back seat to the primary objective of getting the farm business financially competitive.</p>
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<p>For farm businesses or operators with several years worth of "sweat and financial equity" built into their business, debt level decisions typically involve a choice between paying down existing debt or continuing to expand the farm business until it reaches a size that will be meet future goals. During this phase, farmers have the luxury of considering the after-tax merits of both farm and off-farm investment alternatives.</p>
<p>Mature farming businesses or operations that have reached their ultimate size have even more investment options. At this point, debt management becomes more of an art rather than a science. High interest rate debt obligations (obvious targets for elimination) should mostly be retired and remaining debt obligations should be largely comprised of operating lines of credit, land notes (typically at moderate rates) and other business debts retained for their convenience (or tax management purposes). During this phase, the potential allure of off-farm investment opportunities should become even more attractive.</p>
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Good Debt vs. Bad Debt
<p>When most people hear the term "debt," they usually have a negative reaction. Generally, the term invokes images of money flowing "out of your pockets" rather than "into your pockets." However, debt can be either good or bad. Distinguishing between the two is what differentiates sophisticated farm managers and investors from average ones.</p>
<p>"Good debt" is money you borrow to finance an asset, hopefully something that has value today and appreciates over time. Good debt is typically characterized by a low interest rate and/or an asset that has value today and appreciates over time. "Bad debt" is borrowed money that is not used to finance an asset (or which finances an asset that depreciates over time) and/or debt that has unacceptably high interest rates. As a general rule, good debt generates additional cash flow for you while bad debt either doesn't generate additional cash flow or (in a worst case scenario) generates an additional liability.</p>
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<img valign="top" align="right" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$farm_barn_house.png" alt="Farm" />
<p>The good debt/bad debt designation does not exclusively refer to the item financed. For instance, debt taken to acquire farmland that produces positive cash flows (after all expenses) would be a good debt. If that same farmland was purchased with a loan carrying a 25% interest rate, the purchase would likely turn out to be bad debt. Credit card debt is typically used as the ultimate example of bad debt. Good investors and debt managers will typically prioritize the elimination of bad debt. Good debts are then addressed (either eliminated or retained) based on a comparison of the after-tax return versus other investment alternatives.</p>
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Examining Your Credit Report
<p>According to the Federal Reserve Board of Governors, the total amount of revolving consumer credit outstanding tops $953 billion. The largest component of this type of debt comes from credit cards, which comprises about 98% of revolving consumer credit.</p>
<p>A record of your entire personal credit history is kept and maintained at three nationwide credit consumer credit reporting agencies (Equifax, Experian, and TransUnion). Your credit report provides critical information that determines how much credit you can obtain, if any, and what interest rate will be offered. Your personal credit history will also carry over into business credit terms and offerings. This is why it is important to periodically review your personal credit report for accuracy so that you are not unfairly penalized because of an error.</p>
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Exercise 6: Obtain a Free Copy of Your Credit Report
<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" alt="Exercise" />
<p>It's been estimated that 25% of credit reports contain errors serious enough to deny credit or increase the cost of borrowing. To get a free copy of your report to check for errors, visit http://www.annualcreditreport.com or call (877) 322-8228. By law, each of the three credit bureaus must give you a free credit report once a year, if requested. If you find erroneous information, you will need to contact the credit bureau and file a challenge; the bureau is required to pass along your information to the other two bureaus. </p>
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<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" />
<h3>Earl</h3>
<p>Select the Play icon to see how Earl's been managing his debt.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$003_earl$@SLASH@$0.mp3"></a></p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$003_earl$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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Agricultural Lending and Credit
<p>Credit is the bridge that connects a farm business and family cash flow over time. A good farm and family financial manager will oversee numerous sources of cash (e.g., farm sale proceeds, new loans, asset sales, and nonfarm income). Simultaneously, there are cash outflows occurring including farm expenses, loan principal and interest payments, asset purchases, and nonfarm expenses. The goal of good management is to (over time) build a model where the cash inflows exceed the cash outflows. Credit serves to bridge the gap that sometimes occurs between the time that an investment has to be made and when the results can be realized.</p>
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<p>A good agricultural lender is a valuable partner for any farm family. The banking industry provides the most credit to agriculture with $114.2 billion in total farm loans outstanding at the end of 2007, according to the American Bankers Association's <i>Farm Bank Performance</i> report. The report indicates that $69 billion of this total supports small farms and that nearly 60 percent of all farm loans held by farm banks at the end of 2007 were for amounts less than $250,000. Like other small business loans, loans to farmers are generally extended to individuals who are, themselves, responsible for repayment of the loan. Communication of both your personal and farm business goals will help strengthen your partnership with a lender.</p>
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Sources of Credit
<p>If we've learned anything from the financial market meltdown of 2008-2009, it was how essential the availability of credit is to small businesses and the US economy. This is even more evident in agriculture. Farmers borrow money for purchasing capital assets and operating farm businesses from many different sources. Some lending agencies specialize in certain types of loans and some provide other financial services in addition to lending money. As reported by USDA's Economic Research Service, sources of funds for both real estate and non-real estate agricultural loans are shown in the link below.
<p><a href="$@FILEPHP@$$@SLASH@$image$@SLASH@$sources_agricultural_credit.png" target="_blank">Sources of Agricultural Credit</a> </p>
<p>The take-home message from these figures is to investigate all possible sources of credit. Some may be more appropriate than others for a particular type of loan.</p>
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Uniform Commercial Code Documents
<p>A review of debts owed is an important part of evaluating investment opportunities. While more farm business debt obligations show up on consumer credit reports than in the past, some still do not make it to credit reporting agencies. The liens that are important to farm family businesses involve those attached to farm equipment, operating notes, and rented land. The Uniform Commercial Code (UCC) is a uniform act that covers all 50 states and reports liens on personal property (not real property, like real estate).</p>
<p>All states have provisions for UCC-1 filings and searches. UCC-1 filings put the world on notice that a person or business has a debt obligation or lien with another individual or business and what the collateral for that debt encompasses.</p>
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Exercise 7: Obtain a Uniform Commercial Code Lending Record
<img valign="top" align="left" hspace="10" vspace="10" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" alt="Exercise" />
<p>Exercise 7 will help you to explore your state's system. Even if the recording and searching system is privatized, as it is in Florida, the system will be linked to your Secretary of State's website. UCC-1 searches will not find real estate loans, however. Real estate loans (mortgages) are recorded at the local county courthouse (where the land resides). You will need to contact the recorder (or go online in many counties) to find out if there are mortgages recorded for your real estate. Select the link below to get started.</p>
<p><a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$IFF_Ex7_Searching_Uniform_Commercial_Code_Records.doc" target="_blank">Obtain a UCC (Uniform Commercial Code) Lending Record</a>. </p>
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Summary
<p>Before a farm family considers a wide array of available investment options, they should first examine the level and terms of their existing debts. No small business category relies more on borrowed capital than agriculture. For this reason, getting the best loan at the most attractive rate is essential. Ensuring that your credit report contains only factual information is a key step to negotiating fair terms.</p>
<p>For farmers, paying down debt generates a "guaranteed return" and results in an increased equity position (higher net worth). However, all debts are not created equal. Some debts are good and some are bad. Eliminating bad debts (because they have high interest-rates or they are financing a non-appreciating asset) is an easy decision. From an investment perspective, the decision to pay down "good debt" versus purchasing alternative off-farm investments (and the diversification that they bring) is where the tough choices begin. This topic will be discussed further in depth in Lesson 6.</p>
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141
lesson
Finding Money to Invest
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Introduction
<p>Let's face it…finding money to invest isn't easy. This is especially true for farm families, who often earn income in irregular amounts spread unevenly throughout the year. Additionally, farmers must balance their business demand for money with the needs of their household. Variable and/or unpredictable earnings make it difficult to plan ahead and follow the recommended investment strategy of dollar-cost averaging. This is where you invest a regular amount at a regular interval (e.g., $50 per month) as salaried workers often do with deposits that are withdrawn from a paycheck. Farm family incomes can fluctuate wildly based on factors such as weather, crop yields, government subsidies, and ever-changing market prices for crops and livestock. Small wonder that respondents to the national study associated with this online investment education (OIE) course identified "more money to invest" as a major motivator for investing. One respondent described farm families' unique investment challenges this way: "We are not the same as people who buy stock by paycheck withdrawal." Another stated, "We tend to pay everything in large lump sums."</p>
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Objectives
<p>After completing this lesson, you will:</p>
<ul>
<li>Understand the unique cash flow considerations involved with investing by farm families.</li>
<li>Develop investment strategies that fit the cash flow patterns associated with your farm business.</li>
<li>Learn about investments that are suitable for situations where infrequent large sums become available.</li>
<li>Learn new money management and expense reduction strategies to "find" money to invest.</li>
<li>Learn about investment products that are available in small dollar amounts.</li>
</ul>
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Let's See What You Already Know 1
<b>Let's See What You Already Know</b>
<p>What is a cash flow pattern?
Choose one answer.
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The relationship between income and expenses for several months
Correct
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The amount of money spent on household expenses excluding savings
Incorrect. A cash flow is the relationship between income and expenses for several months.
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The amount of money spent on household expenses including savings
Incorrect. A cash flow is the relationship between income and expenses for several months.
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The amount of income coming in to a household
Incorrect. A cash flow is the relationship between income and expenses for several months.
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Let's See What You Already Know 2
<b>Let's See What You Already Know</b>
<p>What is the most realistic way to invest when you have an irregular cash flow?
Choose one answer.
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Invest a regular amount at regular time intervals
Incorrect. The most realistic way to invest when you have an irregular cash flow is to invest when you can.
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Invest 10% of what you make every year
Incorrect. The most realistic way to invest when you have an irregular cash flow is to invest when you can.
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Only invest when the farm business gets a government subsidy
Incorrect. The most realistic way to invest when you have an irregular cash flow is to invest when you can.
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Invest what you can when you can
Correct
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Let's See What You Already Know 3
<b>Let's See What You Already Know</b>
<p>Which example best exemplifies a method of freeing up money to invest?
Choose one answer.
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Buying gasoline on a credit card
Incorrect. The best example of a method of freeing up money to invest is cutting back on food expenses by using coupons and buying store brands.
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Borrowing money to invest in a Roth IRA
Incorrect. The best example of a method of freeing up money to invest is cutting back on food expenses by using coupons and buying store brands.
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Buying extra food at the store this month, so next month you can invest more
Incorrect. The best example of a method of freeing up money to invest is cutting back on food expenses by using coupons and buying store brands.
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Cutting back on food expenses by using coupons and buying store brands
Correct
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Let's See What You Already Know 4
<b>Let's See What You Already Know</b>
<p>What is the difference between a mutual fund and exchange-traded funds (ETFs)?
Choose one answer.
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ETFs are better for investing relatively small regular dollar amounts while mutual funds work best for large occasional dollar amounts
Incorrect. Mutual funds are better for investing relatively small regular dollar amounts while ETFs work best for large occasional dollar amounts.
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ETFs are best for financial goals that are more than 10 years away and mutual funds are best for goals less than 5 years away
Incorrect. Mutual funds are better for investing relatively small regular dollar amounts while ETFs work best for large occasional dollar amounts.
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Mutual funds are better for investing relatively small regular dollar amounts while ETFs work best for large occasional dollar amounts
Correct
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There is no difference, both accomplish the same financial goals
Incorrect. Mutual funds are better for investing relatively small regular dollar amounts while ETFs work best for large occasional dollar amounts.
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Let's See What You Already Know 5
<b>Let's See What You Already Know</b>
<p>Which of the following is a retirement savings account that is available only to self-employed workers?
Choose one answer.
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Social Security
Incorrect. The retirement savings account that is available only to self-employed workers is the Keogh Plan.
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401(k)
Incorrect. The retirement savings account that is available only to self-employed workers is the Keogh Plan.
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U.S. savings bonds
Incorrect. The retirement savings account that is available only to self-employed workers is the Keogh Plan.
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Keogh Plan
Incorrect. The retirement savings account that is available only to self-employed workers is the Keogh Plan.
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Go With the (Cash) Flow
<p>Many farm families find it difficult to invest regular dollar amounts because their income is anything but regular. This is especially true when farming is a full-time occupation and there is no off-farm income to supplement it. What to do? Go with the flow—cash flow—and invest what you can when you can. Start by doing what financial experts recommend for all self-employed workers. Track your income and expenses for several months to get a good feel for monthly and seasonal cash flow patterns. For example, if you run a U-pick strawberry farm, the bulk of your income could be earned in just 4 to 6 weeks of every year. Other types of farms (e.g., dairy) with year-round sales have a little more predictability. Carry around a small pocket notebook to record expenses as they occur. Then add up the amount spent in each expense category (e.g., gasoline) at the end of the month. Most people under-estimate how much they spend, especially on "little things" such as convenience store food purchases.</p>
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<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$month210.png" alt="Close-up of pen on monthly calendar" />
<p>Be sure to include occasional expenses (e.g., quarterly insurance premiums, college tuition for children, and property tax bills) as monthly expenses by dividing the annual cost by 12. Use the Spending Plan Worksheet at http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf to help you calculate the monthly cost of these expenses. Then review your <a href="$@LESSONVIEWBYID*658@$&pageid=5114" target="_blank">Estimated Expenses and Emergency Cash Reserves Worksheet (Exercise 3)</a> to make sure that it includes a monthly amount toward the cost of bills that occur infrequently.</p>
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"Feast" and "Famine" Planning
<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$crops_contrasting265.png" alt=Contrasting crops" />
<p>Once you know your approximate monthly living costs, compare them with your monthly income to identify "feast" (income greater than expenses) and "famine" (income less than expenses) months. Set aside excess income from your "feast" months and tap some of this money to pay household and farm business bills, including investment deposits, during "famine" months. This is one way to manage irregular cash flow.</p>
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"Finding" Money to Invest
<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$binoculars250.png" alt="Binoculars and pocketwatch on pennies" />
<p>Regardless of whether you’re in a "feast" or a "famine" month, you can probably do one or more things to reduce household expenses and free up money to invest. For example, cutting back on [you name an expense that is realistic for you] and redirecting $3 a day, plus pocket change, into a savings jar will result in about $100 of monthly savings, enough for a deposit to many mutual funds. Need more good ideas? <br><br></p>
<p>To learn more about strategies to "find" money to invest, click here <a href="$@LESSONVIEWBYID*854@$&pageid=7364" target="_blank">Unit 3: Finding Money to Invest</a>.</p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" alt="Lee Ellen at table with laptop and paper" />
<h3>Lee Ellen</h3>
<p>Select the Play icon to find out how Lee Ellen has found money to invest.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$004_lee_ellen$@SLASH@$0.mp3"></a></p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$004_lee_ellen$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
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Investing With Small Dollar Amounts
<p>Want to start investing or increase the amount of money that you have already been setting aside? Set a financial goal to invest a certain amount of money periodically (i.e., monthly, quarterly, or annually). Tap your "feast" account, as necessary, when monthly income is less than monthly expenses, including investment deposits. If you're investing small dollar amounts, look for investments with small initial minimum deposits. For example, some mutual funds will open an account for $1,000 or less and accept subsequent deposits of $50 or $100. U.S. savings bonds can be purchased for as little as $25 or $50.</p>
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<img valign="top" align="right" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$money_twenty_dollars255.png" alt="Twenty dollar bill as marker label in dirt" />
<p> Also consider contributing regularly to an online (or other) savings account where minimum deposits are low. For example, with some online savings accounts, money earns CD level interest with no prolonged holding periods (unlike CDs). Once the account reaches a specific value (e.g., $500 or $1,000), the money can be put toward a chosen investment. </p>
<p>To learn more about investing with small dollar amounts, click here <a href="$@LESSONVIEWBYID*854@$&pageid=7620" target="_blank">Unit 8: Small Dollar Investing</a>.</p>
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"Big Ticket" Investing
<p>Farmers told the online investment education (OIE) team that they sometimes receive income in large dollar amounts. For example, a large blueberry farmer could earn several hundred thousand dollars during the growing season or another farmer might sell a parcel of land that produces a cash windfall. Several investment products stand out as good choices in these situations. Those who want to invest in the stock market might consider an exchange-traded fund (ETF), which is a portfolio of securities that tracks a market index. ETFs are listed on a stock exchange and trade like individual stocks. When they are only purchased occasionally, brokerage commissions are not an ongoing concern. </p>
<p>For more information about ETFs, see http://www.extension.org/pages/A_Comparison_of_Mutual_Funds_and_Exchange_Traded_Funds_(ETFs):_Twelve_Factors_to_Consider. </p>
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<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$modern_silo270.png" alt="Ladder on side of modern silo" />
<p>For investors who desire fixed-income securities and have a large dollar amount to invest, a laddered portfolio of bonds or certificates of deposit (CDs) might be appropriate. Laddering involves taking a sum of money and building a portfolio of individual securities with staggered maturities. For example, if you wanted to create a 5-year ladder, you would invest 20% of your money into bonds or CDs maturing in one, two, three, four, and five years. When the first investment reaches maturity in a year, an investor would reset the ladder by placing the money received into a new 5-year bond or CD.</p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$anna.png" alt="Anna outdoors" />
<h3>Anna</h3>
<p>Do you regularly receive a large federal and/or state income tax refund of $1,000 or more? Why not consider investing all or part of it as Anna has been doing? Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$03_anna$@SLASH@$0.mp3"></a></p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$03_anna$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
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Investment Strategies for Farm Families
<p>While the irregular amount and frequency of farming and ranching revenues makes it difficult to practice many traditional investing strategies that a regular paycheck can accommodate, there are also unique opportunities. Many farm families participate in programs that provide commodity program payments and conservation program payments. These periodic payments are ideal sources of investment funds that can be used to diversify into off-farm assets. While there are typically many demands for these funds from multiple parties (e.g., lenders), the financial future of a farm family is also important.</p>
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Pay Yourself First
<img valign="top" align="right" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$cows_two265.png" alt=Two cows" />
<p>One of the most successful strategies for saving and investing involves "paying yourself first." This concept can be used for unique revenues associated with a farm business. Typical activities that can provide a "pay yourself first" opportunity include equipment sales, land sales, and the basic sale of crops and livestock. If a standard practice of diverting even a small portion (e.g., 5% to 10%) of any of these revenue sources to off-farm investments can be adopted, the financial future of a farm household can be greatly strengthened.</p>
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Summary
<p>Like many families headed by self-employed workers, farm families have unique challenges (e.g., irregular incomes) and opportunities (e.g., access to SEP, SIMPLE, and Keogh plans). The key to successful investing is to develop an action plan and stick with it. Whether you decide to invest small dollar amounts on a regular basis or large sums as they become available, there are investment products suitable for your investment style. In later lessons, you'll learn even more about characteristics of investment products and that perplexing issue that all farm families face: how to compare investments in farm and non-farm assets.</p>
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lesson
Determining Your Asset Allocation and Risk Tolerance
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Introduction
<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$tractor_silos.png" alt="Tractor and silos"/>
<p>This lesson will focus on two key aspects of investing. The first is asset allocation. Asset allocation is how you divide your money among various types of investments, including farm business assets. The second is investment risk tolerance. This is your comfort level (or not!) about risks associated with investing, especially "market risk" associated with the short-term volatility of stocks and investments (e.g., mutual funds and exchange-traded funds or ETFs) that include stocks. </p>
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Objectives
<p>After completing this lesson, you will:</p>
<ul><li>Understand the investment value of land ownership.</li>
<li>Understand the concept of asset allocation as it relates to farm families.</li>
<li>Determine your personal investment risk tolerance level using a 13-question online quiz.</li>
<li>Review alternative asset classes (e.g., U.S. stocks and non-U.S. bonds) in a portfolio approach worksheet to identify possible areas to expand investments to become more diversified.</li>
<li>Compare your current asset allocation with an ideal allocation comprised of seven possible asset classes.</li></ul>
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<p>In this lesson, you'll learn about asset allocation and explore the issue of investing in farmland versus off-farm alternatives. You can also complete two activities to: 1. Help you determine your current asset allocation weightings (i.e., the percentage of your total investment dollars in real estate, stocks, bonds, etc.), and 2. Assess your investment risk tolerance level.</p>
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Let's See What You Already Know 1
<b>Let's See What You Already Know</b>
<p>What is asset allocation?
Choose one answer.
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The shifting of money from a low return investment to a high return investment
Incorrect. Asset allocation is the weighting, or proportion of assets, placed in different types of investments such as stocks, bonds, real estate, and cash.
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Taking all of your assets and combining them into one investment
Incorrect. Asset allocation is the weighting, or proportion of assets, placed in different types of investments such as stocks, bonds, real estate, and cash.
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Making a regular investment deposit at a regular time interval (e.g., $50 per month)
Incorrect. Asset allocation is the weighting, or proportion of assets, placed in different types of investments such as stocks, bonds, real estate, and cash.
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The weighting, or proportion of assets, placed in different types of investments such as stocks, bonds, real estate, and cash
Correct
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Let's See What You Already Know 2
<b>Let's See What You Already Know</b>
<p>What is investment risk tolerance?
Choose one answer.
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The volatility of an investment such as stock
Incorrect. Investment Risk Tolerance is how much investment risk an investor can personally tolerate.
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The riskiness of an investment on a scale from 1 to 10
Incorrect. Investment Risk Tolerance is how much investment risk an investor can personally tolerate.
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How much investment risk an investor can personally tolerate
Correct
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The percentage of stock in an investor’s portfolio
Incorrect. Investment Risk Tolerance is how much investment risk an investor can personally tolerate.
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Let's See What You Already Know 3
<b>Let's See What You Already Know</b>
<p>What is one benefit of farm land as an investment for farm families?
Choose one answer.
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Diversifies an investment portfolio
Correct
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Depreciates in value over time
Incorrect. One benefit of farm land as an investment for farm families is that it diversifies an investment portfolio.
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It is usually the smallest asset on their balance sheet
Incorrect. One benefit of farm land as an investment for farm families is that it diversifies an investment portfolio.
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There are no financial benefits aside from farm income
Incorrect. One benefit of farm land as an investment for farm families is that it diversifies an investment portfolio.
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Let's See What You Already Know 4
<b>Let's See What You Already Know</b>
<p>What is one major thing that can influence the value of farmland?
Choose one answer.
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Cell phone towers
Incorrect. One major thing that can influence the value of farmland is location.
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Costs of livestock feed
Incorrect. One major thing that can influence the value of farmland is location.
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Weather patterns
Incorrect. One major thing that can influence the value of farmland is location.
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Location of farmland
Incorrect. One major thing that can influence the value of farmland is location.
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Let's See What You Already Know 5
<b>Let's See What You Already Know</b>
<p>What is a realistic option for using farmland as an income-generating retirement asset?
Choose one answer.
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Increase your farmland acreage and take on more debt
Incorrect. A realistic option for using farmland as an income-generating retirement asset is renting farmland to another farmer.
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All of these answers are realistic.
Incorrect. A realistic option for using farmland as an income-generating retirement asset is renting farmland to another farmer.
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Hold onto your farmland until you die
Incorrect. A realistic option for using farmland as an income-generating retirement asset is renting farmland to another farmer.
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Rent your farmland to another farmer
Correct
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Asset Allocation Basics
<p>Assets are grouped by classes of risk and return. Some assets are low risk and low return, like Treasury notes, and some assets are high risk with potential high return, like a growth stock. Asset allocation refers to the weighting, or proportion of assets, placed in different types of investments (also known as asset classes) such as stocks, bonds, real estate, and cash. Since each asset class has its own return and risk characteristics, combining them can reduce a portfolio’s overall volatility (i.e., ups and downs in value).</p>
<p>The goal of investment diversification is to select from asset classes that tend to balance each other out. A number of well-regarded studies of investment portfolios have concluded that approximately 90% of variability in investment performance stems from asset allocation (i.e., your mix of investment asset classes).</p>
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Personal Asset Allocation Factors
<p>How do you determine an asset allocation for yourself and your family? Consider the following factors:</p>
<ul><li>your personal level of risk tolerance,</li>
<li>your knowledge and prior experience with investing,</li>
<li>how long you have to reach your financial goals (i.e., your investment time horizon), and</li>
<li>your need for liquidity (i.e., the ability to quickly convert the investment into cash).</li>
</ul>
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<p>There is no magic portfolio mix that is appropriate for everyone. However, a general guideline for investors who are risk-averse is to subtract their age from 100. This guideline suggests that the appropriate mix for a 55-year old would be 45% (e.g., 100 - 55) in equity investments (e.g., stocks and stock mutual funds and ETFs) and 55% in interest-generating investments (e.g., bonds, fixed-income investments, and cash). For those who are willing to take a bit more risk, subtract your age from 115 (e.g., 115 - 55 = 60%) to determine the stock portion of your investment portfolio. </p>
<p>Of course, farm families tend to hold a large percentage of assets in farmland and equipment, which will skew your asset allocation weightings. Nevertheless, the "subtract your age guideline" can still be used to determine an asset allocation for non-farm assets. It also reinforces the suggestion that, as investors age, the fixed income portion of their investment portfolio should gradually increase, providing for more stable returns. Remember that true investment diversification only comes from combining assets that perform differently. Diversification across asset classes keeps you from being in the worst possible investment at the worst possible time with 100% of your investment capital.</p>
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Exercise 8: Investment Risk Tolerance Quiz
<p>Investment risk tolerance has also been called the "sleep at night factor." In other words, how much investment risk can you personally tolerate without staying awake at night worrying about your money or, worse yet, panicking at the worst possible moment? There is no "right" or "wrong" risk tolerance level because every investor is different. People often prefer to invest in what they know (or think they know). A good example of the latter is salaried workers who load up on their employer's company stock. The online investment education (OIE) team's survey of farm families found that many farmers who considered alternative investments and weighed them against farmland were reluctant to diversify beyond their "comfort zone." Some had previously lost money in non-farm investments, including scams, which simply reinforced this viewpoint. What is your risk tolerance level? Complete the 13-question online Investment Risk Tolerance Quiz and find out. When you're done, click "view results" to see your score and see what type of investments are appropriate for your risk personality.</p>
<p>Complete the <a href="http://njaes.rutgers.edu/money/riskquiz" target="_blank">Investment Risk Tolerance Quiz</a> (for each financial decision-maker in the family/operation). </p>
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Interpreting Your Risk Tolerance Score
<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$asset_allocation.png" alt="Asset allocation chart" />
<p>If you have a low risk tolerance, the volatility of risky asset classes may prove too much to handle. Generally speaking, the more conservative an investor you are (regardless of age), the less stock you'll want to hold in your investment portfolio and the more bonds and cash equivalents (e.g., certificates of deposit or CDs). The more conservative you are, however, the more you'll need to save to reach a financial goal because of the risk-return trade-off. History tells us that stocks have provided the highest long-term investment returns of any asset class. Cash asset returns have averaged only about a third that of stocks.</p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$anna.png" alt="Anna outdoors" />
<h3>Anna</h3>
<p>What's Anna's risk tolerance? Select the Play icon to find out.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$02_anna$@SLASH@$0.mp3"></a></p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$02_anna$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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Exercise 9: Asset Allocation Review Worksheets
<p>This activity provides a framework for creating a portfolio with seven asset classes. The allocation decision among interest-generating and equity investments will determine the portfolio's basic growth and volatility level. Decisions proceed from the most general level (top of figure) to the more detailed levels (bottom of figure). The <b>Short-Term Debt</b> asset class lists a number of investments that have little or no interest rate risk. The next asset class is <b>U.S. Bonds</b>, which can be differentiated by type (e.g., conventional and inflation-adjusted), issuer (e.g., the federal government, corporations, or municipalities), maturity (the length of time the principal will be outstanding), and quality (the likelihood of timely payment of interest and principal). <b>Non-U.S. Bonds</b> provide another alternative with exposure to currency exchange rate fluctuations.</p>
<p>Continued on the next page.</p>
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<p>The <b>U.S. Stock</b> asset class can be further categorized based on a company's size (market capitalization) and style (growth vs. value). <b>Non-U.S. Stocks</b> provide a complement to U.S. stocks by adding international exposure. <b>Real Estate Investments</b> can be held passively through real estate investment trusts (REITs) or directly through ownership of physical properties. </p>
<p>Historically, <b>Commodity Linked Investments</b> (including livestock and crops) have been negatively correlated with many financial asset classes. Commodity oriented investments tend to deliver above-average returns when U.S. stocks are generating below-average returns. This tendency toward countercyclical performance makes the commodity linked investment asset class, with which farmers have direct exposure, a potentially powerful portfolio diversification component when combined with other equity and income-generating investments.</p>
<p>Complete the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$IFF_Ex9_Asset_Allocation_Worksheets-2.xls" target="_blank"> Asset Allocation Review Worksheets</a>. If you need help filling out the worksheet, you can view this <a href="$@FILEPHP@$$@SLASH@$Captivate_Worksheet_Demos$@SLASH@$Ex9_Asset_Allocation_demo$@SLASH@$Ex9_Asset_Allocation_demo.htm" target="_blank" >Flash tutorial</a>. The tutorial will open in a new browser window. </p>
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Farmland as an Investment
<p>Now let's bring farmland into the investment asset allocation discussion. According to the U.S. Department of Agriculture, the value of farm real estate represents about 87% of all farm sector assets. Farmland plays a significant role in the investment asset allocation of farm families. You may notice that land is the biggest asset on your balance sheet – and the largest source of farm debt. Land connects you to your business and to your desired way of life. Studies of the performance of U.S. farmland in an investment portfolio found that land:</p>
<ul><li>serves as a hedge against inflation,</li>
<li>diversifies a portfolio, and</li>
<li>enhances overall portfolio performance.</li></ul>
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<img valign="top" align="left" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$farmer_field.png" alt="Farmer looking at his field" />
<p>Financial returns aside, there is another reason that you own farmland. You have a personal goal of owning an attractive asset class which can complement a broader investment portfolio. Owning land also creates a sense of control which, in turn, serves as a powerful motivator to maintain ownership. </p>
<p>One OIE survey respondent put it this way: "Selling land that has been in your family for generations is difficult. It's different from investing in stocks." Another said: "While land is considered a business asset, it is still part of the family."</p>
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What Influences the Value of Farmland?
<p>Below are major factors that can affect the value of farmland as an investment and ultimately determine whether a land investment decision proves to be profitable or not:</p>
<ul><li>Location, location, location (e.g., land near populated areas has value to developers and investors).</li>
<li>Fierce competition among farmers in areas where the supply of farmland for sale may be limited.</li>
<li>Low interest rates, which boost the "buying power" of both farm and non-farm buyers.</li>
<li>Tax incentives to exchange farmland (e.g., tax rules for 1031 exchanges).</li>
<li>Non-farm investors seeking to shift resources from non-land assets into land investments.</li>
<li>Anticipated government farm payments, which are quickly capitalized into the value of land. USDA recently estimated that roughly 25% of the total value of farmland reflects government payments.</li>
<li>Taxes, which have a large long-term effect on returns from farmland or any other type of investment.</li></ul>
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Why Value Farmland?
<p>The typical farmer buys land for a lifetime with intentions of passing it on to future generations. You may ask "Why bother placing a value on land if you plan on keeping it forever?" One reason is to simply see where you stand financially as part of a periodic review of your household net worth. Another reason is that farmland value creates significant equity for you. </p>
<p>This equity is a resource for new or existing farm loans and can even enable some borrowers to restructure their farm debt. You can use the increased value of farmland as collateral to purchase additional land or other farm assets. Finally, farmland can be the source of a significant level of income generated from farming, itself, or renting farmland to someone else. In this context, farmland can be considered an income-generating investment.</p>
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<img valign="top" align="left" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$farmland_california.png" alt="Farmland in California" />
<p>Just a word of caution about investing in farmland…the infrequency of farmland availability (especially land located adjacent or near existing operations) can create the impression that a specific land purchase is a "once-in-a-lifetime opportunity." </p>
<p>However, major investments, like land purchases, must be made based on merit and not emotion. While the merits of a purchase may include both personal and business components, traditionally low-profit margins in agriculture make the margin for error in farmland purchases very small.</p>
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Farmland as a Retirement Asset
<p>As a retirement asset, farmland provides you with several options. You can:</p>
<ul><li>Rent your land to another farmer—they pay you an amount to farm your land or share in expenses to produce and share a commodity with you.</li>
<li>Hire a farmer to custom farm your land—you hire a farmer and his equipment to plant a crop or take care of livestock that you sell to generate income.</li>
<li>Hire a farm manager to conduct business on your behalf.</li>
<li>Sell your land to meet retirement living expenses. Selling farmland is typically a permanent decision that could have significant tax implications and should be carefully thought through by way of an exit strategy or succession plan.</li></ul>
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<img valign="top" align="left" hspace="10" vspace="20" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" alt="Lee Ellen at table with laptop and paper" />
<h3>Lee Ellen</h3>
<p>It's fair to say that farm families will always have one additional investment decision to make compared to other investors. That's the decision to invest in farmland (or repay farm debt) versus putting money into non-farm investments. In Lesson 6, we'll discuss this dilemma even more, including a review of the historical performance of stocks versus farmland. Lee Ellen has been thinking about her investment portfolio for a while now. Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$02_lee_ellen$@SLASH@$0.mp3"></a></p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$02_lee_ellen$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" />
<h3>Earl</h3>
<p>Whatever you do, never put money into investment products that you don't understand or feel comfortable with. Select the Play icon to hear some advice from Earl on this subject.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$08_earl$@SLASH@$0.mp3"></a></p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$08_earl$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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Summary
<p>In this lesson, you've learned what the term "asset allocation" means and how it can determine the composition, and ultimately the performance, of an investment portfolio. You also learned about factors that influence asset allocation decisions and tools to help you make personal asset allocation decisions. The second half of this lesson focused on the role of farmland in a farm family's investment portfolio and Anna, Lee Ann, and Earl all shared their experiences. In Lesson 6, you'll learn even more about available investment products and about research that compares their performance to agriculturally oriented alternatives.</p>
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lesson
Evaluating Investment Products and Agriculture Oriented Alternatives
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Introduction
<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$farmland_colorado.png" alt="Farmland in Colorado" />
<p>Now that you're familiar with the concept of asset allocation and have determined your personal investment risk tolerance level and asset allocation weightings, it's time to delve deeper into the "nuts and bolts" of investing. </p>
<p>In this lesson, you will learn about characteristics of equity ("ownership") and fixed-income ("loanership") investments and details about how either type of investment can be acquired through mutual funds or exchange-traded funds (ETFs). In addition, you'll learn about a recent study of farmers' off-farm investment activity and about research that compares the historical performance of stocks versus farmland. You'll also learn what correlation is and how uncorrelated assets can enhance investment performance. </p>
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Objectives
<p>After completing this lesson, you will:</p>
<ul><li>Understand characteristics of equity investments, fixed-income investments, and mutual funds.</li>
<li>Learn findings of a research study about farmers' off-farm investment activity.</li>
<li>Learn about the historical performance of stocks versus farmland.</li>
<li>Understand the definition of the word "correlation" as it pertains to selecting investments.</li>
<li>Understand the benefits of investment diversification with uncorrelated assets.</li>
<li>Learn investment strategies to hedge against the production cost risks of an agricultural business.</li></ul>
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<p>This lesson includes links to three in-depth supplemental units about investment products. As a result of completing this lesson, you'll have a better understanding of places to invest your money and how they compare with agriculture-oriented alternatives that are also available to farmers.</p>
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Let's See What You Already Know 1
<b>Let's See What You Already Know</b>
<p>What is an equity investment?
Choose one answer.
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An investment that is held 10 years or longer
Incorrect. An equity investment is an investment where something of value is owned (i.e., stocks, real estate).
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A type of investment sold only at banks
Incorrect. An equity investment is an investment where something of value is owned (i.e., stocks, real estate).
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An investment where something of value is owned (i.e., stocks, real estate)
Correct
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A loan to a corporation or government entity (i.e., a bond)
Incorrect. An equity investment is an investment where something of value is owned (i.e., stocks, real estate).
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Let's See What You Already Know 2
<b>Let's See What You Already Know</b>
<p>What is a fixed-income investment?
Choose one answer.
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An investment where something of value is owned (i.e., stocks, real estate)
Incorrect. A fixed income investment is where investors loan money to various types of borrowers (e.g., corporations and government) in exchange for periodic interest payments.
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A type of investment sold only at banks
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An investment that is held 5 years or less
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Where investors loan money to various types of borrowers (e.g., corporations and government) in exchange for periodic interest payments
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Let's See What You Already Know 3
<b>Let's See What You Already Know</b>
<p>What is one benefit of a mutual fund investment?
Choose one answer.
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Can be bought and sold like stocks on a stock exchange
Incorrect. One benefit of a mutual fund investment is professional management.
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Guaranteed rates of return from dividends and capital gains
Incorrect. One benefit of a mutual fund investment is professional management.
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Professional management
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Investors get personalized investment advice
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Let's See What You Already Know 4
<b>Let's See What You Already Know</b>
<p>What is one benefit of an exchange traded fund?
Choose one answer.
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Professional management
Incorrect. One benefit of an exchange traded fund is that it can be bought and sold like stocks on a stock exchange.
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Guaranteed rates of return from dividends and capital gains
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Investors get personalized investment advice
Incorrect. One benefit of an exchange traded fund is that it can be bought and sold like stocks on a stock exchange.
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Let's See What You Already Know 5
<b>Let's See What You Already Know</b>
<p>What is "correlation" as it applies to investing?
Choose one answer.
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Degree to which movements of two variables (i.e., stocks and bonds) are related or not
Correct.
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Purchasing the same type of mutual fund from two different companies
Incorrect. Correlation as it applies to investing is the degree to which movements of two variables (i.e., stocks and bonds) are related or not.
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Not having “all your eggs in one basket”
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Degree to which investment needs are similar to financial goals
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Equity ("Ownership") Investments
<img valign="top" align="left" hspace="2" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$news_2.png" alt="Newspaper headline about stock market" />
<p>No other type of investment gets as much media exposure as common stock. Every day that the stock market is open, various media outlets report the Dow Jones Industrial Average and other benchmark indexes. Common stock, along with real estate, collectibles (e.g., stamps, coins, art, classic cars), commodities, and business assets (including farmland) are called "ownership" assets because people who invest in them own all or a piece of something. For example, investors who own stock are partial owners of the companies that they invest in and share investment profits and losses proportionately with other stockholders.</p>
<p>To learn more about investing in common stock and other equity investments, click here <a href="$@LESSONVIEWBYID*854@$&pageid=7429" target="_blank">Unit 4: Ownership Investments</a>.</p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" alt="Lee Ellen at table with laptop and paper" />
<h3>Lee Ellen</h3>
<p>Lee Ellen wants to learn more about some companies, and possibly invest in them. Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$04_lee_ellen$@SLASH@$0.mp3"></a></p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$04_lee_ellen$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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Fixed-Income ("Loanership") Investments
<p>As the name implies, loanership investments are those where investors loan money to various types of borrowers (e.g., banks, corporations, the federal government, states, and municipalities) in exchange for periodic interest payments. Examples of fixed-income investments include bonds, certificates of deposit (CDs), mortgage-backed securities (e.g., Ginnie Maes), and fixed annuities. Generally, the longer the time until a fixed-income investment matures (e.g., a 30-year bond versus a 5-year bond), the higher the return. This higher return is necessary to cushion investors against the prolonged impacts of inflation. Fixed-income investments help offset the risks of investing in stocks and can provide a stream of income from periodic interest payments that is particularly attractive to retirees seeking a "retirement paycheck."</p>
<p>To learn more about investing in fixed-income investments, click here <a href="$@LESSONVIEWBYID*854@$&pageid=7484" target="_blank">Unit 5: Fixed-Income Investing</a>.</p>
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Mutual Fund Investing
<p>Mutual funds are large portfolios of stocks, bonds, or other securities that are collectively owned by many shareholders and managed by an investment company (e.g., Fidelity, T. Rowe Price, and Vanguard). They are a popular investment choice because they are professionally managed, provide instant diversification, and often have affordable minimum deposit requirements. There are dozens of different types of mutual funds to meet investment objectives such as long-term growth and income. Some funds invest only in U.S. securities while others invest in overseas companies or a combination of domestic and foreign securities. Index funds, which track a market index such as the Standard & Poor’s 500, are popular with many investors.</p>
<p>To learn more about investing in mutual funds, click here <a href="$@LESSONVIEWBYID*854@$&pageid=7535" target="_blank">Unit 6: Mutual fund Investing</a>.</p>
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Exchange-Traded Funds (ETFs)
<img valign="top" align="left" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$portfolio_report.png" alt="Portfolio folder" />
<p>Another investment product that enables investors to build a diversified portfolio containing multiple asset classes (domestic stocks, foreign stocks, bonds, real estate, commodities, etc.) is an exchange-traded fund (ETF). While the composition (holdings) of a mutual fund is determined by the fund manager, the composition of an ETF is typically formula-based and described in the ETF prospectus. Like mutual funds, ETFs provide an ownership interest in a pool of securities and other assets. However, ETFs can be bought and sold throughout the day like stocks on a securities exchange through a broker-dealer. Mutual fund shares are bought and sold at the prevailing market price at the end of each trading day.</p>
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<p>Investors can select an ETF that contains a broadly diversified mix of stocks or bonds or very specific exposure to an individual asset class. This enables investors to participate in the financial performance of a broad mix of investments or select only those funds that "fill an existing gap" in their asset allocation exposure. Individual circumstances and preferences will determine whether the gaps in asset allocation are best filled using ETFs or mutual funds.</p>
<p>To compare key differences between mutual funds and ETFs and determine which product is appropriate for you, see http://www.extension.org/pages/A_Comparison_of_Mutual_Funds_and_Exchange_Traded_Funds_(ETFs):_Twelve_Factors_to_Consider. </p>
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Correlation and Diversification
<p>Correlation is a statistical term that indicates the degree to which the movements of two variables are related. When the term is applied to investing, the "variables" are different types of investments (i.e., asset classes) such as stocks and bonds. For farm families, farmland and equipment are asset classes too. However, they are highly correlated; meaning their values tend to move up and down together. Research indicates that, by combining assets that are affected differently by economic events, a strategy known as diversification, investment risk is generally reduced, particularly over the long-term.</p>
<p>Diversification is less effective in short time periods, however, especially when a major financial "tornado" affects virtually every type of asset class, both foreign and domestic, and turns them upside down. In the fall of 2008, institutions (e.g., pension plans and investment companies) and individual investors, alike, sold assets indiscriminately, often regardless of their underlying value, as a result of fear, panic, uncertainty, and computerized trades. In more "normal" markets, diversification generally provides some shelter from investment risk if the combined asset classes have low correlations and different price movements.</p>
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Investment Diversification for Farm Families
<p>Do you have "all your eggs in one basket" (i.e., all of your investments in one asset class)? Review your completed <a href="$@LESSONVIEWBYID*657@$&pageid=5109" target="_blank">Integrated Business Balance Sheet and Personal Net Worth Exercise (Exercise 2)</a> to see how much of your total wealth is held, respectively in farm, equity, fixed-income, and cash assets (e.g., money market funds). If you're "top heavy" in one category, particularly farm assets, take action to diversify by:</p>
<ul><li>Purchasing investments in underweighted asset classes. This can be done slowly (e.g., $100 per month).</li>
<li>Purchasing non-farm investments that hedge farm assets. For example, investments in energy through stocks, mutual funds, or exchange-traded funds can help to partially offset production cost increases associated with rising fuel prices.</li></ul>
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Investment Performance: Stocks vs. Farmland
<p>In the survey and focus group that preceded the development of this online investment education (OIE) course, farmers told the OIE team to address a common dilemma for farm families. Should they invest in securities, such as stocks and bonds, or should they buy farmland? A Purdue University economist examined farmland investments in relation to high quality (blue chip) stocks from 1990 to mid-2002 and found that both asset classes had their ups and down. The pre-tax value of $1,000 invested in 1990 in stocks that comprise the Standard & Poor's 500 index and in Indiana farmland was as follows:</p>
<ul><li>1990: Farmland: $1,119; Stocks: $969</li>
<li>1995: Stocks: $2,087; Farmland: $1,847</li>
<li>2000: Stocks: $4,835; Farmland: $3,222</li>
<li>2002, through July 31: Farmland: $3,830; Stocks: $3,348</li></ul>
<p>And the winner is…..both! As seen from the dollar figures above, stocks and farmland traded places as the top investment during this time frame. Another series of articles by University of Iowa economists concluded that the timing of stock and land investments, as well as the relative level of stock and land prices at the time of purchase, is one of the biggest determinants of investment performance. The take-away message from all of these studies is that stock and farmland performance are not highly correlated. Thus, a mixture of both can contribute to a well-diversified investment portfolio. In addition, the timing of "when you buy" and "when (if) you sell" is a major determinant of investment success.</p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" />
<h3>Earl</h3>
<p>Earl's been thinking about a real estate investment. Select the Play icon to learn more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$04_earl$@SLASH@$0.mp3"></a></p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$04_earl$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
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Wisconsin Farmer Investment Study
<p>How do other farmers invest their money? A study of 371 Wisconsin farmers was conducted in 2006 to determine how, why, and where they invest off the farm. 60% of respondents considered making an off-farm investment within the five years before the study and 51% actually made an off-farm investment. Those more likely to invest were cash grain or vegetable producers and farmers with more formal education, a net worth of $2.5 million or greater, and $50,000 or more in government payments. Of those with $10,000 or more invested in off-farm investments, 34% invested in non-agricultural stocks or mutual funds and 29% purchased bonds, CDs, or money market funds. Agriculturally-oriented investments selected by the sample included marketing farm supply cooperatives, ethanol plants, and ag-specific stocks (e.g., John Deere).</p>
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Words of Caution
<p>Be careful not to allow your knowledge of farming and the agricultural economy cloud your judgment about the merits of specific investments. Several Online Investor Education survey respondents described losses springing from investments in ag-related industries. Here's what one had to say: "We've invested in a bio-diesel plant because it is something that I am close to. So far, there has been a lot of red ink. I guess that is not diversification."</p>
<p>Consider non-farm investments as a compliment to your agriculturally-dependent investment activities. Investments should be considered based on their expected return and risk characteristics. While investing in agriculture-oriented ventures seems logical and comfortable, in many cases it provides portfolio concentration, not diversification.</p>
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Summary
<p>Several recent studies have concluded that farmland has generally fared well as an investment selection. Like all forms of real estate, the most important factor determining its value is location, location, location. While farmland is an important asset in the portfolios of farm families, it should not be your only asset. Owning other asset classes will reduce investment risk because different investments tend to counterbalance one another over the long term. Diversification may also provide added liquidity (i.e., the ability to convert some or all of your investment capital into cash fairly quickly).</p>
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<p>Not sure how to get started? Consider starting out with a stock and/or bond index fund that tracks a broad market index such as the Standard & Poor's 500. Make at least the minimum required initial deposit and subsequent deposits whenever you can afford it. Each mutual fund has specific policies that are described in a prospectus, the official legal document that describes a mutual fund. If you've got a large lump sum to invest, consider starting out with one or more exchange-traded funds or a laddered portfolio of fixed-income securities such as bonds or CDs. If you are so inclined, consider hiring a professional financial advisor to assist you. In Lesson 7, you'll learn how to evaluate financial service providers and information sources.</p>
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lesson
Evaluating Financial Service Providers and Information Sources
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Introduction
<p>In previous lessons, you've learned important investment terminology (e.g., asset allocation, correlation, and diversification). You've also seen how non-farm investments can help diversify a "farm-heavy" portfolio. A number of studies have found that there is a relatively non-correlated relationship between the investment performance of stocks and farmland, suggesting that a mix of both can contribute to a well-diversified portfolio. Perhaps the previous lessons have convinced you to "cast a wider net" and invest beyond the farm. Now what? Where can you go for information and assistance and what are the pitfalls to avoid with respect to frauds and scams? </p>
<p>All of these topics are covered in this lesson, which also includes links to three in-depth supplemental units and three exercises to help you compare and select cash equivalent assets (e.g., checking, savings, and money market accounts, online bank savings accounts, and certificates of deposit or CDs), brokerage account providers, and financial advisors. When you’ve completed this lesson, you'll have a better understanding of available resources that can help you make wise investment decisions.</p>
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Objectives
<p>After completing this lesson, you will:</p>
<ul><li>Learn about available resources (e.g., organizations, Web sites, publications, etc.) for investors.</li>
<li>Complete worksheets to compare cash equivalent assets and brokerage account providers.</li>
<li>Learn questions to ask when selecting professional financial advisors.</li>
<li>Learn how to properly prepare for consultations with a financial advisor.</li>
<li>Learn about "red flags" of investment scams and how to avoid them.</li></ul>
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Let's See What You Already Know 1
<b>Let's See What You Already Know</b>
<p>Which of the following is NOT an investment resource?
Choose one answer.
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Financial magazines (e.g. Money)
Incorrect. A Farmer's Almanac is NOT an investment resource.
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Cooperative Extension
Incorrect. A Farmer's Almanac is NOT an investment resource.
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Incorrect. A Farmer's Almanac is NOT an investment resource.
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Farmer's Almanac
Correct
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Let's See What You Already Know 2
<b>Let's See What You Already Know</b>
<p>What is one advantage of having a professional financial advisor?
Choose one answer.
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An advisor’s services are free of charge if you buy stock
Incorrect. One advantage of having a professional financial advisor is financial expertise and access to investment research and asset allocation software.
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A higher return on your investments than if you invested yourself
Incorrect. One advantage of having a professional financial advisor is financial expertise and access to investment research and asset allocation software.
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Financial expertise and access to investment research and asset allocation software
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All of these are advantages.
Incorrect. One advantage of having a professional financial advisor is financial expertise and access to investment research and asset allocation software.
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Let's See What You Already Know 3
<b>Let's See What You Already Know</b>
<p>What is the definition of a Ponzi Scheme investment fraud?
Choose one answer.
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A type of fraud that involves penny stocks
Incorrect. A Ponzi scheme is a type of fraud where “investors” are paid with money taken in from new “investors” until the scheme collapses.
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A type of fraud where “investors” are paid with money taken in from new “investors” until the scheme collapses
Correct
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A type of fraud that uses victims’ personal information to commit a crime
Incorrect. A Ponzi scheme is a type of fraud where “investors” are paid with money taken in from new “investors” until the scheme collapses.
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A type of fraud that involves victims with similar characteristics such as religion
Incorrect. A Ponzi scheme is a type of fraud where “investors” are paid with money taken in from new “investors” until the scheme collapses.
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Investment Resources
<img valign="top" align="left" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$news_3.png" alt="Newspaper headline" />
<p>There is certainly no shortage of investment information these days. Between Web sites, television (e.g., CNBC), talk radio shows, seminars, and financial publications, the problem isn't "lack of information," it's "information overload." What to do? Start slowly and learn what you can, when you can. For example, subscribe to a financial magazine (e.g., <i>Kiplinger's Personal Finance, Money, and Smart Money</i>) and read it every month or attend a Cooperative Extension investment class or seminars through an off-farm employer. Another recommendation is to read the 11 supplemental units that are part of Investing for Farm Families.</p>
<p>To learn more about investment resources, click here <a href="$@LESSONVIEWBYID*854@$&pageid=7664" target="_blank">Unit 9: Getting Help: Investing Resources</a>.</p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" alt="Lee Ellen at table with laptop and paper" />
<h3>Lee Ellen</h3>
<p>Lee Ellen is interested in an online brokerage account. Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$09_lee_ellen_2$@SLASH@$0.mp3"></a></p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$09_lee_ellen_2$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
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Exercise 10: Comparison Worksheet for Evaluating Money Market and Savings Accounts, Certificates of Deposit, and Checking Accounts
<p>Many farm families start their off-farm investment program with low-risk "cash equivalent" assets such as a money market funds and CDs. Research by the online investment education (OIE) project team found that 78% of a nationally representative sample of 300 farm families held cash assets compared to almost half (48%) who owned individual stocks, bonds, or securities and 43% who owned mutual funds outside of a retirement savings plan. Want to get the best return on your cash equivalent assets? Use the Comparison Worksheet for Evaluating Money Market and Savings Accounts, Certificates of Deposit, and Checking Accounts and compare the annual percentage return or APY (interest rate), compound interest frequency, minimum deposit requirements, fees, and other characteristics of competing financial products.</p>
<p>Complete the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$IFF_Ex10_Comparison_Wksheet_CK_SV_MMs_CDs.doc" target="_blank">Comparison Worksheet for Evaluating Money Market and Savings Accounts, Certificate of Deposits, and Checking Accounts</a>. </p>
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<p>For the previous exercise and the following one, the worksheets are organized to identify criteria for comparison that are readily available and regularly updated at www.bankrate.com. You can get comparison data for financial institutions from that site and then only need to fill in information for local financial service providers.</p>
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Exercise 11: Comparison Worksheet for Evaluating Brokerage Account Providers
<p>Maybe you already have sufficient cash assets and are ready to open a brokerage account with a financial services firm (at a "brick and mortar" office or online) to purchase stocks, bonds, or other securities. Here, too, you'll want to compare available providers to get the best return on your money. An important watchword is "low expenses." Carefully compare each provider's fee structure because, the fewer fees you pay, the more of your investment earnings you'll get to keep. Think about the type of services that you really need. If you require a lot of hand-holding, you'll want to choose from among firms that provide added support. However, if you're looking for a way to execute your own investment plan, then a discount online broker (with the lower expenses that they charge) might be your preferred choice.</p>
<p>Complete the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$IFF_Ex11_Brokers_Comparison_Worksheet.doc" target="_blank">Comparison Worksheet for Evaluating Brokerage Account Providers</a>. </p>
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Getting Help from Professional Advisors
<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$financial_advisor.png" alt="Financial advisor" />
<p>So far, we've assumed that you're an active investor who has the time, or is willing to make the time, to compare available investment products. What if that's not the case and you need some help? Then it’s time to select a financial advisor. Be sure to find out all you can about a financial professional's educational background, work experience, and compensation method(s).</p>
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<p>Some advisors charge fees based on a flat rate or hourly rate while others receive commissions or receive a percentage of assets under management. Understanding how an advisor is compensated is very important when you consider whether an investment is good for you- or good for the advisor. To save money on fee-based consultations, bring your own financial records and statements, along with your list of questions, when you meet with an advisor.</p>
<p>To learn more about selecting financial professionals, click here <a href="$@LESSONVIEWBYID*854@$&pageid=7696" target="_blank">Unit 10: Selecting Financial Professionals</a>.</p>
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Exercise 12 - Financial Advisor Questionnaire
<img valign="top" align="left" hspace="5" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" alt="Exercise" />
<p>It is absolutely essential to evaluate the credentials, services, experience, and compensation method of potential financial advisors. Follow the "Rule of Three" and interview at least three local practitioners, if possible. In areas where financial advisors are scarce, seek referrals from friends and individuals who you perceive to have their financial houses in order. Other trusted advisors (e.g., a CPA or an attorney) may also be able to provide solid leads. Your financial advisor does not have to be a local resource. In fact, in some cases, it may be more comfortable if they don't live next door or attend the same community functions.</p>
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<p>The main thing is that they're competent and accessible and responsive to your needs, questions, and concerns. The Comprehensive Financial Advisor Diagnostic form, developed by the National Association of Personal Financial Advisors (the professional organization for fee-only financial planners) can help you make informed decisions about engaging a potential financial advisor based on the information that they provide.</p>
<p>Evaluate a Potential Financial Advisor using the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$IFF_Ex12_Financial_Advisor_Questionnaire.doc" target="_blank">Financial Advisor Questionnaire</a> .</p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$anna.png" alt="Anna outdoors" />
<h3>Anna</h3>
<p>Anna's considering getting professional assistance. Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$10_anna$@SLASH@$0.mp3"></a></p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$10_anna$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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Investment Fraud
<p>Every investor needs to understand the "red flags" (warning signs) of investment fraud to avoid being taken by unscrupulous fraudsters. This was clearly demonstrated in the fall of 2008 when reports about Ponzi scheme kingpin, Bernie Madoff, began to surface. Ponzi schemes are essentially "robbing one person to pay another." Initial "investors" are paid off with money taken in from new ones. When new money eventually dries up, the scheme collapses and investors lose their money. Madoff's fraud also had characteristics of "affinity fraud" because it preyed upon members of tight-knit ethnic groups. </p>
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<img valign="top" align="right" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$financial_experts2.png" alt="Financial professionals" />
<p>How can you avoid investment fraud? Check investment advisors with your state securities regulation agency and heed these red flags:</p>
<ul><li>promises of "guaranteed" or "risk-free" returns,</li>
<li>exotic or unusual sounding "investments,"</li>
<li>claims of astronomical returns in a short period of time,</li>
<li>lack of detail about an investment company's name and physical location,</li>
<li>investment returns on stock-related assets that never vary,</li>
<li>claims of "exclusivity" about a company's investors, and</li>
<li>pitches by fraudsters to invest quickly during "a limited window of opportunity."</li></ul>
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<p>To learn more about investment fraud, click here <a href="$@LESSONVIEWBYID*854@$&pageid=7734" target="_blank">Unit 11: Investment Fraud</a>. Another helpful information source is FINRA, the Financial Industry Regulatory Authority. FINRA has a collection of investor protection resources at www.finraprotects.org. </p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" />
<h3>Earl</h3>
<p>Earl's reflecting on his experience with fraud. Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$11_earl$@SLASH@$0.mp3"></a></p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$11_earl$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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It Won't Happen to Me
<img valign="top" align="right" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$computer_women.png" alt="Woman reading paper and using computer" />
<p>Don't be so sure. Fraudsters are slick and operate in a variety of venues including the Internet, telemarketing, and through community organizations, including churches, where they dupe a trusted leader to promote fraudulent investments to other members. </p>
<p>Several OIE survey respondents, i.e., fellow farmers, admitted falling prey to investment scams. Bottom line: never invest in any investment product that you don't fully understand or feel comfortable with and, remember, "if it sounds too good to be true, it probably is."</p>
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Summary
<p>The old adage that "knowledge is power" is certainly true about investing. This lesson was all about empowering yourself to make wise investment decisions by locating helpful information, hiring professional advisors, and avoiding investment fraud. While investment knowledge can't prevent investment losses, such as those caused by the "market meltdown" of 2008-2009, it may help keep your emotions in check and stay focused on long-term goals. Want to know more? Contact your local Cooperative Extension office for local investment education resources or visit the eXtension Web site http://www.extension.org/personal_finance. </p>
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lesson
Investing for Retirement and Farm Succession Planning
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Introduction
<img valign="top" align="left" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$haybales_2.png" alt="Haybales in a field" />
<p>One of the most important financial goals of all investors, including farm families, is retirement. There's just one big difference between farmers and everyone else….a large majority of farm families really don't plan to retire in the usual sense (i.e., stop working). Rather, many farmers plan to continue working as long as they are able, although perhaps fewer hours per day or with a smaller scale operation. </p>
<p>In addition, farmers are older than average American households. According to the 2007 agricultural census, the average age of U.S. farmers is 57.1. In research that preceded the development of this online investment education (OIE) course, with a sample of 300 farm families, 51% of respondents strongly agreed and 31% tended to agree with the statement "When the time comes, I expect to cut back from farming rather than to retire completely." One reason is that farming is one of the few occupations where someone can literally "live where they work." </p>
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Objectives
<p>After completing this lesson, you will:</p>
<ul><li>Understand the process of retirement planning as it applies to farm families.</li>
<li>Learn about available IRA retirement investment plans (e.g., Roth, Traditional, SEP, and SIMPLE IRAs).</li>
<li>Understand the process of estate planning as it applies to farm families.</li>
<li>Understand generational differences with respect to farm transfer decisions.</li>
<li>Understand common concerns about farm transfer decisions.</li></ul>
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<img valign="top" align="right" hspace="8" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$potato_field.png" alt="Potato field" />
<p>This lesson will help you make investment decisions related to retirement and get you thinking about farm-specific estate planning, including transfer and succession decisions. By the time you are finished, you'll have a better idea of decisions and tools available to help farmers anticipate retirement and estate planning issues.</p>
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Let's See What You Already Know 1
<b>Let's See What You Already Know</b>
<p>What is an individual retirement account (IRA)?
Choose one answer.
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A bank passbook savings account for retirement
Incorrect. An IRA is a tax-deferred retirement savings account for workers with earned income.
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A savings account provided by companies as an employee benefit
Incorrect. An IRA is a tax-deferred retirement savings account for workers with earned income.
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A tax-free retirement savings account for self-employed workers
Incorrect. An IRA is a tax-deferred retirement savings account for workers with earned income.
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Let's See What You Already Know 2
<b>Let's See What You Already Know</b>
<p>What is meant by the term "farm transfer"?
Choose one answer.
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Plans for putting a farm in a farmland preservation program
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Plans for moving to a new farm
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Plans for selling a farm
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Let's See What You Already Know 3
<b>Let's See What You Already Know</b>
<p>What is estate planning?
Choose one answer.
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The process of planning to sell a farm and farm assets
Incorrect. Estate planning is the process of managing, enjoying, and disposing of assets at the least possible tax cost.
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The process of naming hiring a farm manager
Incorrect. Estate planning is the process of managing, enjoying, and disposing of assets at the least possible tax cost.
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The process of writing a will to distribute assets following death
Incorrect. Estate planning is the process of managing, enjoying, and disposing of assets at the least possible tax cost.
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The Graying of Agriculture
<p>As noted above, the U.S. farm population is an aging population. Thus, some version of retirement (even if it involves a reduced work schedule in addition to receiving income from Social Security and other sources) is on the "radar screen" of many farm families. This is especially the case if one of your goals is to pass on the legacy of the farm business to the next generation. For a farmer, letting go of the "management reins" is a difficult transition, even if they are handed to a family member. </p>
<p>In this situation, not only is your life affected by your retirement planning decisions, but also the lives of your children, grandchildren, and/or other people involved in the farm transfer. Farms are five times more likely to pass from generation to generation than any other business. Often this is accomplished in small increments rather than by a quick, one-time action.</p>
<p>To access a ten module retirement planning course designed especially for farm families, with links to dozens of online resources, select this link http://laterlifefarming.rutgers.edu/. </p>
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Exercise 13: A Retirement Estimator for Farm Families
<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" alt="Exercise" />
<p>So how do you plan what you need to save for retirement? The retirement planning process is actually pretty straightforward: estimate living expenses in retirement, determine Social Security and other income sources, subtract the difference, and estimate required savings to close the gap. Purdue University Extension created the <a href="http://www.ces.purdue.edu/farmretirement/" target="_blank">Retirement Estimator for Farm Families</a> especially for farmers and ranchers. It includes sections for estimated annual income from the farm and estimated farm-related payments after retirement.</p>
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Exercise 14: Individual Retirement Account (IRA) Comparison Table
<p>Fortunately, there are many available retirement savings opportunities. Like all people with "earned income" (i.e., a salary or earnings from a business), farm families are eligible to contribute to an individual retirement account (IRA). In the study of 300 farm families, described before, 75% of the sample had at least one type of retirement savings account in place (e.g., IRAs, 401(k) plans, and SEPs, for self-employed workers). </p>
<p>Focus groups with New Jersey farmers in 2008 found that some farmers avoid tax-deferred savings plans designed for the self-employed (e.g., SEPs, SIMPLEs, and Keoghs), mainly due to future income uncertainty and the requirement to fund employees' accounts if a farmer's personal accounts are funded. Instead, these farmers preferred tax-deferred investments that they could fund solely for themselves and their spouse (e.g., IRAs).</p>
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<p>However, for farm operations with only family members as employees (or no employees), these plans allow the farm business to contribute substantial amounts of income into retirement plans and simultaneously reduce the farm's immediate tax liabilities. Tax-deferred investments grow faster than taxable ones because taxes are postponed until a later date.</p>
<p>The Individual Retirement Account (IRA) Comparison Table contains specific details about three types of IRAs available to individuals and two available to small businesses. It will help you compare the features of each investment plan (e.g., eligibility requirements, annual contribution limits, and distribution rules) so you can determine if one of these alternatives could help you achieve your long-term financial goals.</p>
<p>Select this link for the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$IFF_Ex14_Evaluating_IRA_Accounts_and_Business_Retirement_Plans.doc" target="_blank">Individual Retirement Account (IRA) Comparison Table</a>.</p>
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Retirement and Farm Succession Planning
<p>In the next 20 years, ownership of approximately 70% of U.S. farmland is expected to change hands. This is huge! Unfortunately, many farmers are not having the “critical conversations” necessary to assure a smooth transfer of their farm. A 2005 survey found that just 25% of North Carolina farm operators had discussed their retirement plans with their families and only 7% had consulted a financial advisor. </p>
<p>The average age of respondents was 59, however, an indication that turnover of management and farmland was imminent. Perhaps one reason that transition discussions were postponed was that these farmers were in no rush to retire: 47% indicated that they never planned to retire, 35% planned to semi-retire (i.e., operate the farm while receiving Social Security and/or other retirement benefits), and only 18% planned to fully retire.</p>
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More Farmer Retirement Survey Findings
<p>Complete results of a study of 2,099 farmers by the North Carolina Farm Transition Network, Inc. can be found at http://www.ncftn.org/research/farmsuccessionbrochure/view. Some key findings about farmers' retirement plans (or lack thereof) and decisions to transfer farm ownership and control are as follows:</p>
<ul><li>67% had not discussed their retirement plans with anyone.</li>
<li>57% had a will (i.e., 43% did not!), 11% had a trust, and 8% had other estate plans.</li>
<li>70% had life insurance and 15% had long-term care insurance.</li>
<li>Only 26% had identified a primary successor who will continue to operate the farm after the current operator retires (i.e., 74% do not have a definite successor)</li></ul>
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<ul><li>Of farmers with a named successor, most often the person that they selected was a son or daughter. Only 49% of identified successors were currently working on the operator's farm, however.</li>
<li>When asked about their biggest concern about transferring their farm to a successor, respondents' most frequent response (37%) was "no comment."</li></ul>
<p>So, if you find it difficult or impossible to address these issues within your own family, you are not alone!</p>
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Generational Farm Transfer Concerns
<p>Within farm families, there are often differences of opinion about different generation's roles in farm management and the operation's financial viability. The older members of the farm family are often concerned about the following four issues:</p>
<ul><li>entrusting the business they have built to someone else,</li>
<li>generating sufficient income to support multiple families, including the older farmer's retirement needs,</li>
<li>developing transition plans that treat all children fairly, and</li>
<li>preserving the legacy of the farm business.</li></ul>
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<p>The concerns of younger farm family members usually include the following:</p>
<ul><li>economic viability of the existing farm business,</li>
<li>ability to make changes to the farm operation, if necessary,</li>
<li>stress of high debt loads needed to maintain or expand the farm operation, and</li>
<li>communication of transition plans and management responsibilities by senior family members.</li></ul>
<p>As you can see from the above lists, there are a lot of "issues" for farm families to discuss related to succession planning. It's no wonder that so many decide to avoid discussing them altogether. This is a mistake, however, because it just postpones difficult decisions until the future, often at a time of crisis (e.g., death of the farm operator). Purdue University Extension has a very helpful Web site, Who Will Get Grandpa’s Farm?, (see http://www.ces.purdue.edu/farmtransfer/) that provides information about communication strategies that can be used when having a discussion about farm transfer decisions.</p>
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<span align="left"><img valign="center" align="left" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" />
<h3>Earl</h3>
<p>Earl hit the big "6-0" several years ago and has increasingly been thinking about the future of his farm. Another area of concern for older farmers is advance directives for health care (e.g., living wills and health care powers of attorney). For additional information on this topic, visit the eXtension learning lesson at http://www.extension.org/pages/Communicate_Your_Advance_Directives_for_Health_Care. </p>
<p>Select the Play icon to find out what Earl's been thinking about estate planning.</p>
<a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$01_earl$@SLASH@$0.mp3"></a>
<a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$01_earl$@SLASH@$transcript.html"> Read Audio Transcript</a>
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What is Estate Planning?
<img valign="top" align="right" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$last_will.png" alt="Person writing" />
<p>Estate planning can be thought of as the "grand finale" to investing. After accumulating wealth over time through regular investment deposits, interest, dividends, and capital gains, estate planning is the process of managing, enjoying, and disposing of assets at the least possible tax cost. </p>
<p>For farm families, carefully designed estate and farm succession plans enable them to make transitions based on their life cycle rather than traumatic events such as death, disease, or disability. Making a will is a crucial part of estate planning, but it does not conclude the process. Planning your estate also involves reviewing how you own your property, considering insurance needs, and examining your family business structure.</p>
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<p>Estate planning can be less overwhelming if you separate it into four basic steps:</p>
<ol><li>Initiate discussions that include all immediate family members.</li>
<li>Define and convey your objectives clearly.</li>
<li>Compile relevant information such as property titles, net worth, and other inventories.</li>
<li>Seek professionals who can help you execute your plan and keep things on track.</li>
</ol>
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Benefits of Estate Planning
<p>A properly designed estate plan can provide an open line of communication between older and younger generations so that no one is surprised or disappointed when a farm business transition occurs. Generally, the sooner planning begins, the more options that are available. </p>
<p>People often avoid estate planning because they think it's expensive or they underestimate the value of their estate. However, expenses incurred now to seek professional assistance will seem small compared to potential expenses that a farm family estate could incur in future litigation and taxation. Possibly the only thing worse than a family member dying without an estate plan in place is seeing a sizeable portion of a family's lifetime of work wasted due to poor planning and/or family quarreling. </p>
<p>In addition, if you avoid putting a plan together for yourself, state government intestacy laws (i.e., distribution procedures for those who die without a will) will make those tough decisions for you. Rarely are state intestacy distribution procedures consistent with decisions that people would have made for themselves. Worse yet, surviving family members are the ones forced to live with the consequences.</p>
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Keeping Up to Date
<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$financial_advisors2.png" alt="Financial advisors" />
<p>Getting your estate plan in place is not the final step. The final challenge involves keeping things updated when significant changes occur in your life (e.g., marriage, divorce, births, deaths, etc.); changes occur in the law; or you simply change your mind about certain decisions. Work with a competent team of professionals who will help you review and modify your estate plan as needed to keep it current.</p>
<p>In addition, take time to review the beneficiaries of your retirement savings plans and life insurance policies periodically and update them as needed. To list all your beneficiary designations in one place, see the Beneficiary and Personal Representative Designations worksheet at http://njaes.rutgers.edu/money/pdfs/beneficiary-designations.pdf. </p>
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Exercise 15: Sketching a Farm Asset and Management Transfer Plan
<p>You've got some weighty decisions ahead of you whether you plan to keep your farm in the family or not. To help you think about decisions that need to be made, review the Sketching a Farm Asset and Management Transfer Plan worksheet. It will help you think about property that needs to be transferred (e.g., livestock, machinery, and real estate), tax and debt considerations, and farm management transfer decisions. This activity will also help facilitate any conversations that you might have with professionals helping to draft legal documents that implement your plans. Keep this document in an accordion file folder, a notebook, or a file cabinet drawer, along with your completed <a href="$@LESSONVIEWBYID*657@$&pageid=5105" target="_blank">Financial Emergency Preparedness worksheet (Exercise 1 in Lesson 1)</a>, <a href="$@LESSONVIEWBYID*657@$&pageid=5109" target="_blank">Integrated Business Balance Sheet and Personal Net Worth Exercise (Exercise 2 in Lesson 1)</a>, and <a href="$@LESSONVIEWBYID*658@$&pageid=5118" target="_blank">Insurance Evaluation and Goals worksheet (Exercise 4 in Lesson 2)</a>. This way, all information pertaining to your personal assets and debts, professional advisors, insurance policies, and business assets and debts is located in one place.</p>
<p>Complete the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$IFF_Ex15_Farm_Asset_and_Management_Transfer_Plan.doc" target="_blank">Farm Asset and Management Transfer Plan Worksheet</a>.
</p>
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<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" alt="Lee Ellen at table with laptop and paper" />
<h3>Lee Ellen</h3>
<p>In Lesson 7, investment fraud was discussed. It bears repeating, as we close out this course, because farmers are an identifiable target group for "affinity fraud." This is the name for scams that exploit the sense of trust and friendship in groups of people who have something in common. Don't believe it can happen to you? It happened to several OIE survey respondents, who were all farmers. </p>
<p>Select the Play icon to hear what Lee Ellen has to say.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$11_lee_ellen$@SLASH@$0.mp3"></a></p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$11_lee_ellen$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
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Summary
<p>Tools to help you make retirement and estate planning decisions were the focus of this lesson. After all, financial security in later life and the well-being of family members are major reasons why people invest in the first place. Most of resources discussed in this lesson were specially designed for farm families. <a href="$@LESSONVIEWBYID*664@$&pageid=5215" target="_blank">The Retirement Estimator for Farm Families</a> showed you what you need to save for a comfortable retirement, <a href="http://www.ces.purdue.edu/farmtransfer/" target="_blank">Who Will Get Grandpa's Farm?</a> explained how to discuss farm transfer issues with family members, and the <a href="$@LESSONVIEWBYID*664@$&pageid=5227" target="_blank">Sketching a Farm Asset and Management Transfer Plan</a> worksheet asked you to respond to questions about key farm transfer decisions. You also heard how Earl’s getting serious about his estate planning and Lee Ellen wisely dodged an affinity fraud scam.</p>
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<p>This lesson concludes the Investing for Farm Families online investment education (OIE) course. The OIE project team hopes that you have found it helpful. We encourage you to revisit Investing for Farm Families often, as your busy schedule allows, and to read the 11 supplemental units on topics of interest to you and the monthly investment messages. In addition, if you have an investment-related question, eXtension financial experts are only a mouse click away at http://www.extension.org/personal_finance. </p>
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lesson
11 Supplemental Units
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UNIT 1: BASIC BUILDING BLOCKS OF SUCCESSFUL FINANCIAL MANAGEMENT
<img hspace="10" vspace="20" valign="top" align="left" alt="Farm couple" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$couple.png" />
<p>Investing is an important part of the financial planning process. Yet, information overload and busy lives make managing finances successfully a challenge for almost everyone at some point. This unit is designed to help you understand the basic building blocks of sound financial management—the steps you need to complete, or at least consider, before you begin an investment program.</p>
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Learning Objectives
<p>This unit will help you:
<ul>
<li>Keep records and a budget </li>
<li>Reduce expenditures</li>
<li>Calculate net worth and cash flow </li>
<li>Create an emergency fund</li>
<li>Maximize tax deductions</li>
<li>Write financial goals</li>
</ul>
<!-- <h3>Instructions</h3><p>Based on your experience with the above, review the content and complete the exercises in this unit as needed. Choose your path:
<ul>
<li>If you are a beginner, start from the beginning.<br /></li>
<li>If you know the material but need to update or flesh out your records, advance to exercises.</li>
<li>If you want a review of the unit, go to the summary and questions at the end.</li>
</ul>
</p> -->
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1 - Basic Building Blocks of Successful Financial Management
<img src="$@FILEPHP@$$@SLASH@$image$@SLASH@$IFYFpyramidsmaller.png" alt="Financial management building blocks in a pyramid" align="right" vspace="15" hspace="15" />
<p>Visualizing the financial management building blocks in a pyramid, the wealth protection blocks on the bottom of the pyramid form a strong, secure foundation and provide crucial stability for the wealth accumulation and distribution blocks on top.</p>
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<img alt="Financial management building blocks in a pyramid" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$IFYFpyramidsmaller.png" align="left" hspace="10" vspace="10" />
<p>Each building block relies upon the strength and stability of the personal finance strategies used in the blocks below it. Decisions for one building block may have a definite impact on options available in adjacent blocks. For example, if you overuse credit, you may not qualify for a mortgage on a home or a loan for your farm. As you move up the pyramid, your financial life becomes more complex. This complexity, along with changes in your life, may require that you re-evaluate and change earlier strategies. Working from the bottom to the top of the pyramid, we will discuss 11 key components of a successful financial plan that make up the blocks of the pyramid. We will discuss, in turn, the components of wealth protection, accumulation, and distribution. </p>
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2 - Wealth Protection
<h3>Cash Management</h3>
<p>Cash management strategies include budgeting, keeping financial records, maximizing the interest earned on checking and savings accounts, and regularly preparing financial statements, such as net worth and cash flow. One of the soundest pieces of financial advice is to spend less than you earn. It sounds simple, but if you are not fully aware of how you spend money, you may be spending more than you realize. After you track your income and expenses, following a spending plan (budget) that is adjusted to your individual situation and goals is an excellent strategy to plan your spending.</p>
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<p>To estimate the value of your assets and chart your financial progress, each year you should add together everything you own (assets), then subtract everything you owe (debts), including your mortgage and credit card debt. This summary of assets and debts is called a net worth statement or balance sheet. It will help you analyze the way you currently manage your finances and make decisions to improve your financial situation.</p>
<p>You want your net worth to increase each year. During the early stages of your life, when you’re establishing yourself at work and accumulating the necessities of life, your net worth may rise slowly. It will probably grow the most right before retirement when you are at the peak of your career and accumulating assets to ensure a secure retirement. </p>
<p>Plan to review and update your net worth annually. The actual date of your review is not important. It might be your birthday, New Year’s, right after you do your taxes, or some other important date. It is more important that you remember the date and complete your annual checkup. It also is important to regularly reconcile bank and other financial statements with your own records. </p>
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<p>A vital aspect of the cash management building block is financial record-keeping. An effective record-keeping system should be convenient and not too complicated to maintain. A number of systems are available commercially, or you can design your own (e.g., with file folders). It is important that the system makes sense to you and that you use it consistently.</p>
<p>Select a date for balance sheet preparation and stay with that date for subsequent balance sheets. Most farm operations will select end-of-year/beginning-of-year as their balance sheet preparation date. Corporate operations may select the beginning date of their fiscal year for balance sheet preparation. Lenders require a balance sheet, submitted as part of a loan application, be no older than 3 or 6 months. In that case, the balance sheet will need to be updated for a lender. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" title="Lee Ellen at table with laptop and paper" alt="Lee Ellen at table with laptop and paper" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$01_lee_ellen$@SLASH@$0.mp3"></a><br /><br /></div>
</td>
<td>
<h3>Lee Ellen</h3>
<p>Lee Ellen needs to figure out the net worth of her family's dairy operation. Select the Play icon to find out what she's thinking.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$01_lee_ellen$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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Exercise: Calculate Net Worth
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Complete the worksheet, <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U1Ex1_Net_Worth_Calculation.xls" target="_blank">Net Worth Calculation</a>.
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</table>
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<h3>Emergency Cash Reserve</h3>
<p>Setting aside money to meet unexpected expenses provides a financial safety net and allows you to take advantage of financial opportunities as they arise. Most experts recommend an emergency fund equal to 3 to 6 months living expenses; however, you do not need to set aside this total amount in a low-yielding passbook, certificate of deposit, or money market account. The amount of your emergency fund depends upon your age, health, job outlook, and personal financial situation (e.g., amount and kind of insurance coverage). An emergency fund might be adequate with enough to cover 3 to 6 months of expenses using a combination of cash and credit if you have a source of low-cost borrowing (e.g., home equity credit-line loan, cash-value life insurance, or retirement plan). If your household has multiple sources of income or dual earners, you can count on those other sources of income in an emergency.</p>
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<p>You might want a larger emergency fund if you are in business for yourself and/or if your work is seasonal. If your health is questionable (e.g., you foresee long-term disability or extensive medical expenses), you anticipate a large expenditure for the care of a relative in the near future, or your child is about to enter college, you may also need a larger cash reserve. </p>
<p>Your emergency cash reserve can be subdivided to minimize penalties for early withdrawal of large amounts of funds at one time and to maximize interest earned on accounts should an emergency occur. Money that would be needed within 3 months of a financial emergency is best placed in an interest-bearing checking account, passbook savings, money-market deposit account, or money market mutual fund. Funds needed 4 to 6 months after an emergency could be placed in short-term certificates of deposit (CDs) as well as 3- and 6-month Treasury bills. Money that would not be needed for 7 months to 2 years could be placed in a money market mutual fund and longer term CDs (12-, 18-, and 24-month). Money you can avoid withdrawing for 2 to 5 years during a financial emergency could be placed in Treasury notes, short-term bond funds, or 3- to 5-year CDs. </p>
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Exercise: Reserve Cash for Emergencies
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
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<td>
<p>Complete the worksheet, <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U1Ex2_Emergency_Cash_Reserves_Calculation.xls" target="_blank">Emergency Cash Reserves Calculation</a>.
<p>Begin by summarizing the total cost of monthly fixed and flexible expenses on the Expense Tracker page. This will enable you to calculate how many months of household expenses should be set aside in an emergency fund.
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<h3>Risk Management</h3>
<p>Every day we are exposed to many risks which can cause a financial loss. Accidents, property damage, illness, and death are risks we often consider. However, other risks, such as the possibility of being sued or becoming disabled and unable to work, are also important. We each have to decide how we will protect ourselves should a risk become a reality. If you do not have a plan, you might have to go into debt or use funds set aside for other financial goals in the event of financial disaster.</p>
<p>Appropriate risk management strategies protect against catastrophic financial losses, regardless of the cause. Good comprehensive insurance coverage against severe setbacks is essential. Areas for coverage include life, health, homeowner’s or renter’s, auto, disability, and liability. Smart consumers can obtain this coverage at a cost that allows them to move up the pyramid to accomplish other goals without being insurance poor. Note that this type of risk management should not be confused with investment risk, which is a different financial concept. </p>
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<p>To determine when you need to purchase insurance, consider the best way to handle each of your risks. Because your risks change over a lifetime, evaluate your situation every few years and make appropriate changes. Can your savings cover a financial loss so that you don’t need to buy insurance? Increasing the deductibles (the portion of a loss that you pay) on your policy usually saves you money as well. However, when self-insuring or carrying high deductibles on policies, you must set aside the necessary funds in your emergency cash reserve to pay for those expenses in case of a loss.</p>
<p>Risk management strategies can be combined with savings and investments to achieve financial goals (e.g., buying cash value life insurance). However, be careful to ensure that your strategies provide the best return on the money involved. Determine if insurance protection can be purchased less expensively so that you can invest the savings for a greater overall return. </p>
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Exercise: Evaluate Insurance Coverage
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
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<td>
<p>Complete the worksheet, <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U1Ex3_Insurance_Evaluation_And_Goals.xls" target="_blank">Insurance Evaluation and Goals</a>. <br />
</td>
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<img valign="top" align="left" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$tax_bracketcorrected.png" alt="Tax brackets" />
<h3>Tax Management</h3>
<p>The goal for taxpayers is to pay no more than the least possible tax owed. Avoiding taxes through legal tax reduction strategies is not to be confused with illegal tax evasion. Legally avoiding taxes means using effective financial record-keeping, decision making, and planning strategies to reduce your total income tax . One example of good tax management is adjusting the amount of federal income tax withheld from your paycheck. If you receive a big income tax refund (over $500) each year, you are giving the federal government an interest-free loan. Evaluate the amount you have withheld and determine if you could use this money more effectively throughout the year to manage cash flow or invest for financial goals.</p>
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<p>Tax laws continue to dictate how we structure our financial plans. As laws favor or disallow certain strategies, we need to make adjustments. Two examples of this phenomenon are Individual Retirement Accounts (IRAs) and home equity credit-line loans. When everyone was allowed a tax deduction for a Traditional IRA, this strategy was widely encouraged and used. Since tax laws restricted IRA deductions, many people automatically either turn to Roth IRAs or eliminate IRAs completely as a viable alternative. Since tax deductions for non-mortgage consumer interest are not allowed, many people have turned to home equity credit-line loans to finance large purchases and deduct the resulting interest. </p>
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<p>As tax laws change, adjust your financial plans to use strategies which are most favorable to your situation. Most of us are aware of the tax advantages of tax-deferred savings. The idea, of course, is to put off paying income taxes on money until you withdraw it in retirement when, possibly, your tax bracket may be lower. However, you have no guarantee that this will happen, especially if you are very successful at saving for retirement and accumulating assets. In addition, the tax laws are constantly changing. You should seek the advice of a Certified Public Accountant (CPA), Certified Financial Planner® (CFP), or tax professional to gain insight into how tax laws will affect you.</p>
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<p>For example, under a tax law effective in 1997, up to $250,000 of profit from the sale of a primary residence is tax-free if you file an individual tax return; up to $500,000 if you and your spouse file jointly. To qualify for this tax-free benefit, you must own and live in your home for 2 of the 5 years prior to the sale. Only one spouse is required to own the home, but both need to have lived there to qualify for the larger $500,000 capital-gain tax exclusion. Further, you can use this exclusion even if you previously claimed the old $125,000 exclusion. How often you use this new exclusion is unlimited, but generally you can qualify only once in any 2-year period. If you must sell a home because of ill health, a job-related move, or unforeseen circumstances prior to meeting the 2-year test, you can claim a prorated exclusion [See Internal Revenue Service www.irs.gov]. </p>
<p>Another tax-saving strategy, for farmers, is pre-paid expenses. For example, farmers often pre-pay expenses for next year’s production. This effectively reduces the current year’s net farm income on which farmers pay taxes. You can refer to IRS Publication 225, Farmer Tax Guide, for detailed explanations. </p>
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Exercise: Determine Tax Bracket
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Determine your personal federal marginal tax bracket by downloading the <a target="_blank" href="http://njaes.rutgers.edu/money/taxinfo/">current year’s tax bracket income ranges</a>.
</td>
</tr>
</table>
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3 - Wealth Accumulation
<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$investment_plancorrected.png" alt="Investment plan folder" />
<h3>Financial Goals</h3>
<p>To get where you want to go in life, it is important to decide in advance how you will get there. Goals are signposts on the highway to the future. They serve as your guide to personal, career, and financial success. By keeping specific goals in view, you can direct your energies toward achieving your goals.</p>
<p>Financial goals are important because they help us to organize and direct our financial lives, providing a framework for decision-making. They can help us cope, provide some control in an environment where many things seem out of control, and help us visualize our financial future. </p>
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<table cellspacing="10" cellpadding="10" border="0" >
<tr>
<td>
<!-- <font color="red">Need to change this orange to the extension orange when I actually have photoshop/fireworks and can pick the correct color</font> -->
<p>How can you establish financial goals and utilize the building blocks you need to achieve your dreams? First, you can learn how to create SMART goals. SMART financial goals have several important criteria:
<table width="80%" align="center" cellpadding="10" cellspacing="1" border="1" bgcolor="#CCCCCC">
<tr><td><strong>S</strong></td><td>Must be SPECIFIC with dollar amounts, dates, and resources to be used in accomplishing the goals.</td></tr>
<tr><td><strong>M</strong></td><td>Must be MEASURABLE; determine regular amounts weekly, bimonthly, or monthly to set aside to accomplish goals. Another good "M" word to consider is MUTUAL. Goals that are mutual or shared with other family members will be easier to achieve. It also is important to think about how you will keep yourself and other family members MOTIVATED to achieve goals, especially long-term goals.</td>
</tr>
<tr><td><strong>A</strong></td><td>Your goals need to be ATTAINABLE given your financial situation.</td>
</tr>
<tr><td><strong>R</strong></td><td>It is important that your goals are RELEVANT and REALISTIC. What RESOURCES are available for you to use in achieving your goals? It is also important that you REVIEW and REVISE your goals periodically as necessary.</td></tr><tr>
<td><strong>T</strong></td>
<td>You need a specific TIME-LINE for accomplishing your goals. To achieve those goals, you must also be willing to make TRADE-OFFS in your financial life. Know the difference between needs and wants. Because there is never enough money to fund all of your financial goals at one time, you need to prioritize your goals.</td>
</tr></table></p>
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<img src="$@FILEPHP@$$@SLASH@$image$@SLASH@$winter_barn.png" alt="Winter barn" />
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$deposit_ticket.png" alt="Deposit ticket" />
<p>Take the time to put your goals in writing. Putting them on paper will reinforce their significance. Use the Financial Goal-Setting Worksheet on the next page to help you list short-term (under 3 years), medium-term (3 to 10 years), and long-term (10 or more years) goals. Then, to stay motivated, visualize how you will feel when you accomplish your goals. Lastly, it is very important that you periodically set aside a pre-determined sum of money for each specific financial goal. </p>
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Exercise: Set Financial Goals
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Complete the worksheet, <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U1Ex5_Financial_Goal_Setting.xls" target="_blank">Financial Goal-Setting</a>, to calculate the monthly savings required to fund one or more future financial goals.
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</table>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$anna.png" alt="Anna outdoors" title="Anna outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$01_anna$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Anna</h3>
<p>Select the Play icon to find out Anna's financial goals.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$01_anna$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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<h3> Credit Management</h3>
<p>When is the best time to stop a growing debt burden? Before it gets out of hand, of course. You can spot a debt problem early by looking at indicators, such as the number of bills coming in each month. Is the number increasing steadily? This could signal an increasing reliance on the use of credit. Cut back on credit buying now; you will be ahead of the game. Are you consistently paying only the minimum each month on your credit cards or other debts? This habit can be a critical "red flag." If you can pay only the minimum now, do not increase your debt load. Also, keep in mind that, when you pay only the minimum amount each month, you are paying high finance charges on the unpaid balance. This costs money and delays the achievement of financial goals.</p>
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<p>Periodically, get a copy of your credit report and check it for accuracy and completeness. This is especially important before making large purchases where you plan to use credit, such as for a car loan or a mortgage. In many cases credit reports have minor inaccuracies that need to be corrected. Sometimes there are errors that might result in your being turned down for a loan (to correct an incorrect credit report, use the form provided by the credit reporting agency). Visit www.annualcreditreport.com or call 877-322-8228 to request a free credit report each year from each of the three major credit bureaus (Experian, Equifax, and TransUnion). If you have recently been denied credit, employment, insurance, or rental housing based on information contained in your credit report, you are entitled to a copy free of charge from the company that issued the report on which the credit denial was based. You can also check your credit score online at www.myfico.com, www.equifax.com and www.eloan.com. </p>
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<p>Credit management strategies can be used to:
<ul>
<li>Avoid the overuse of credit,</li>
<li>Lower the total amount of debt,</li>
<li>Shorten the term of debt, and</li>
<li>Reduce interest and finance charges paid for the use of credit.</li>
</ul>
</p>
<p>If you have large credit card balances, it is a good idea to repay them before starting an investment plan. Repaying your debts can often provide a greater return on monies than many investment strategies. Repaying high interest rate loans can also provide money that can be used for future investments.</p>
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Exercise: Review Credit Report
<table cellspacing="10" cellpadding="10" border="0">
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Request a free credit report by calling 877-322-8228 or by visiting <a href="http://www.annualcreditreport.com" target="_blank">http://www.annualcreditreport.com</a> and review it for accuracy.<br />
</td>
</tr>
</table>
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<h3>Home Ownership</h3>
<p>Home ownership is a financial goal for many people. A home is often the largest investment, and sometimes the only investment, that many people make. Given the low appreciation rate of real estate in some areas, it is probably better to think of purchasing a home as buying shelter, not as an investment that you expect to rapidly appreciate (increase in value). Home equity, the dollar value of a home in excess of the mortgage owed on it, is considered an asset against which you can borrow. This strategy must be used with extreme caution, however; you could lose your home if you do not repay the amount borrowed. </p>
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<p>In recent years, increasing numbers of farmers are living in homes some distance away from the farm in towns and surrounding communities. Some of this trend can be attributed to working spouses who need to be closer to their places of employment. In other cases, living off the farm is necessary because of multiple families involved in an operation where there is only one house and building nearby is not feasible. Fewer farms have livestock that require daily care and thus farm families have more freedom to choose where they live. This growing trend puts farmers at the same decision making level as non-farm dwelling families making homeownership an important financial goal. </p>
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Exercise: Calculate Home Equity
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Obtain a complimentary market analysis of your home’s value from a local real estate agent and a mortgage balance statement from your bank (or a computerized amortization calculation) and use them to complete the worksheet, <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U1Ex7_Home_Equity_Calculation.xls" target="_blank">Home Equity Calculation</a>.</p>
</td>
</tr> </tbody>
</table>
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<h3>Investments</h3>
<p>You don’t have to be a big-time, high-income investor to have an investment plan. Even if you have only a small savings account, investments can become part of a long-term strategy to achieve specific goals.</p>
<p>A diversified investment portfolio can be developed after building the blocks of a firm financial foundation. Until adequate cash management, an emergency fund, insurance plans, tax management, and credit usage are under control and functioning effectively, it is probably unwise to begin an aggressive investment program.</p>
<p>A diversified investment plan begins with a well-defined philosophy and encompasses strategies designed to specifically accomplish financial goals (e.g., children’s education and funding retirement) without having to sacrifice one goal for the other. </p>
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<h3> Children's Education</h3>
<p>Are you planning to provide your child or children with a college education? If so, do you know how much it will cost? Do you know how you will finance this goal?</p>
<p>Meeting the financial costs of educating children is a financial goal for many people. The strategies to help you meet this goal may differ from other saving and investment strategies, however. Always investigate the tax and financial aid implications of your college-saving strategies.</p>
<p>The earlier you start planning for a college education for your child, the more time you will have to accumulate funds. Consider and plan for the cost of the entire college education. However, because saving ahead for the total cost may be unrealistic for parents, other possibilities need to be explored, including scholarships, grants, loans, and work-study programs. Learn the details about each one. </p>
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Exercise: Calculate College Costs
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Complete a college savings calculation using the <a href="http://www.savingforcollege.com/college-savings-calculator/" target="_blank">World’s Simplest College Cost Calculator</a>.
<p>To find the actual cost of any four-year college or university in the U.S. to use in the calculation, use the <a href="http://money.cnn.com/pf/college/index.html" target="_blank">College Cost Finder</a>.
</tr>
</table>
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<h3>Retirement Planning</h3>
<p>Planning for retirement is a challenge for everyone. Again, the earlier you begin, the longer you will have to accumulate funds and capitalize on compound interest. A plan designed to meet specific retirement goals may be separate from or part of the investment building block.</p>
<p>Some people have given a great deal of thought to retirement, but others have not. Less than half (47%) of working Americans have made a retirement savings calculation, according to the 2008 Retirement Confidence Survey, and 72% have begun to save for retirement. Unfortunately, this means that more than a quarter of workers have not yet begun saving. Most experts believe that regular, systematic savings is a habit that is best established early and maintained, not only throughout the working years, but into the early stages of retirement since people are living much longer. Today, many people spend as many years in retirement as they spent in the workforce. </p>
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<p>Financial experts have long described sources of retirement income as the three-legged stool: Social Security, company pension, and personal savings. Now with the growing concern over the future of Social Security, the reduction in benefits offered by employers, and the low personal savings rate, many see the three legs of the retirement income stool becoming shaky. Many say that the stool may need a fourth leg—paid work after retirement.</p>
<p>The Social Security Administration automatically mails a Personal Earnings and Benefit Statement to all wage earners. Check yours for accuracy. It contains information that provides an excellent basis for retirement planning. Contact the Social Security Administration (Call 1-800-772-1213 or visit the Social Security Online Web Site www.socialsecurity.gov) to obtain a benefit request form. Many online sites provide information about retirement planning (See American Savings Education Council http://www.choosetosave.org/ballpark/). </p>
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Exercise: Estimate Retirement Savings
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Complete an online retirement savings calculation using the online calculator, <a target="_blank" href="http://www.extension.org/pages/Retirement_Estimator_for_Farm_Families">Retirement Estimator for Farm Families</a>.
</tr>
</table>
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4 - Wealth Distribution
<h3>Estate Planning</h3>
<p>If you successfully implement the strategies outlined in the financial management pyramid, you are much more likely to have assets left over at the end of your lifetime and will need a plan for how your accumulated wealth is to be distributed. A will is a necessity if you want to direct the distribution of possessions after death. Yet, almost 70% of the adults in the United States do not have wills. Many people think they do not need to prepare a will because they have so little, or it costs too much, or they will do it later when they have more time or get older. Dying without a will is called dying "intestate" and means that state regulations will determine the distribution of assets. By having a carefully written legal will, you can provide for your family and others in a manner consistent with your desires. </p>
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<p>In addition, a variety of other important legal documents can make provisions for crises other than your death including the following: </p>
<ul>
<li>General Durable Power of Attorney,</li>
<li>Health Care Power of Attorney, and </li>
<li>Living Will.</li>
</ul>
<p>These documents are best completed before a crisis occurs and can ease a difficult period for your family. These components of an estate plan are not directly linked to the financial management pyramid, but can protect assets and insure that your financial strategies and health care decisions are respected. You can learn more about advance directives for health care, including wills and durable powers of attorney for health care, in the learning lesson “Legally Secure Your Advance Directives: Communicate at http://www.extension.org/pages/Communicate_Your_Advance_Directives_for_Health_Care. </p>
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<p>Another recommended action to take with respect to estate planning is to regularly review and update the beneficiaries and contingent beneficiaries of your legal documents, life insurance policies, and retirement savings plans. For a worksheet to record all your beneficiary designations in one place, see http://njaes.rutgers.edu/money/pdfs/beneficiary-designations.pdf [PDF download]. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" title="Earl outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$01_earl$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Earl</h3>
<p>Select the Play icon to find out what Earl's been thinking about estate planning.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$01_earl$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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Exercise: Complete an Estate-Planning Checklist
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Complete the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U1Ex10_Estate_Planning_Checklist.doc" target="_blank">Estate Planning Checklist</a>. <br />
</td>
</tr>
</table>
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<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td align="center"><img src="$@FILEPHP@$$@SLASH@$image$@SLASH@$IFYFpyramidsmaller.png" alt="Financial management building blocks in a pyramid" /></td>
<td>
<h3>Summary</h3>
<p>All the building blocks of successful financial management, including investing, are interrelated. Strategies used in one part of the pyramid can directly impact others. If one building block, such as credit use, becomes too large, the entire pyramid can topple. This pyramid aids effective decision making and the successful achievement of financial goals because all aspects of your financial situation are considered simultaneously.</p>
</td>
</tr>
</table>
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<p>Congratulations! You've reached the end of the unit. Select continue to start Unit 2 or use the lesson menu on the left to skip to any part of Units 1-11. </p><br />
<hr />
<h3>About the Author</h3>
<p><strong>Nancy M. Porter, Ph.D.</strong>, is a Professor and Family Resource Management Specialist with the Clemson University Cooperative Extension Service http://www.clemson.edu/fyd/porter.htm. </p>
<p>Her primary areas of expertise are family financial management and consumer education. Prior to joining the faculty at Clemson, Dr. Porter taught at Delta State University in Mississippi and in the Towanda Area Public Schools in Pennsylvania. Dr. Porter completed her B.S. and M.S. in Home Economics Education at Mansfield University in Pennsylvania. Her Ph.D. in Family Resource Management was earned at Virginia Tech. </p>
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UNIT 2: INVESTING BASICS
<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$computer_women.png" alt="Woman working on computer" />
<p>In Unit 1, you learned about financial building blocks such as cash management. Now it’s time to examine basic investing principles. Wise investing requires knowledge of key financial concepts and an understanding of your personal investment profile and how these work together to impact investing decisions. </p>
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Learning Objectives
<p>This unit will:
</p>
<ul><li>Discuss the difference between saving and investing
</li><li>Illustrate the risk/return tradeoff
</li><li>Explain the importance of the time-value of money and asset allocation
</li><li>Challenge you to think about your personal risk tolerance
</li><li>Help you to recognize that your tax bracket, financial goals, and time horizon are key factors in defining an appropriate investment plan and asset mix for you and your family</li>
</ul>
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1 - Saving and Investing
<h3>The Difference Between Saving and Investing</h3>
<p>Even though the words "saving" and "investing" are often used interchangeably, there are differences between the two. Saving provides funds for emergencies and for making specific purchases in the relatively near future (usually three years or less). Safety of the principal and liquidity of the funds (ease of converting to cash) are important aspects of savings dollars. Because of these characteristics, savings dollars generally yield a low rate of return and do not maintain purchasing power. </p>
<p>Investing focuses on increasing net worth and achieving long-term financial goals. Investing involves risk (of loss of principal) and is to be considered only after you have adequate savings. </p>
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<table cellpadding="5" border="0"> <tbody>
<tr>
<td>
<h3>Savings vs. Investment Dollars</h3>
</td>
</tr> </tbody>
</table>
<table cellspacing="2" border="1" align="center"> <tbody>
<tr>
<th>Savings Dollars
</th>
<th>Investing Dollars
</th>
</tr>
<tr>
<td>
<ul>
<li>Safe </li>
<li>Easily accessible </li>
<li>Low return </li>
<li>Used for short-term goals </li>
</ul>
</td>
<td>
<ul>
<li>Involve risk </li>
<li>Volatile in short time periods </li>
<li>Offer potential appreciation </li>
<li>For mid- and long-term goals </li>
</ul>
</td>
</tr> </tbody>
</table>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$retirement_plancorrected.png" alt="Retirement plan" />
<h3>Your Investment Goals</h3>
<p>Goals are specific things (e.g., "buy a car") that people want to do with their money. As discussed in Unit 1, as people move through various life stages, their needs and financial goals change. Your selection of investments should relate closely to your financial goals; each goal will define the amount and liquidity of the money needed as well as the number of years available for the investment to grow.
</p>
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<h3>Your Risk Tolerance</h3>
<p>Risk tolerance is a person’s emotional and financial capacity to ride out the ups and downs of the investment market without panicking when the value of investments go down. Risk tolerances vary widely. Some are associated with personality factors, while others are based on changing needs dictated by your stage in the life cycle.</p>
<p>If you won’t sleep well at night when the principal value of your investment goes down, you should select saving and investment options with lower risk. On the other hand, it’s important to realize that investments which guarantee the safety of principal will not grow your money quickly and may not maintain purchasing power in times of inflation or over a long time span. In reality it’s necessary to take some risk just to maintain purchasing power. The question is: "What kind of risks are you willing to take?"
</p>
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<h3>Your Time Horizon</h3>
<p>As discussed earlier, time is a very important resource to investors. For example, young investors with a long time horizon may choose investments that exhibit wide price swings, knowing that time is available for fluctuations to average out. Families investing for a specific mid-life goal (e.g., funding a child’s education or purchasing a home) may choose a more moderate course which has opportunity for growth, but provides more safety for the principal. Individuals nearing retirement, and those with the need to depend on investment income to cover daily expenses, may wish to select investments that lock in gains and provide a guaranteed income stream.
</p>
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Exercise: Determine How to Save Money
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Complete the Savings Coat of Arms worksheet (<a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U2Ex1_Savings_Coat_Of_Arms.doc">DOC version</a> or <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U2Ex1_Savings_Coat_Of_Arms.pdf">PDF version</a>) to identify advantages of and obstacles to saving money, as well as effective savings strategies.
</td>
</tr>
</table>
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<table cellpadding="5" border="0"> <tbody>
<tr>
<td>
<h3>Investment Return</h3>
<p>Total return is the profit (or loss) on an investment. It is a combination of current income (cash received from interest, dividends, etc.) and capital gains or losses (the change in value of the investment between the time you bought and sold it). The published rate of return for a selected investment is usually expressed as a percentage of the current price on an annual basis. However, the real rate of return is the rate of return earned after inflation, which is further reduced by income taxes and transaction costs. </p>
</td>
</tr>
<tr>
<td>
<h3>Illustration of "Total Return" and "Rate of Return"</h3>
<table cellspacing="5" cellpadding="5" border="0" align="center"> <tbody>
<tr>
<th> <br />
</th>
<th> Current Income
</th>
<th>+ Capital Gain (or Loss)
</th>
<th>= Total Return
</th>
</tr>
<tr align="center">
<td><br />
</td>
<td> $2
</td>
<td> + $1
</td>
<td>= $3
</td>
</tr> </tbody>
</table><br />
<table cellspacing="5" cellpadding="5" border="0" align="center"> <tbody>
<tr>
<th> <br />
</th>
<th> Annual Return
</th>
<th> ÷ Current Price of Security
</th>
<th> = Rate of Return
</th>
</tr>
<tr align="center">
<td><br />
</td>
<td> $3
</td>
<td> ÷ $24 (per share)
</td>
<td>= .125 or 12.5%
</td>
</tr> </tbody>
</table>
</td>
</tr> </tbody>
</table>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$investment_portfoliocorrected.png" alt="Investment portfolio" />
<p>Historically, stocks have had the highest average annual investment return of all types of investments, especially over long time periods of 10 years or more. The average annual rates of return for major investment asset classes from 1925-2007, according to the Chicago investment research firm, Ibbotson Associates, were: 10.4% large company stocks, 12.5% small company stocks, 5.5% government bonds, 3.7% Treasury Bills, and 3.0% inflation.</p>
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2 - Risk
<p>All investments involve some risk because the future value of an investment is never certain. Risk, simply stated, is the possibility that the actual return on an investment will vary from the expected return or that the initial principal will decline in value. Risk implies the possibility of loss on your investment.</p>
<p>Factors which affect the risk level of an investment include:
<ul>
<li>Inflation,</li>
<li>Business failure,</li>
<li>Changes in the economy, and</li>
<li>Interest rate changes.</li>
</ul>
</p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$pyramidcorrected.png" alt="Financial pyramid" />
<h3>The Risk/Return Relationship</h3>
<p>Generally speaking, risk and rate of return are directly related. As the risk level of an investment increases, the potential return usually increases as well. The pyramid of investment risk (left) illustrates the risk and return associated with various types of investment options. As investors move up the pyramid, they incur a greater risk of loss of principal along with the potential for higher returns. </p>
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<img valign="top" align="right" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$pyramidcorrected.png" alt="Financial pyramid" />
<p>Notice that the top of the pyramid lists futures contracts as highest risk. This is true for speculators who are buying or selling futures contracts strictly on the basis of the market moving up or down in their favor. Farmers who are shifting risk to speculators actually reduce price risk because they are covered by the actual commodity underlying the future contract. This strategy is called hedging. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$anna.png" alt="Anna outdoors" title="Anna outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$02_anna$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Anna</h3>
<p>What's Anna's risk tolerance? Select the Play icon to find out.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$02_anna$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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Exercise: Assess Investment Risk Tolerance
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Complete the <a href="http://njaes.rutgers.edu/money/riskquiz/ "target="_blank">Investment Risk Tolerance Quiz</a>.
</td>
</tr>
</table>
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3 - Diversification
<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$asset_allocation.png" alt="Asset allocation pie chart" />
<p>You can do several things to offset the impact of some types of risk. Diversifying your investment portfolio by selecting a variety of securities is one frequently used strategy. The goal of proper diversification is to build adequate exposure to many different asset classes, with no one asset class dominating the portfolio. Think about it. If you put all of your money in one place, your return will depend solely on the performance of that one investment. </p>
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<p>Alternatively, if you invest in several assets, your return will depend on an average of your various investment returns. Here are three basic ways to diversify your investments:
<ul>
<li>By choosing securities from a variety of asset classes, e.g. a mix of stocks, bonds, cash, and real estate,</li>
<li>By choosing a variety of securities or funds within one asset class, e.g. stocks from large, medium, small, and international companies in different industries, and</li>
<li>By choosing a variety of maturity dates for fixed-income (bond) investments. </li>
</ul></p>
<p>By diversifying, you won’t lose as much as if you invested in just one security right before its market value goes down. However, if the market goes straight up from the time you started, you won’t make as much in a diversified portfolio either. However, historically, most people are more concerned about protection from dramatic losses.</p>
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Exercise: Diversify Portfolio
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Complete the worksheet <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U2Ex3_Portfolio_Diversification_Worksheet.xls" target="_blank">Portfolio Diversification</a>.
</td>
</tr>
</table>
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4 - Dollar-Cost Averaging
<p>Another technique to help soften the impact of fluctuations in the investment market is dollar-cost averaging. You invest a set amount of money on a regular basis over a long period of time — regardless of the price per share of the investment. In doing so, you purchase more shares when the price per share is down and fewer shares when the market is high. As a result, you will acquire most of the shares at a below-average cost per share. </p>
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<table cellpadding="10" cellspacing="10" border="0">
<tr><td><h3>Dollar Cost Averaging Illustration</h3></td></tr>
<tr><td>
<table align="center" border="1" cellspacing="0" cellpadding="5">
<tr>
<td> </td><td> <b>Regular Investment</b> </td><td> <b>Share Price</b> </td><td> <b>Shares Acquired</b>
</td></tr>
<tr>
<td><i>Month 1</i> </td><td> $100 </td><td> $10.00 </td><td> 10.0
</td></tr>
<tr>
<td><i>Month 2</i> </td><td> $100 </td><td> $ 7.50 </td><td>13.3
</td></tr>
<tr>
<td><i>Month 3</i> </td><td> $100 </td><td> $ 5.00 </td><td> 20.0
</td></tr>
<tr>
<td><i>Month 4</i> </td><td> $100 </td><td> $ 7.50 </td><td> 13.3
</td></tr>
<tr>
<td><i>Month 5</i> </td><td> $100 </td><td> $10.00 </td><td> 10.0
</td></tr>
<tr>
<td><b>Total</b> </td><td> <b>$500</b> </td><td> </td><td> <b>66.6</b>
</td></tr>
</table>
</td>
</tr>
<tr><td>
<p><b>Your Average Share Cost: $500 ÷ 66.6 = $7.50</b>
</p>
<p>As most investors know, market timing . . . always buying low and selling high . . . is very hard to accomplish. Dollar-cost averaging takes much of the emotion and guesswork out of investing. You’ll buy more shares with your fixed deposit when market prices are down and fewer shares when prices rise. For most people, dollar-cost averaging is not so much a way of making extra money as a way to limit risk.</p>
</td></tr>
</table>
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5 - The Time Value of Money
<p>Now that you understand the concepts of risk and return, let’s turn to an element that is at the heart and soul of building wealth and financial security... time.</p>
<p>Here is how time can work for you:
<ol>
<li>The longer you invest, the more money you will accumulate.</li>
<li>The more money you invest, the more it will accumulate because of the magic of compound interest. </li>
</ol>
</p>
<p>With compounding, the interest earned on your investments is reinvested or left on deposit. At the next calculation, interest is earned on the original principal PLUS the reinvested interest. Earning interest on accumulated interest over time generates more and more money. Compounding also applies to dividends and capital gains on investments when they are reinvested. </p>
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Exercise: Calculate Compound Interest
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Calculate the future value of savings for one or more financial goals using this <a href="http://www.moneychimp.com/calculator/compound_interest_calculator.htm" target="_blank">Compound Interest Calculator</a>.
</td>
</tr>
</table>
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6 - Asset Allocation
<p>In the final analysis, your overall investment return will be closely associated with the asset categories and allocations that you select. An investor’s group of investments, frequently called an investment portfolio, can be divided in numerous ways among stocks, bonds, and cash management options. You might choose a 20/40/40 portfolio: 20% stocks, 40% bonds, and 40% cash options. Or a 75/20/5 ratio: 75% stocks, 20% bonds, and 5% cash.</p>
<!-- <p>Several factors will impact the exact rate of return that you receive on your investment portfolio. Studies show that the most important one, asset allocation, will account for about 90% of your return. The selection of individual securities and market timing will account for the remaining 10% or so. The critical question, of course, is: "What is the ideal asset allocation for you?" There are several factors to consider as you make this decision.
</p>
<p><strong>Your ideal asset allocation</strong> will be influenced by your:
<ul>
<li>Your investment goals</li>
<li>Your risk tolerance</li>
<li>Your time horizon</li>
<li>Your tax situation</li>
<li>Your time available and your skill in managing your portfolio</li>
</ul> -->
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<p>Generally, the younger you are, the more stocks and stock funds you should own to allow your money to grow. As you get older, you may want to adjust to a more conservative asset allocation that is weighted more heavily toward fixed-income investments. </p>
<p>Several factors will impact the exact rate of return that you receive on your investment portfolio. Studies show that the most important one, asset allocation, will account for about 90% of your return. The selection of individual securities and market timing will account for the remaining 10% or so. The critical question, of course, is: "What is the ideal asset allocation for you?" There are several factors to consider as you make this decision.
</p>
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<p>Your ideal asset allocation will be influenced by:
<ul>
<li>Your investment goals,</li>
<li>Your risk tolerance,</li>
<li>Your time horizon,</li>
<li>Your tax situation,</li>
<li>Your time available and your skill in managing your portfolio, and</li>
<li>Personal and social values.</li>
</ul>
</p>
<p>With respect to the last bullet, investors can choose companies not only based on potential financial performance, but also on the company’s environmental, social, and governance practices. Alternatively called mission investing, ethical investing, sustainable investing, or green investing, socially responsible investing seeks to deliver long-term wealth to investors in the form of financial returns and a cleaner, safer, and more principled world. Socially responsible investing officially has existed for centuries, beginning with religious groups that invested selectively, avoiding so-called “sin” investments such as alcohol and tobacco. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" title="Lee Ellen at table with laptop and paper" alt="Lee Ellen at table with laptop and paper" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$02_lee_ellen$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Lee Ellen</h3>
<p>Lee Ellen wants to make sure her investments are diversified. Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$02_lee_ellen$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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<h3>Your Tax Situation</h3>
<p>The return on any investment is influenced by your federal, state, and local tax situation. Investment earnings may be:
<ul>
<li>Taxable, with taxes paid yearly on interest, dividends, and annual capital gain distributions from investments.</li>
<li>Tax-Deferred, so that taxes on earnings are deferred until withdrawal. Tax-deferred earnings include contributions and returns associated with IRAs, 401(k)s, and other retirement saving plans (see Unit 7).</li>
<li>Tax-Exempt, so that earnings are wholly or partly free from taxes. Roth IRAs and most municipal bonds are common examples. (Tax-exempt status may be different at the state and federal levels.)</li>
</ul>
</p>
<p>Before selecting an investment, learn about its tax consequences for you. Remember, what counts is not what you make on an investment, but what you get to keep both now and in the long run.
</p>
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<img valign="top" align="right" hspace="10" vspace="10" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$investment_portfoliocorrected.png" alt="Investment portfolio" />
<h3>Time and Skill to Manage Your Portfolio</h3>
<p>Some investments require little or no time commitment or special knowledge. Others, such as rental property or a portfolio of high-risk individual stocks, may require constant monitoring and management. How much time are you willing and able to spend?</p>
<p>In a nutshell, the asset allocation which you select must be customized to your situation, needs, and temperament.
</p>
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Exercise: Determine Your Investment Preferences
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Spend a few minutes completing What are Your Investment Preferences? (<a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U2Ex5_Investment_Preferences.doc" target="_blank" alt="Download .doc version of Investment Preferences worksheet">DOC version</a> or <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U2Ex5_Investment_Preferences.pdf" target="_blank" alt="Download .pdf version of Investment Preferences worksheet">PDF version</a>). This worksheet will help you further clarify and summarize your investing preferences.</p>
</td>
</tr>
</table>
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Exercise: Calculate Asset Allocation
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p><a href="http://www.ipers.org/calcs/AssetAllocator.html" target="_blank">Calculate a suggested asset allocation model</a> based on personal factors such as age, current assets, annual retirement savings, risk tolerance level, and marginal tax rate.
<p>Note that the calculator does not include real estate as an asset allocation class. For farm families, real estate is a major investment component that can’t be ignored. Therefore, consider the calculator results as suggested assets to balance out real estate that is already owned. </p>
</td>
</tr> </table>
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<h3>Summary</h3>
<p>In this unit we have discussed basic financial concepts that you need to understand before becoming involved in an investing program:
<ul><li>The difference between saving and investing,</li>
<li>The predictable trade-off between risk and return,</li>
<li>The importance of time to an investment program, and</li>
<li>Aspects of your personal situation and their possible impact on your asset allocation decisions.</li></ul>
<p>The exercises for this unit suggest important steps for you to take to establish a solid foundation for future investing activity. Once completed, you will be ready to begin developing a personal investment plan. A necessary part of the plan is locating dollars to invest. The next unit will help you meet that challenge.</p>
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<p>Congratulations! You've reached the end of the unit. Select continue to start Unit 3 or use the lesson menu on the left to skip to any part of Units 1-11.</p><br />
<hr />
<h3>About the Author</h3>
<p><strong>Joan Witter</strong>, worked on the Cooperative Extension staff at Michigan State University for over 20 years. She received both B.S. and M.A. degrees from Michigan State University and is currently Program Leader Emeritus, Extension Family Resource Management Programs. </p>
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UNIT 3: FINDING MONEY TO INVEST
<img valign="top" align="left" hspace="10" vspace="20" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$calculator_papers.png" alt="Calculator and papers" />
<p>In Units 1 and 2, you learned about building blocks for financial success and basic investment principles. Next we will explore ways to "find" money for investing. Many Americans don't invest because they have little or no savings that can be transferred to investment products. Studies estimate that as many as 70% of Americans live from "paycheck to paycheck," courting financial disaster if their income is suddenly reduced or stopped.</p>
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Lesson Objectives
<p>This unit will help you:
<p><ul><li>Develop a plan to insure that you save the money needed to fund your goals</li>
<li>Identify two strategies you could implement to help you accumulate funds to invest</li>
<li>Identify a money-consuming habit that you would be willing to change</li>
<li>Calculate the amount of money you can realize in one year by changing this habit</li>
<li>Change your behavior, save the appropriate amount of money, and invest it</li>
<li>Track your investment and watch it grow</li></ul>
<!-- <p><h3>Navigating the Lesson</h3><p>Based on your experience with the above, review the content and complete the exercises in this unit as needed.-->
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<p>Generally, Americans are not noted for their savings habits. The individual savings rate in the United States actually fell to a negative number (-0.5) in 2005, the first time since the Great Depression of the 1930s. This means that Americans were spending more than they earned. Americans' savings rates remained at historically low levels throughout the early 2000s until the December 2007 recession took hold and savings rates rose amid investment losses and fears of unemployment.</p>
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1 - Saving Money to Invest
<h3>Are You Satisfied with the Amount You Save?</h3>
<p>This unit is designed to help you "find" money to fund your investment plans. We will suggest tools for success, but you have to supply the desire, self-discipline, wise decisions, and good planning to be successful.</p>
<p>Review your financial status by answering these questions:
<ul>
<li>Do you have 3 to 6 months' income in an emergency fund?</li>
<li>Do you save regularly?</li>
<li>Do you know how much you need to save to achieve your future goals?</li>
<li>Do you save to purchase big-ticket items instead of buying on credit?</li>
<li>When you use credit, do you save to make as large a down payment as possible?</li>
<li>Do you save at least 10% of your personal disposable income?</li>
<li>Do you know how much you need to save for retirement?</li>
</ul>
</p>
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<p>The more times you answered "yes" to the questions on the previous screen, the more likely you are a prudent saver. A "no" can help you identify areas where you could do better. Once you have a sound savings program in place, you are ready to invest surplus funds. Unfortunately, many people feel their savings are not sufficient, and they see no way to meet their immediate needs and have extra funds to invest.</p>
<p>Through this unit of study, you will explore strategies that will help you:
<ul>
<li>Identify ways to increase your savings,</li>
<li>Fund your savings program, and</li>
<li>Accumulate funds to begin your investment program.</li>
</ul>
</p>
<p>It doesn’t take a lot of money to start investing. Unit 8, Investing With Small Dollar Amounts, provides examples of investments that require as little as $25 for a U.S. savings bond or $250, $500, or $1,000 to open a mutual fund account, depending on account requirements.
</p>
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Exercise: Calculate Percentage of Income Saved
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Calculate the amount of money you saved on a weekly, monthly, and annual basis using paycheck stubs, tax records, and financial account statements for background information. Then compare this amount with your annual gross income to determine the percentage of income saved (e.g., $5,000 ÷ $50,000 = a 10% savings rate).
<p>In years where net farm income is negative, savings can be subsidized from positive net farm income years. Over a period of years, the 10% savings goal may be achieved through a combination of equity and cash. Grandma called it "saving for a rainy day" when cash was available. </p>
</td>
</tr> </table>
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2 - Strategies for Saving Money to Invest
<h3>Establish a Regular Savings Program</h3>
<p>The first strategy is to set up a regular savings program if you do not already have one. Saving means putting money aside from present earnings to provide for a known or unexpected need in the future. It is an integral part of family and personal financial planning. Having a specific goal provides motivation to save. You probably will not get very far saving for the sake of saving.
</p>
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<h3>Needs versus Wants</h3>
<p>Individuals and families save to satisfy their needs and wants. Needs are items that are necessary for survival such as food, shelter, clothing, and medical care. Wants are all the other things we think we need, but could do without. If we spend our money to satisfy wants before we meet our needs, we will probably experience financial difficulties.</p>
<p>Generally speaking, five major financial needs require planning for in the near and distant future:
<ol>
<li>Emergencies from the normal course of living such as car repairs or replacing a major appliance,</li>
<li>Loss of income as a result of death, divorce, disability, or unemployment,</li>
<li>Other family goals such as education for your children or a special vacation,</li>
<li>Retirement,</li>
<li>Upcoming debt obligations and accounts payable relating to the farm.</li>
</ol>
</p>
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<p>Once goals have been set, a major thought in most people’s minds is "How am I going to reach this goal? There is no way I can save that much money!" However, most people find that, if they really put their minds to it and they have set realistic goals, they can save the necessary money.</p>
<p>As we noted earlier, a regular savings program is critical to a family’s immediate well-being as well as their long-term security. To adequately fund a savings program and begin an investment program, you must identify a specific amount to save from each paycheck and honor that commitment. Regular savings in small amounts is generally more effective than setting aside larger sums at sporadic intervals. As your salary increases, increase the amount you commit to savings. Periodically farm families experience a windfall profit. Effectively managing money in these times of flush cash is a viable strategy to fund investment goals. One just needs to be prepared.
</p>
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<h3>Pay Yourself First</h3>
<p>Another important concept for your savings program is to "pay yourself first." Make your "savings bill" a part of your spending plan, just like rent or mortgage payments, utility bills, clothing, car payments and upkeep, child care, or any other bill that you normally incur. When you pay your other bills, pay your savings bill by depositing the money into a savings account or other financial instrument.</p>
<p>One painless way to accomplish this is payroll deduction if it is available. Your employer deposits your savings directly from your paycheck into a credit union, bank account, or a money market fund for a higher interest rate. If you never see the money, you won’t miss it or be tempted to use it for something else before it reaches your savings account. Note how quickly small amounts of money can grow with time by reviewing <a href="$@FILEPHP@$$@SLASH@$html_pages$@SLASH@$10_a_month.html" alt="Open How $10.00 a Month Will Grow in new window" target="_blank">How $10.00 a Month Will Grow</a>.
</p>
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<h3>Save Bonus Money</h3>
<p>Saving "bonus" money is also an easy strategy. Bonus money is money earned or received that was not expected, such as tax refunds, gift money, overtime pay, rebates, and refunds. Saving this money over time will boost your saving dollars and provide a larger balance on which to earn interest for the future. (Note: if you consistently receive a large tax refund, you may want to adjust your tax withholding and/or estimated tax payments. A tax refund means that the government has had your money interest-free during the year; you were losing the use of the money to fund your financial goals.)
</p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$anna.png" alt="Anna outdoors" title="Anna outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$03_anna$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Anna</h3>
<p>Anna's got some plans for her bonus money. Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$03_anna$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$cut_coupons.png" alt="Hands cutting coupons" />
<h3>Save Coupon Money</h3>
<p>Another strategy to boost your savings is to save coupon money. Many people use coupons to reduce their grocery and personal care bills, but few think of actually saving the money they saved! </p>
<p>To make this strategy a reality, put aside the amount you "saved" by using coupons at the grocery store or drugstore. The amount saved is probably printed on each receipt. Put the "savings" (the money you did not spend) in a special "coupon saving jar." Every month or so add this cash to your savings account. Saving just $2 a week for 52 weeks gives you a savings total of $104 which could be your "seed" money to open an investment account. However, remember that you aren’t saving if you buy something that you don’t need or that costs more than a comparable product even with the coupon.
</p>
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<h3>Continue Installment Loan Repayments</h3>
<p>Most of us have one or more installment loans that we are repaying. Once you pay off an installment loan (assuming other loans are not overdue), continue to make "payments" to your savings account. For example, when you pay off your car loan, continue writing a check for the same amount, but make the check payable to your savings account. You were able to get along without this money for the duration of the car loan, so continue to live at the same level and save the "car payment." This is a good way to save for the down payment on your next car when the old car needs to be replaced. It also adds a substantial amount of money to your savings account on a regular basis. This same strategy can be used when other household expenses end (e.g., childcare).
</p>
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<p><b>Collect Loose Change</b></p>
<p>Another painless strategy is to collect loose change. At the end of each day, empty out your pockets and wallet and put the change in a special container. Every other week or once a month, deposit the change in your savings account. Don’t cheat on yourself by "stealing" change that has been collected. Take it all to the bank. Some people even go so far as to keep all their change. They only pay for cash purchases with bills and save all their coins. Develop a plan that works for you and stick to it.</p>
<p><b>Save Lunch Money</b></p>
<p>Saving lunch money is another way you and your family can save money. Get up 10 minutes earlier and make your own lunch. Save the money you would have spent on lunch. If all family members do this, the family can realize a nice sum that they can add to their savings. Working together to reach a family goal, such as a new TV or a summer vacation, can be an excellent family activity.
</p>
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<h3>Shop for Sale Prices</h3>
<p>Another strategy that can work for all family members on a wide variety of purchases is to save the money you "save" when you buy items on sale. When you buy an item on sale, save the difference between the sale price you paid and the "full" price you would have paid if the item had not been on sale. Put this money in a safe place and on a regular basis deposit it into your savings or investment account. Using this strategy can add large amounts to your savings program. The key is that you actually save this difference and apply it to your savings or investment program.
</p>
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<h3>Plan a "Nothing" Week</h3>
<p>Once in a while, have a "Nothing" Week, an entire week when you and your family agree not to spend any more money than is absolutely necessary. You would not go to the movies, out to eat, bowling, etc. Plan to do special activities, but save the money instead of spending it. Add this money to your savings program. </p>
<p>Another similar strategy is to use a crash budget approach. A crash budget works like a crash diet—you try to cut out all unnecessary spending and save as much as possible in a given period of time, say two weeks or a month. Add all the savings to your savings or investment program. If the "Crash Budget" sounds unbearable, consider a "Cut-Back" Week. During this week, do what the family would normally do, but think of ways to make it less expensive and save the difference. For example, rent a movie instead of going to the theater, brown bag lunch instead of eating out and drink mix-your-own lemonade instead of soft drinks, etc.
</p>
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<h3>Avoid Paying Credit Charges</h3>
<p>A critical savings strategy to consider is avoiding the use of credit. Unless credit purchases are paid off in full each month, interest consumes dollars that could be spent funding your saving and investing goals. Suppose that you have a balance of $1,000 on a credit card that carries a 19.8% interest rate and a full grace period. If you make no more charges against the account and only pay the minimum payment of 3% per month, you will pay approximately $165 in interest over one year. If you continue making only minimum monthly payments for the rest of the $1,000 with no additional charges, you will take eight years and three months to pay it off, and you will have paid $843 in interest.</p>
<p>Carefully evaluate all spending decisions, especially those being paid with credit. Make every spending decision on the basis of how it will satisfy your goals. Eliminate spending for items that have little or no value relative to your goals. Also be aware of your needs and wants as you make purchases.
</p>
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Exercise: Find Money to Save
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Complete the worksheet <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U3Ex2_Finding_Money_to_Save.xls" target="_blank">Finding Money to Save</a>.
</td>
</tr> </table>
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3 - Steps to Breaking Habits
<p>Some of the items we buy are needs, items that are necessary for survival. Other purchases are wants, all the things we think we need, but could do without. Buying items to satisfy our wants can become a habit; before we know it, we are spending lots of money on these items. Find money to improve your financial situation by identifying some of your money habits. Then break those habits or at least reduce the number of times you enjoy the habit each day, week, or month. Review the table on the next page for specific examples.</p>
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<table cellspacing="10" cellpadding="10" border="0">
<tr><td>
<p>
<table bgcolor="#ffffff" border="1" cellpadding="3" cellspacing="0" align="center">
<tr>
<td bgcolor="#c0c0c0" colspan="4" width="550" ><strong>Looking For Money</strong></td>
</tr>
<tr>
<td width="121"><strong>Cable/Satellite TV</strong></td>
<td width="206"> </td>
<td width="120"><strong>$40/month= </strong></td>
<td width="73" bgcolor="#C0C0C0"><strong>$480/year</strong></td>
</tr>
<tr>
<td width="121"><strong>Video/DVD rentals </strong></td>
<td width="206"><strong>$9/weekend = </strong></td>
<td width="120"><strong>$36/month= </strong></td>
<td width="73" bgcolor="#C0C0C0"><strong>$432/year</strong></td>
</tr>
<tr>
<td width="121"><strong>Movie tickets </strong></td>
<td width="206"><strong>2@ $7/visit =</strong></td>
<td width="120"><strong>$14/month= </strong></td>
<td width="73" bgcolor="#C0C0C0"><strong>$168/year</strong></td>
</tr>
<tr>
<td width="121"><strong>Treats at movie </strong></td>
<td width="206"><strong>2@ $5/visit =</strong></td>
<td width="120"><strong>$10/month= </strong></td>
<td width="73" bgcolor="#C0C0C0"><strong>$120/year</strong></td>
</tr>
<tr>
<td width="121"><strong>Dry cleaning </strong></td>
<td width="206"><strong>4 garments @$7 ea/mo= </strong></td>
<td valign="middle" width="120"><strong>$28/month= </strong></td>
<td width="73" bgcolor="#C0C0C0"><strong>$336/year</strong></td>
</tr>
<tr>
<td width="121"><strong>Car wash </strong></td>
<td width="206"><strong>$5/week =</strong></td>
<td width="120"><strong>$20/month= </strong></td>
<td width="73" bgcolor="#C0C0C0"><strong>$240/year</strong></td>
</tr>
</table>
</p>
</td>
</tr>
</table>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td>
<p>Going further, if your family drinks iced tea instead of a 2-liter soda for the evening meal, you can probably save at least $5 a week or $260 a year ($5 x 52 = $260). By drinking tap water instead of other beverages, you can save $7 a week or $364 a year ($7 x 52 = $364).</p>
<p>Changing or adjusting a few habits can result in big savings for you and your family. To see how easy this can be, use the following steps to help you identify and change habits. </p>
</td>
<td><img src="$@FILEPHP@$$@SLASH@$image$@SLASH@$soda_cans.png" />
</td>
</tr> </tbody>
</table>
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<h3>Steps to Breaking Money Habits</h3>
<p>
<ol>
<li>Identify the habit, determine frequency, and calculate total cost,</li>
<li>Make a decision to change,</li>
<li>Act immediately,</li>
<li>Share your plan,</li>
<li>Stick with your plan to change, and</li>
<li>Celebrate your success.</li>
</ol>
</p>
<p>By following these six easy steps, you can gain better control of your financial resources and increase the money available for investing. Put this six-step plan to work for you and your family.</p>
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<h3>Step 1. Identify the habit, determine frequency, and calculate total cost</h3>
<p>First, calculate your total monthly and yearly costs. Are you happy with where your money is going? If you aren't, now is the time to learn about ways to break habits and begin a savings program for you and your family.</p>
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Exercise: So Where’s the Money?
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Using the worksheet, <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U3Ex3_So_Where_Is_Money.xls" target="_blank" alt="download worksheet">So Where’s the Money?</a>, think of some habits you might be able to adjust. Select from the products or services listed or add your own choices to the list. Then determine how often you purchase the product or service. Next, calculate the total cost of enjoying the product or service for one year. Armed with this information, you are ready to advance to Step 2 in your quest to break habits and collect funds for investing. </p>
</td>
</tr> </tbody>
</table>
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<h3>Step 2. Make a decision to change</h3>
<p>The second step to breaking habits involves looking for alternatives and choosing a different way of spending your money. This action step demands that you take control of the situation. One way to do this is to review your money habits and where you spend money, then identify how you can make changes. For example, have you ever stopped to consider how much you and other family members are spending for hair care and premium television channels? If you spend $80.00 each month for hair care, that’s $960.00 per year. Add a premium channel bill of $25.00 per month or $300.00 per year. That is a lot of money.</p>
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<p>What can you do? Let's look at the example of hair care. It is important for you and other family members to look good and feel good about yourselves. You can take control and make changes that will help you capture some of the money going to personal care expenses and redirect its use toward other family goals and still be well-groomed. "How can I do that?" you ask. Learn how to do these tasks yourself, or barter with a friend or neighbor who has these skills. You do something for them that they can’t do, and they do your hair. Every once in a while, treat yourself or other family members to a special makeover. Otherwise, save the money you would be spending on hair care, and put this money toward your family goals.</p>
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<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td>
<p>Once you get into the swing of breaking habits, you and your family can come up with ideas on how to change and adjust spending.</p>
<p>Ask yourself:
<ul>
<li>Am I getting the best buys?</li>
<li>Am I spending more than I need to?</li>
<li>How could I change my spending?</li>
</p>
</td>
<td>
<img src="$@FILEPHP@$$@SLASH@$image$@SLASH@$family_grocery_shopping.png" alt="Family grocery shopping" />
</td>
</tr>
</table>
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<p>Be specific and honest as you review expenditures. Come up with creative ways to save money, and share these ideas with others. Here is an example from the clothing area to get you started. </p>
<ul>
<li>First, do inventories of each person’s clothing: evaluate items—which are still useable, need replacing, or need to be added?</li>
<li>Once you know what needs to be purchased, check out sales at different stores and look for the best buys.</li>
<li>Avoid buying designer clothing, as it is usually very expensive. Ask yourself and family members if it is worth the extra cost. Consider what else you could buy if you bought items that cost less and had money left.</li>
<li>Check out second-hand outlets, flea markets, thrift stores, and manufacturers’ outlet stores.</li>
</ul>
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<ul>
<li>Be a knowledgeable shopper; don’t think that the outlet stores are always cheaper than other stores.</li>
<li>Know the prices of what you plan to buy and comparison shop for the best deal.</li>
<li>Make simple repairs.</li>
<li>Swap clothing with family and friends.</li>
<li>Develop a positive attitude about recycled clothing and share that attitude with your children. Well-maintained clothing from relatives and friends can greatly enhance a wardrobe.</li>
<li>When shopping for clothes, read all care labels very carefully. Only buy washable items. Dry cleaning can become quite expensive over the life of a garment.</li>
</ul>
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<p>By adopting these strategies, you will see your clothing budget shrink. Add the money you no longer spend on clothing to your investment plan. With these budget reduction ideas for clothing in mind, brainstorm ways to save money in other budget categories with family, friends, neighbors, and co-workers. Develop money saving lists for:
<ul>
<li>Using utilities,</li>
<li>Buying home furnishings,</li>
<li>Purchasing health and beauty aids,</li>
<li>Shopping in the grocery store,</li>
<li>Buying a car (new and/or used),</li>
<li>Selecting telephone and cable/satellite television features,</li>
<li>Buying toys and other gift items,</li>
<li>Selecting insurance coverage, and</li>
<li>Financing large ticket items and other purchases.</li>
</ul>
</p>
<p>For more information on saving money, access a copy of 66 Ways to Save Money from the Internet at <a href="http://www.pueblo.gsa.gov/cic_text/money/66ways/index.html" target="_blank" >http://www.pueblo.gsa.gov</a>.
</p>
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<p>Some habits are very hard to break even when they are dangerous to our health and physical well-being as well as our financial well-being. Examples that quickly come to mind are smoking, overeating, drinking alcohol, and gambling. These activities can be life threatening and/or result in financial ruin. If you smoke a pack of cigarettes a day, what is the cost for a year? A pack-a-day habit adds up fast:</p>
<p>
<div align="center">$6.00/pack/day = $42.00/week = A whopping $2,184.00/year.</div>
</p>
<p>Remember, if you believe in yourself, you can kick any habit. Once you get into the swing of breaking habits, you and your family can come up with numerous ideas on how to change and adjust spending. Perhaps together the family could turn the task of saving into a friendly competition for the "Saver of the Year Award." The winner would be the person who saved the most dollars or the largest percentage of their income in a given period of time. By making the decision to change, you are ready to advance to Step 3 in breaking habits and finding money to invest.
</p>
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<h3>Step 3. Act Immediately</h3>
<p>Now that you have all these great ideas to keep more of your money, how will you keep yourself motivated? Writing down your new desired behavior is one strategy. By recording the change, you are committing yourself to a new behavior. It is necessary to start your new behavior immediately. For best results, begin within 24 hours after making the decision to change or adjust spending. The sooner you begin a new behavior, the sooner the new behavior will become a habit. Step 4 will further assist you in adopting new behaviors. </p>
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<h3>Step 4. Share your plan
</h3>
<p>To further establish a new behavior, share your plan with others. Tell family, friends, and co-workers about your plan. By giving others the opportunity to support you, you boost your determination to succeed. If your behavior change involves the entire family, all family members must work together for the family to succeed. Refer back to the worksheet, <a href="$@FILEPHP@$$@SLASH@$worksheets_raw$@SLASH@$where_money.doc" target="_blank">So Where’s The Money?</a>. Go over the chart with the entire family. Together, decide ways the family can break habits and develop a savings plan. Now is also a good time to make a family "piggy bank." The "bank" can be an empty jar or a small box. Once the family decides on their family financial goal, they can put a picture identifying the goal on the "bank."</p>
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<p>Examples of goals include paying off a bill, buying something for the house or farm, visiting family members in another state, or accumulating money for school shoes. The "bank" needs to be kept where all can see it and all can help by adding money. After accumulating a sum of money, the family might want to open a savings account at a local bank or credit union. Once this account has grown to cover emergencies, additional savings may then be invested so the family will realize a larger return on their money.</p>
<p>Even with the best of intentions, sometimes staying focused on your savings plan is hard. The next step of the action plan will help you move forward.</p>
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<h3>Step 5. Stick with your plan to change</h3>
<p>Step 5 is a critical step toward breaking habits and increasing family savings. You and family members must always look for new ways to reduce spending and increase savings. It is important to reinforce the fact that you can change your attitudes and break habits. Stay focused on your goal. It takes about 30 days for a new behavior to become a habit. The next two pages have some specific activities for you and your family that will help you gain control of your finances, but still have fun as a family. By engaging in activities such as these, we are changing our attitudes and choosing activities that are more "money friendly." Changing attitudes and lifelong habits will serve you well immediately and over a lifetime and set an example for your children by instilling the value of saving.</p>
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<ul>
<li>Plan a family outing. Choose activities that are free or inexpensive, such as attending a free concert in the park, visiting a museum, borrowing videos from the library, or attending story hour at the library.</li>
<li>Plan a family night. Have a special treat, ask family members to share a talent, remind family members how much you appreciate everyone working together to cut back spending. Together, count the money that the family has saved, talk about the goal toward which the family is saving, and how soon you think you will reach the goal.</li>
<li>Have a "make your own pizza" night. Instead of going out for pizza, put the difference of the cost of food prepared at home and the cost of eating out in the family "bank."</li>
<li>Pack lunches instead of eating out.</li>
</ul>
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<ul><li>Look for food specials at fast food restaurants. Bring home the food as a surprise instead of taking the kids out. Not only is this a money saver but a time saver and stress reducer (no arguments over where to go and what to eat).</li>
<li>Video/DVD rental might be less costly than going to the movies. Swapping weeks to rent movies with neighbors might be less costly than going each weekend yourself. Borrow videos/DVDs from the public library.</li>
</ul>
<p>Yes, you can do it—you can change your attitude. You can break habits and save for things that are really important to you and your family. You just have to stick with your plan. If you are successful, you will reach Step 6 of our action plan.</p>
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<img valign="top" align="right" hspace="10" vspace="10" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$family_picnic.png" alt="Family picnic" />
<h3>Step 6. Celebrate your success</h3>
<p>The last step to breaking habits is to celebrate your success. Once you have reached your initial goals, let others know of your success. Enjoy the fruits of your savings. Then continue with your new behaviors that are now habits. You have the tools necessary to be successful. Remember to trim all unnecessary expenses and keep your needs and wants in perspective. Watch the pennies you save grow into dollars which can be used to fund your saving and investment programs.</p>
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Exercise: Identify a Money Habit to Break
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Identify a money habit to break by following the six-step process described on the previous pages. Write down the action(s) to be taken at each step and make a change in spending.
</td>
</tr> </table>
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4 - Comparison Shopping
<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$family_shop_kids_cart.png" alt="Family shopping" />
<p>Comparison shopping is the customer’s best, but least used, technique when spending regardless of the type of expenditure. Comparing prices and products can save as much as 50% off a price you might have paid without making the comparison. Comparison shopping makes good sense. It is important to remember that an over-spender isn’t just someone who spends more than he earns. An over-spender is also anyone who pays too much for things, especially when items or services purchased are conveniently available for less.</p>
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<p>Internet shoppers can find comparison shopping resources at "shopping bot" (short for robot) Web sites such as <a href="http://www.mysimon.com" target="_blank">http://www.mysimon.com</a> and <a href="http://www.bestbuys.com" target="_blank">http://www.bestbuys.com</a>. The benefits of comparison shopping are more than the money saved. Comparison shopping puts you in control of your finances. It helps you learn more about the products and services you are interested in buying. As a more informed consumer, you are able to make better spending decisions. Additionally, each success will reinforce your resolve to comparison shop again. By making wise consumer decisions and getting a good value for less, shoppers are able to save and/or invest the money saved.</p>
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Exercise: Comparison Shop
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Compare three similar products or services for sale using the worksheet <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U3Ex5_Rule_of_Three.doc" target="_blank">Rule of Three</a>, which lists criteria for comparison shopping.
</td>
</tr> </table>
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5 - Fund Investment Program
<h3>Untapped Strategies: Potential Money Sources to Fund Your Investment Program</h3>
<p>Do you know that sometimes you can collect dollars instead of pennies by becoming a more knowledgeable consumer? By using the strategies that follow, you may be able to add large sums of money to your family’s savings and investment program. Throughout the country, billions of dollars remain in accounts that have been abandoned or forgotten. These accounts include checking and saving accounts, pension benefits, and insurance benefits.</p>
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<p>How could anyone possibly forget about something of value? Well, maybe you neglected to retrieve a security deposit after moving out of an apartment. Perhaps dividends on a stock or mutual fund have been going to the wrong address. Maybe you switched banks and failed to close out all your old accounts. Or you changed jobs frequently and previous employers don’t know where to send pension benefits. Perhaps you are entitled to benefits of a life insurance policy or cash left by a relative who has died. In any event, you might be entitled to unclaimed property held by your state or the Pension Benefit Guaranty Corporation. Or you might be the beneficiary of a long-lost insurance policy. Fortunately, receiving your just rewards is not extremely difficult if you know how to proceed. </p>
<p>To locate missing bank accounts and other unclaimed cash, contact your state’s unclaimed property office or visit the Web site <a href="http://www.missingmoney.com" target="_blank">http://www.missingmoney.com</a>. In most states, owners can recover their cash whenever they learn about it, no matter how long it has been in the state fund. Some states even pay interest on money left in interest-bearing accounts. Instead of waiting for a state to find you, which is unlikely, you can contact the state’s unclaimed property office. </p>
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<p>When you write or call about abandoned property, give your name (maiden or former names, if necessary), Social Security number, current address, and all previous addresses while you lived in the state. If you are applying for property that was held in someone else’s name, provide his or her Social Security number and former addresses. States normally take 2 to 3 weeks to write back saying whether there is property waiting for you. If you are due a windfall, they will send you an abandoned-property claim form to complete.</p>
<p> Return the completed form with proof that the cash belongs to you. If it’s in your name, you will need to supply only a current ID, such as a copy of your driver’s license, and any document that links you to the money (e.g., a pay stub, savings passbook, or utility bill). For property that belonged to you when you lived at an earlier address, you must provide proof that you lived there. A copy of a tax return will do. Expect to get your check in about two months.</p>
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<p>From time to time, you may see advertisements of asset finders, people who offer to find lost property for you. Beware of such ads. If you decide to hire such a firm, pay no more than 10% of the assets recovered and check out the firm with the Better Business Bureau. According to one state property fund director: <blockquote>If you ever get a card or letter from a company offering to find your money, take that as a tip that the firm knows you have money waiting. So call or write to the state fund yourself. Then you’ll get all the money you’re due.</blockquote></p>
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<p>The Pension Benefit Guarantee Corporation (PBGC), a federal agency, has launched a nationwide search on the Internet to find workers who are owed benefits and who could not be located when pension plans closed. To check if your name is on the list of hard-to-find beneficiaries, log onto the Pension Search Directory at <a href="http://www.pbgc.gov/search" target="_blank">www.pbgc.gov/search</a>. The directory identifies about 1,000 companies mainly in the transportation, machinery, retail trade, apparel, and financial services industries.</p>
<p>If you do not have a computer, check for availability at a public library, or libraries at high schools, community colleges, or universities. If you are not able to access a computer and you feel you are owed benefits, write to:
<blockquote>Pension Benefit Guaranty Corporation
Missing Participant Program
1200 K Street, NW, Suite 930
Washington, DC 20005</blockquote></p>
<p>Include the participant’s or beneficiary’s name, address, daytime telephone number, Social Security number, date of birth, and the name and location of the employer.</blockquote></p>
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<p>Another place to look for lost cash is the Internal Revenue Service. Yes, the IRS has tens of millions of dollars in unclaimed tax-refund checks that were returned because of an incorrect address or other delivery problems. If you think you are owed a tax refund, but have not received it, visit <a href="http://www.irs.gov" target="_blank">http://www.irs.gov</a> or call the IRS at 1-800-829-1040.</p>
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<p>The last place where you might look for ready cash is lost insurance policies, yours or those of relatives where you might be the beneficiary. If you think there is a lost policy in your family, send a stamped, self-addressed business envelope to:
<p>Missing Policy Service<br />
American Council of Life Insurers<br />
1001 Pennsylvania Avenue, NW <br />
Washington, DC 20004-2599</p>
<p>The Council will send you a tracer form to complete and return and has information about searching for missing policies. For additional information, see <a href="http://www.acli.com" target="_blank">http://www.acli.com</a>.</p>
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6 - Stretch Your Money
<p>Whether you save pennies to make dollars, break habits and bank the savings, or find that you are the beneficiary of a long-lost life insurance policy, you are the one who has to manage your funds to best meet your individual and/or family goals. Remember that saving money does not make one a tightwad. On the contrary, saving money often allows you to have more of what is important to you and your family. As you continue on your path to saving money, you may find that the following ideas will serve you well as road marks on your journey.
</p>
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<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$monthcorrected.png" alt="Calender" />
<h3>Adopt the Two-Week Rule</h3>
<p>If you think you really want something, wait two weeks to get it. The purpose of this habit is to make you an impulse saver, not an impulse spender. The two-week rule does not mean losing out on a once-in-a-lifetime opportunity. How many items, such as expensive clothing, a new piece of furniture, a boat or recreational vehicle, or a new car, would not be there in two weeks? If you wait two weeks to buy big-ticket items, two good things can happen. You may find that the same item is less expensive somewhere else. Or you may discover that you really did not want the item once the initial excitement wore off.
</p>
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<h3>Avoid Unnecessary Waste</h3>
<p>Another principle to practice is keeping items that are still good. You can avoid waste, which translates into savings or more money for other activities. You don’t have to keep using items that need to be replaced, but do continue using those that still have value. The money that you would use for premature replacements can fund your savings and investment programs or purchase other goods and services for you and your family.</p>
<p>In a similar vein, don’t waste goods and services. Don’t leave the television on when nobody is watching it or operate the air conditioner when nobody is going to be in the house for hours. Don’t throw away a tube of toothpaste that is good for a few more brushes. These actions are related to the conservation of resources, not money; but in the end you save money, too.
</p>
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<p>Another related principle is to develop a positive philosophy regarding care and maintenance of goods. By taking proper care of products, using them in the intended manner, and maintaining them according to manufacturer’s instructions, you can greatly extend the useful life of an item. Instead of buying a new item, use the well-cared-for item and invest the money you would have spent. Let it be earning interest for you and contributing to your long-term financial security.</p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" title="Earl outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$03_earl$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Earl</h3>
<p>Earl's got some ideas about the new equipment he's wanted. Select the Play icon to hear more.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$03_earl$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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<h3>Become a Coupon Clipper
</h3>
<p>Would you think it was crazy to take a few dollar bills out of your wallet each week and throw them into the garbage can? That is exactly what you are doing by not using coupons for items that you normally buy or taking advantage of dozens of money-saving opportunities each day. If you spent five minutes a week cutting out coupons for your grocery shopping and saved at least $6.00 a week, that is the same as getting paid $72.00 an hour after taxes. In a year, you would save a minimum of $300.00. You would need to deposit $5,000.00 and get a 6% yield tax-free to make that much money. Remember, pennies do make dollars.
</p>
<p>And finally, practice treating yourself. Having saved money by not buying things you don’t need allows you to spend money for the things you want and that make your life enjoyable. Learn to truly enjoy the fruits of your labor.</p>
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Exercise: Stretch Dollars
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Complete the worksheet, <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U3Ex6_Fifteen_Ways_to_Stretch.doc">Fifteen Ways to Stretch a Dollar.</a>
</td>
</tr> </table>
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<h3>18 Ways to Keep More Cash </h3>
<p>To help you stay on target, read the list below, 18 Ways to Keep More Cash, for reinforcement and additional strategies. </p>
<p>1. Pay yourself first. Have automatic contributions from an off-farm job paycheck or checking account go to a savings or investment plan. Money that you do not see is often easier to save than money you have and must then set aside.
<p>2. Find money to save by refinancing your mortgage. Cutting your rate by a percentage point will probably pay off if you plan to be in your home for an additional 18 months (Note: This depends on the closing costs required).
<p>3. Switch to a credit card that charges a lower interest rate, but be aware of low rates that increase after 6-12 months. Be ready to switch cards again.
<p>4. If you are offered a no-fee, no-points home equity loan, sign up. Use this line of credit to pay off higher-cost debt. Do not use it to increase your debt load.
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<p>5. Pay ahead on your mortgage. An extra $25-$50 a month can make a big difference in the amount of interest you pay as well as the number of years you pay. Or pay your monthly payment in two installments (if allowed) -- one payment 2 weeks before the due date and the other on the due date. You will reduce the total cost of the mortgage and the length of the loan.
<p>6. To cut your utility bill, unplug the extra refrigerator or freezer that is used infrequently. Also lower the thermostat on your water heater to 120 degrees, install high-efficiency showerheads and faucets, switch to compact fluorescent bulbs in fixtures that are on at least 4 hours a day, replace an inefficient heating and cooling system if you are likely to stay in your current house for a decade or more, and check with your utility to see if they have programs that will pay you to insulate your home.
<p>7. Sign up for overdraft protection on your checking account; dodge unnecessary bank fees; avoid keeping large balances in your checking or savings accounts earning low interest rates -- invest them in higher-yielding investments; and compare costs of checks from your bank and other sources for the best buy. Join a credit union for potential savings on your banking and credit transactions.
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" title="Lee Ellen at table with laptop and paper" alt="Lee Ellen at table with laptop and paper" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$03_lee_ellen$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
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<h3>Lee Ellen</h3>
<p>Lee Ellen has some plans for reducing insurance costs. Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$03_lee_ellen$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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<p>8. Shop for the best price on all your insurance needs. Reduce costs by having home and auto insurance with one insurer, installing safety devices in your home, canceling private mortgage insurance when you have sufficient equity in your home, purchasing life insurance only on breadwinner(s) or primary care-givers, and avoiding single-disease health insurance policies.
<p>9. Comparison shop for the best prices on prescription drugs. When available, use generic drugs for both prescription and over-the-counter drugs, and utilize mail-order pharmacies for drugs taken regularly.
<p>10. If you smoke, stop. It is bad for your health and costs about $2,000 a year for a pack-a-day smoker. A year after you quit, check with your life insurance agent for reduced premiums.
<p>11. Encourage your college-bound students to apply for scholarships and offer to pay them a lump sum to graduate on time to avoid having to pay a fifth year of college. If your child attends college at least 150 miles away, check with your agent regarding lowering your auto insurance premium (it could drop as much as one-third). Even if the student takes the car to school, costs may be lower due to the location of the school.
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<p>12. Maximize contributions to your tax-deferred retirement plan and contribute to an IRA. Even though you may not be able to deduct IRA contributions from your income, the money in your account grows tax-deferred until it is taken out.
<p>13. Save big by buying a nearly new rather than a brand-new car. Other savings related to your car include pumping your own gas, buying the octane fuel recommended for your car, raising your collision and comprehensive deductibles to $500, and avoiding four-wheel drive vehicles unless needed (they cost more up front and you pay more for gas, tires, and insurance). If you buy a new car, order from the factory, selecting only the options you want unless the dealer is willing to discount the price of unwanted options.
<p>14. Buy in bulk at discount and warehouse stores. Always shop with a list to avoid impulse buys and use coupons when appropriate. Try store brands for considerable savings.
<p>15. Instead of beginning your landscaping projects the first warm day of spring when plants and related materials are most expensive, wait until the items go on sale.
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<p>16. To save dollars on your entertainment and education budget categories use the local library. They have the latest books, magazines, journals, and newspapers as well as music compact discs, Internet access, investment research, and a host of other services.
<p>17. Other quick ways to add cash back into your budget include canceling subscriptions to magazines you do not read or could access at the library, dropping club memberships you do not use, canceling credit cards you no longer use, disconnecting cable or satellite television or at least dropping some of the options you probably have, and trimming back the options you carry on the telephone.
<p>18. Catch your coins and bank your surprises. At the end of each day, put all your loose change into a savings container and once a month deposit the collection into your savings account. Whenever you receive unexpected money such as a gift or contest winnings, put all or part of the money into your savings account.
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<h3>Summary</h3>
<p>If you are able to provide the desire and self-discipline, you will be able to "find" the money necessary to fund your saving and investment programs. Improving your financial health through increased savings is not a matter of luck, rather it reflects planning, defined goals, wise decisions, and a desire for personal success. The various savings strategies included in this unit offer you the groundwork needed to initiate a saving and investment program for you and your family.</p>
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<p>Congratulations! You've reached the end of the unit. Select continue to start Unit 4 or use the lesson menu on the left to skip to any part of Units 1-11.</p><br />
<hr />
<h3>About the Author</h3>
<p><strong>Joyce H. Christenbury, M.Ed., CFCS</strong>, is a Professor Emerita of Family and Youth Development Department with the Clemson University Cooperative Extension Service. As an Extension family resource management specialist, she provided leadership in the area of family resource management with an emphasis on helping individuals and families develop skills needed to cope with today’s complex marketplace. Professor Christenbury received her undergraduate degree in Home Economics Education from Winthrop University, Rock Hill, SC and her masters from the University of North Carolina at Greensboro in housing, management, and equipment. Prior to joining the Clemson faculty in 1973, Christenbury taught in the College of Home Economics at the University of Delaware in Newark, Delaware.
</p>
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UNIT 4: OWNERSHIP INVESTMENTS
<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$sharescorrected.png" alt="Stock shares" />
<p>Now that you know some basics about investing and ways to find money to invest, it’s time to learn about the types of investments that are available. There are two basic categories of investments: ownership and loanership. The focus of this unit is ownership investments. </p>
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Learning Objectives
<p>This unit will help you:
<ul>
<li>Make a list of financial goals so you can match them with appropriate equity and other investments</li>
<li>Identify equity investments that match your goals and available cash flow</li>
<li>Research these investments and compare at least three specific products (e.g., stocks)</li>
<li>Calculate the percentage of your portfolio allocated to equity investments</li>
</ul></p>
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<p>Equity or ownership investing means becoming a partial owner of a company or piece of property through the purchase of investments such as stock, growth mutual funds, and real estate. With ownership investments, you have influence on some decisions made about the investment. </p>
<p>For example, if you own stock, you may vote for members of the board of directors that makes decisions about the company or make proposals concerning its operations. If you own an apartment which you rent, you make decisions such as repainting and setting the rent price. When the value of an investment goes up, you share that increase with other owners; when it goes down, you share the loss. </p>
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<p>When there are earnings, you share them. There are no guarantees about what the price of the investment will be should you want to sell it in the future. The price may be higher than it was when you bought the investment but it could be lower. Likewise, there are no guarantees that there will be earnings (such as dividends) or of how much they will be. Price and earnings may be affected by the management of a company or by outside factors such as political changes, weather, and the national or world economy. </p>
<p>On the other hand, when you have a loanership investment, you simply loan your money to someone (e.g. a bank or state government) and get an agreed upon return. Generally, when you invest larger sums of money and invest for longer periods of time, you earn more. If you want to learn more about these investments please refer to Unit 5, Fixed-Income Investing, in this course. </p>
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<p>The focus of this unit is ownership investments. These investments, equities, can either be owned outright or purchased on credit. Examples of equities include stock, growth mutual fund shares, real estate, collectibles, commodities, and businesses. This unit will provide you with an overview of investment products available for purchase. If you are interested in investing in any of these products, you should learn more about their characteristics, as well as about the particular company or product, before investing. </p>
<p>Most ownership investments are found fairly high in the <a href="$@FILEPHP@$$@SLASH@$image$@SLASH@$pyramid.png" target="_blank">Pyramid of Investment Risk</a>. In other words, with the increasing potential for a high rate of return comes a high potential for loss of principal. The specific investments you make can influence how high that risk is. For example, owning a speculative stock has more risk than owning a home in an established neighborhood. </p>
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1 - Common Stocks
<p>When a company wants to raise money, it offers investors a share of ownership in the company in the form of stock in exchange for that money. As a partial owner of the company, each investor shares in the success or failure of the business. There is no guarantee of return on the investment. Investors become part owners of a business and have no guarantee that they will receive any income for the use of their money or that they will get back any or all of their money in the future. </p>
<p>However, historically, common stocks have outperformed all other investments. According to the Chicago investment research firm Ibbotson Associates, the average annual return on U.S. large company stocks from 1926 to through 2007 was 10.4% versus 12.5% for small company stocks, 5.5% for long-term government bonds, and 3.7% for U.S. Treasury bills. </p>
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<p>If a company makes money in a given time period, its board of directors may decide to reward its owners by distributing dividends or may choose to reinvest the money in the company. If you own a stock that pays dividends, you may have the option of reinvesting them in more stock instead of receiving a cash dividend. The dividends are still taxable but dividend reinvestment plans (also known as DRIPs) are an easy way to increase your investment holdings. </p>
<p>As owners of the business, stockholders elect directors who select the people who manage the company on a day-to-day basis. Depending upon the business and the way in which it is set up to operate, stockholders may have the opportunity to influence other decisions as well. Typically, this happens at an annual business meeting and stockholders can cast proxy votes if they are unable to attend the meeting in person. </p>
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<p>There are many companies that offer stock investments. If you are interested in purchasing stock, you should learn about the industry and the particular business in which you are considering investing. There are many ways to learn. Magazines such as <i>Kiplinger’s</i> and <i>Money</i> are one. Newspapers, especially those that focus on economic topics, like <i>The Wall Street Journal</i>, and those in large cities, such as the <i>New York Times</i> are good sources. Companies such as Value Line produce materials to specifically rate stocks. These are typically carried in the reference section of larger libraries. </p>
<p>The Internet is full of Web sites that offer information. Scrutinize each site to determine the source and note whether written material is produced by a person or business that may gain profit from the information provided. One place to look for such Web sites is in the money section of the site at http://www.consumerworld.org/. There, you will find a link to the American Association of Individual Investors at http://www.aaii.org/, as well as a link to a stock market simulation for learning about how the market works. </p>
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<img valign="top" align="right" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$reportcorrected.png" alt="Company prospectus" />
<p>By law, a company must provide a prospectus, which describes information such as its management and financial situation when it first issues stock. If you are interested in purchasing new stock in a company, you can request a prospectus. You may also find prospectuses online at the Securities and Exchange Commission Web site at http://www.sec.gov. Some annual reports are available online from the Public Registers Annual Report Service at http://www.prars.com. </p>
<p>It is important to consider your goals and your needs when you invest in stocks and to select ones that are most likely to match your situation. </p>
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<p>Generally stocks are classified by category. </p>
<ol>
<li>Growth stocks are those of companies that are expected to increase in value. They may have high P/E (price to earnings) ratios. This means that the price of the stock is high compared to the forecasted earnings. A high ratio tends to indicate a more speculative situation. A low ratio tends to indicate a more conservative investment.</li>
<li>Income stocks are expected to pay regular, relatively high (compared to other companies) dividends.</li>
<li>Speculative stocks are those that have potential for the future. They generally do not pay much in dividends and their prices may be relatively volatile.</li>
<li>Value stocks currently have relatively low prices compared to their historical earnings and the value of the company’s assets.</li>
<li>Blue chip stocks are those of established companies with relatively stable stock prices and relatively predictable earnings. </li>
<li>Penny stocks are sold for $5 per share or less. They may be initial offerings with prices set intentionally low or stocks of companies that are experiencing difficult financial times. In either case, they are speculative stocks; if you invest in them, you should be prepared to lose all of your money.</li>
</ol>
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<p>Investors use indexes to assess the general activity of the stock market. They are widely reported in newspapers, on television and radio, and via the Internet. The Dow Jones Industrial Average is the most widely followed gauge of daily market activity. It includes 30 stocks in well-established companies. Other indexes include the Standard & Poor’s 500 (which includes over 100 unique economic sectors), the New York Stock Exchange Composite (all stocks traded on the New York Stock Exchange), the American Stock Exchange Composite (stocks traded on the American Stock Exchange), and the NASDAQ Composite (newer stocks traded over-the-counter in the quotations system of the National Association of Securities Dealers). </p>
<p>Indexes also help show trends in market behavior. Investors use Beta as a measure of a stock’s price volatility–how much it changes. The average Beta for all stocks is +1. However, the Beta for an individual stock can be either positive or negative. The larger the Beta figure (e.g. +2 versus .50), the more speculative–and thus risky–a stock. </p>
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<p>A "must read" for all equity investors is a company’s annual report. Along with other investor resources, such as <i>Value Line</i> and professional advisors, annual reports provide important clues to company performance. To obtain a company’s annual report, call its "shareholder relations"department or request a copy online from the company Web site. </p>
<p>The first part of a company’s annual report is the letter to shareholders. Here, company management explains significant changes in company operations (e.g., new products, decreased earnings) and in the report’s financial statements (balance sheet and income statement). </p>
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<p>Like a personal net worth statement, the balance sheet in an annual report lists a company’s assets and liabilities (debts) at a particular time (usually the end of a company’s fiscal year). Assets are things owned by a company, such as product inventory and accounts receivable (money owed by customers). Liabilities are company obligations to pay for goods and services or to repay borrowed funds (e.g., interest and principal on company bonds). The name balance sheet reflects the fact that figures must "balance" the value of a company’s assets must equal the sum of its liabilities and shareholder equity (the total value of all shareholders’ investments in a company. </p>
<p>Various financial ratios can be used to determine the financial health of a company. A common one is the current ratio, which is current (less than a year) assets divided by current liabilities. A 2:1 ratio ($2 of assets for every $1 of debt) is considered adequate. Another helpful ratio is the debt-to-equity ratio, a company’s total liabilities divided by shareholder equity. It should be less than 1:1.</p>
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<p>Income statements in an annual report describe a company’s net income (or loss) per share. A common ratio used to analyze income statements is earnings per share: net income divided by the number of outstanding shares. Another is the price/earnings (P/E) ratio, which is calculated by dividing the share price by earnings per share (e.g., $24 per share and $2 earnings per share = P/E of 12). </p>
<p>Stocks can be bought and sold on one of several major exchanges. Newspapers typically report on the New York Stock Exchange and the American Stock Exchange. Newer or less frequently traded stocks are sold by telephone or computer hookup rather than at an exchange and are called over-the-counter. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td>
<p>Current information about stock prices and sales is available in most newspapers. An example of a newspaper report of the New York Stock Exchange is shown below. </p>
<p><div align="center"><table border="1" cellpadding="2" cellspacing="0">
<tr>
<td bgcolor="#d8d8d8" colspan="2" align="center" valign="top" width="29%"><b>52-week</b></td>
<td bgcolor="#d8d8d8" valign="top" width="17%"><b>Abbr.</b></td>
<td bgcolor="#d8d8d8" valign="top" width="17%"><b>Sales</b></td>
<td bgcolor="#d8d8d8" valign="top" width="17%"> </td>
<td bgcolor="#d8d8d8" valign="top" width="20%"> </td>
</tr>
<tr>
<td bgcolor="#d8d8d8" valign="top" width="13%"><b>High</b></td>
<td bgcolor="#d8d8d8" valign="top" width="16%"><b>Low</b></td>
<td bgcolor="#d8d8d8" valign="top" width="17%"> </td>
<td bgcolor="#d8d8d8" valign="top" width="17%"><b>(000s)</b></td>
<td bgcolor="#d8d8d8" valign="top" width="17%"><b>Last</b></td>
<td bgcolor="#d8d8d8" valign="top" width="20%"><b>Chg</b></td>
</tr>
<tr>
<td bgcolor="#ffffff" valign="top" width="13%">96.13</td>
<td bgcolor="#ffffff" valign="top" width="16%">48.38</td>
<td bgcolor="#ffffff" valign="top" width="17%">ABC Corp.</td>
<td bgcolor="#ffffff" valign="top" width="17%">12728</td>
<td bgcolor="#ffffff" valign="top" width="17%">85.56</td>
<td bgcolor="#ffffff" valign="top" width="20%">-2.44</td>
</tr>
<tr>
<td bgcolor="#ffffff" valign="top" width="13%">51.25</td>
<td bgcolor="#ffffff" valign="top" width="16%">22.94</td>
<td bgcolor="#ffffff" valign="top" width="17%">DEF Corp.</td>
<td bgcolor="#ffffff" valign="top" width="17%">21938</td>
<td bgcolor="#ffffff" valign="top" width="17%">32.75</td>
<td bgcolor="#ffffff" valign="top" width="20%">-1.63</td>
</tr>
<tr>
<td bgcolor="#ffffff" valign="top" width="13%"> 8.50</td>
<td bgcolor="#ffffff" valign="top" width="16%"> 3.44</td>
<td bgcolor="#ffffff" valign="top" width="17%">GHI Corp.</td>
<td bgcolor="#ffffff" valign="top" width="17%"> 66</td>
<td bgcolor="#ffffff" valign="top" width="17%"> 4.69</td>
<td bgcolor="#ffffff" valign="top" width="20%">- 0.13</td>
</tr>
<tr>
<td bgcolor="#ffffff" valign="top" width="13%">68.00</td>
<td bgcolor="#ffffff" valign="top" width="16%">47.44</td>
<td bgcolor="#ffffff" valign="top" width="17%">JKL Corp.</td>
<td bgcolor="#ffffff" valign="top" width="17%"> 53</td>
<td bgcolor="#ffffff" valign="top" width="17%">56.94</td>
<td bgcolor="#ffffff" valign="top" width="20%">+0.07</td>
</tr>
</table></div>
</p>
<p>The next page has more information about the chart.</p>
</td>
</tr> </tbody>
</table>
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<p>Terms: </p>
<ul>
<li>52-week High-Low–These numbers tell the highest and lowest prices at which the stock has sold in the last year. Prices are in dollars and decimals of dollars. For example, highest price the ABC Corp. stock sold for in the last year was $96.13 and the lowest price was $48.38.</li>
<li>Abbreviation–Standard abbreviation of the stock’s name. For example, ABC Corp..</li>
<li>Sales (000s)–The number of shares traded yesterday. It is multiplied by 1,000. Thus, ABC Corp. sold 12,728,000 shares the previous selling day.</li>
<li>Last–Price at closing yesterday. For ABC Corp. it was $85.56 per share.</li>
<li>Chg–The difference in the closing price yesterday and the day before. The price today was $2.44 lower than yesterday’s.</li>
</ul>
<p>Note: The nation's stock exchanges converted stock prices from fractions to decimals in 2001. </p>
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<p>When stock is purchased or sold, a fee is generally charged. The cost will vary, depending on where the stock is purchased (e.g. discount broker, direct purchase, online). Comparison shop to determine available costs and services and to get the best deal. </p>
<p>Many investors use a specific strategy, dollar cost averaging, to invest in stocks. They regularly invest the same amount (e.g. $50) at regular intervals (e.g. monthly) regardless of the price of the stock. </p>
<p>When investors use the buy and hold strategy, they purchase stocks and keep them for a number of years, not worrying about the changes in the market. Investors refer to times when prices are very low as a bear market and times when they are high as a bull market . The goal of successful equity investing is to buy when prices are low and sell when prices are high. You can learn more about these strategies in Unit 2, Investment Basics. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" title="Lee Ellen at table with laptop and paper" alt="Lee Ellen at table with laptop and paper" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$04_lee_ellen$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Lee Ellen</h3>
<p>Lee Ellen wants to learn more about some companies, and possibly invest in them. Select the Play icon to hear more.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$04_lee_ellen$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
</td>
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Exercise: Common Stock
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Request a company’s annual report (or download it from the company’s Web site) and read it, paying particular attention to the company’s balance sheet and economic indicators such as current ratio, debt-to-equity ratio, earnings per share, and price/earnings (P/E) ratio. Record 3 to 5 key points about the company’s stock.</p>
</td>
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</table>
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Exercise: Common Stock
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<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Compare key financial data about two competing companies in the same industry (e.g., Pepsico versus Coca Cola) by searching online for key company data from a financial Web site such as <a href="http://finance.yahoo.com/" target="_blank">http://finance.yahoo.com</a>.</p>
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</table>
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2 - Real Estate
<img valign="top" align="right" hspace="10" vspace="10" alt="Graph showing rise of home value" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$property_chartcorrected.png" />
<p>This very popular investment alternative includes land, the permanent structures on land, and accompanying rights and privileges, such as crops and mineral rights. A home is generally the single largest asset that most people have. Other ways to invest in real estate include owning rental houses and land for potential housing or commercial development. You can also invest in real estate indirectly by purchasing units in a real estate limited partnership or shares in a real estate investment trust (REIT). Since direct ownership of real estate is so common, we will begin by discussing it. </p>
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<p>When you purchase real estate, the costs of purchase include: </p>
<ol>
<li>Real estate commissions (which may technically be paid by the seller, but do influence the total cost of the property),</li>
<li>Transfer and recording fees charged by the state and/or local government,</li>
<li>Attorney fees,</li>
<li>Title search fees,</li>
<li>Appraisal fees,</li>
<li>Surveying fees, and</li>
<li>Inspection fees (these may be optional).</li>
</ol>
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<p>There are also ongoing costs to owning real estate. These vary according to the type of structure and the location. The property must be maintained and protected through the purchase of insurance. When you purchase real estate, ongoing costs include: </p>
<ol>
<li>Cutting grass, raking leaves, removing snow, or painting,</li>
<li>Roof or furnace replacement,</li>
<li>Homeowners insurance to protect the structure and your liability related to it, and</li>
<li>Annual property taxes.</li>
</ol>
<p>Home ownership is encouraged through our income tax system which provides an income tax deduction for mortgage interest and property taxes and through generous tax exemptions on the increase in value realized when homes are sold. However, tax benefits of ownership should not be the only reason for buying a house. </p>
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<p>Real estate is fairly high in the investment risk pyramid. Although real estate can sometimes be quickly turned into cash, it can also take a long time to find the right buyer at the right price. Nor can you control the condition of the property next door. A public change, such as a power line or road, or some other event, may also increase or decrease the value of your property. </p>
<p>You may receive regular or intermittent income from real estate including rent for structures or the land itself, income from sales of crops such as timber or from gravel or minerals in the land. Costs are associated with each form of income. You can also make money on the sale of real estate if you can sell it for more than you paid for it and the costs of the sale. Real estate agents often say that the key to success in real estate investing is "location, location, location." Where your investment is and what is near it will greatly influence its value. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" title="Earl outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$04_earl$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Earl</h3>
<p>Earl's been thinking about a real estate investment. Select the Play icon to learn more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$04_earl$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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<p> You can also purchase real estate indirectly through:
<ol>
<li>Real estate limited partnerships,</li>
<li>Real estate investment trusts (REITs),</li>
<li>Mortgage ownership, and</li>
<li>Thoroughly investigate these investments before purchasing them.</li>
</ol>
Investors in real estate limited partnerships buy shares for unit costs of $500 or $1,000. The partnership invests in land or commercial real estate such as shopping malls and apartment complexes. A pro-rated share of rental income is passed on to investors as taxable income. When a partnership is liquidated or sold, any profits are distributed as capital gains. </p>
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<p>When you buy shares in a real estate investment trust (REIT), the company manages various real estate investments. It may own real estate (e.g. apartment complexes and offices) and make money by renting the property or by making loans to others who own and manage property. Like a mutual fund, REITs provide diversification and professional management. They are required to distribute almost all of their annual income as dividends to investors. If the REIT portfolio is not properly managed or there are changes in the market, the principal investment may lose value. </p>
<p>You can select from over 300 REITs for investors. REIT shares, typically costing up to $40 each, are bought and sold through brokerage firms and traded like stock on major exchanges. Additional information about REITs can be obtained from brokerage firms or the National Association of Real Estate Investment Trusts Web site: http://www.nareit.com. </p>
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Exercise: Real Estate
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Compare key financial data about two competing REITs by obtaining print materials from a stock broker or searching online for REIT data at http://www.nareit.com. </p>
</td>
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</table>
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3 - Equity Unit Investment Trusts
<p>Unit investment trusts (UITs) are an unmanaged portfolio of professionally selected securities that are held for a specified period of time. They were first issued in the 1960s as a way to "package" and sell portfolios of professionally selected bonds, especially tax-exempt municipal bonds. The cost of a unit is generally $1,000. During the 1990s, the UIT concept was extended to stocks. </p>
<p>Unlike mutual funds, that are professionally managed, equity UITs are a "buy-and-hold" investment. Securities in the portfolio are held for a pre-determined time to generate dividends and capital gains for investors. At maturity, investors can take their cash and invest elsewhere or can "roll over" their balance into a new UIT. </p>
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<p>Like their bond counterparts, equity UITs are an unmanaged portfolio of stocks that usually remains unchanged throughout the life of the trust. Some equity UITs follow a specific investment strategy such as investing in the five or ten highest yielding stocks among the 30 stocks included in the Dow Jones Industrial Average or only in stocks listed on foreign stock exchanges. Like mutual funds, an increasing number of equity UITs also select stocks from a particular industry sector (e.g., technology) or companies located in a particular state or region of the country. </p>
<p>Like individual stocks, UIT dividends and capital gains are taxable, whether earnings are distributed in cash or reinvested in additional UIT units. If the value of a UIT portfolio increases, that capital gain is taxed. Most equity UITs have maturities of six years or less. Shares can be sold prior to the trust’s maturity at a price determined by market conditions. Two advantages of equity UITs are not having to worry about changes in portfolio holdings or management and tax efficiency (low taxes because stocks in a UIT portfolio are rarely traded). A major disadvantage is their up-front cost. Equity UITs typically charge a front-end load (commission) of 3% to 5% of the amount invested. </p>
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Exercise: Equity Unit Investment Trusts
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
</td>
<td>
<p>Increase your investment knowledge by reading the Investment Company Institute’s "A Guide to Unit Investment Trusts" found at http://www.ici.org/investor_ed/brochures/bro_g2_uits. Record 3 to 5 points that you didn’t previously know about investing in unit investment trusts and two personal applications. </p>
</td>
</tr> </tbody>
</table>
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4 - Equity Mutual Funds
<p>Mutual funds are professionally managed portfolios of securities and are described in detail in Unit 6. Options available for equity investors include: </p>
<ul>
<li><b>Growth Funds</b> - funds that typically invest in the stock of well-established companies with an objective of capital appreciation.</li>
<li><b>Aggressive Growth Funds</b> - funds that invest in new companies without a track record or funds that use risky trading actions.</li>
<li><b>Equity-Income Funds</b> - funds that invest in the stock of companies that are known for their payment of above-average dividends.</li>
<li><b>Focus Funds</b> - funds that invest in a small number (e.g. 20 or 30) of stocks instead of the 100+ securities typical of most funds.</li>
<li><b>Global Funds</b> - funds that invest in stocks worldwide, including those issued by companies located within the United States.</li>
</ul>
<p>Continued on the next page.</p>
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<ul><li><b>Emerging Markets Funds</b> - funds that invest primarily in the stock of developing countries.</li>
<li><b>Gold Funds</b> - funds that invest in gold mining companies or related securities (e.g., precious metals).</li>
<li><b>Index Funds</b> - funds that include stocks that comprise a benchmark market index such as the Standard & Poor’s 500 or Wilshire 5000. </li>
<li><b>Sector Funds</b> - funds that invest entirely or predominantly in a single economic sector (e.g., technology and health care).</li>
<li><b>Socially Conscious Funds</b> - funds managed for capital appreciation that screen out certain securities based on designated social priorities (e.g., eliminating companies with poor environmental records).</li>
<li><b>International Funds</b> - funds that invest only in stocks issued outside of the United States.</li>
<li><b>Momentum Funds</b> - funds that invest in companies that are "hot" at the moment but tend to be very volatile as share prices change. </li>
<li><b>Regional Funds</b> - funds that concentrate on companies located in one part of the world (e.g., Europe, Asia).</li>
</ul>
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Exercise: Equity Mutual Funds
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Request an equity mutual fund’s abbreviated “profile” prospectus (or download it from an investment company’s Web site) and read it, paying particular attention to the fund’s investment objective, historical performance relative to market benchmarks, expense ratio, and minimum required initial and subsequent deposits. Record 3 to 5 key points about the mutual fund. </p>
</td>
</tr> </tbody>
</table>
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5 - Exchange-Traded Funds
<p>Exchange-traded funds (ETFs) are a “hybrid” investment with characteristics of both stocks and index mutual funds. Like stocks, ETFs trade on stock exchanges and experience price changes throughout each market trading day. Like index funds, they consist of a portfolio of securities that is passively managed. This means that, by definition, ETFs consist of the securities that comprise a specific benchmark market index. ETFs were first introduced in 1993 and have seen tremendous growth in assets ever since. </p>
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<p>The most popular ETF, so-called “Spiders” (trading symbol: SPY), an acronym for Standard & Poor’s Depository Receipts, tracks the Standard & Poor’s (S&P) 500 index of large company stocks. The second most popular ETF, formerly referred to as “Cubes” (trading symbol: QQQ) and now called Powershares QQQ, tracks the NASDAQ 100 index of small company stocks. There are also ETFs that track indexes for various industry sectors (e.g., energy, financial services, healthcare, real estate, and technology), different company sizes (e.g., large-, mid-, and small- capitalization stocks), and dozens of foreign countries or regions of the world (e.g., Europe and Asia). </p>
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<p>Many ETFs have an even lower turnover than managed mutual funds. Turnover refers to the frequency with which securities in an ETF portfolio are bought and sold. Changes in an ETF portfolio typically occur only when a change is made to the underlying index upon which it is based. This translates into extremely low expense ratios (i.e., expenses as a percentage of assets), as low as 0.09% (less than a tenth of 1%) to 0.11%, compared to about 0.18% for the least costly stock index mutual funds and much less than the average expense ratio of about 1.5% charged by actively managed (non-index) stock funds. </p>
<p>Another advantage of ETFs, compared to mutual funds, is that investors themselves can decide if and when to sell ETF shares and, by doing so, arrange the best timing to incur capital gains tax liability. In other words, investors have the same flexibility to buy and sell shares as they do with individual stocks. With mutual funds, on the other hand, taxable dividends and capital gains, as well as transaction costs, are automatically passed along to fund investors and taxed accordingly. </p>
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<h3>Recommendations</h3>
<p>Below are some recommendations about exchange-traded funds provided by investment experts: </p>
<ul>
<li>Choose an ETF that reflects your financial goals and investment risk tolerance, just as you would do when selecting a stock or mutual fund. For example, if you are a very conservative investor, stick with a broadly diversified ETF, such as a “spider,” rather than a very narrowly defined ETF that invests in the stock of just one country or one industry sector.</li>
<li>Consider how various ETFs match your asset allocation strategy and weight your purchases accordingly. Asset allocation is the percentage of an investor’s portfolio in various asset classes such as stocks, bonds, and cash equivalent assets such as Treasury bills.</li>
</ul>
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<p>Below are some recommendations about exchange-traded funds provided by investment experts (continued):</p>
<ul> <li>Start simple with just a few ETFs. The <em>AAII Journal</em> (American Association of Individual Investors) suggests three types of ETFs as core investments: a total stock market ETF (tracks all U.S. stocks), a total international ETF (tracks stocks from all foreign counties), and an intermediate-term U.S. government or municipal bond ETF for exposure to fixed-income securities. More sophisticated investors can add on additional layers such as large-cap, mid-cap, and small-cap ETFs and ETFs from specific regions such as Europe, the Pacific, or emerging markets (developing countries). “Cap” is short for capitalization, which is the share price of a stock multiplied by the number of outstanding shares.</li>
</ul>
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<p>Below are some recommendations about exchange-traded funds provided by investment experts (continued):</p>
<ul> <li>Consider ETFs for large, infrequent lump sum deposits (e.g., a settlement or inheritance) because trading costs are incurred each time a purchase is made. In other words, you need to go through a broker every time ETF shares are bought or sold. Consider using low-cost index funds for frequent periodic deposits such as contributions to an employer retirement savings plan and share purchases that are automatically debited from a bank account on a regular schedule (e.g., a $100 deposit on the 15th of every month).</li>
<li>Read an ETF’s prospectus before investing. In it you will learn about a stock or bond ETF’s underlying index as well as characteristics of the ETF itself. Another good source of information is the ETF sponsor’s Web site, which will provide a description of available ETFs, performance data, and portfolio holdings.</li> </ul>
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Exercise: Equity Exchange Traded Funds
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Increase your investment knowledge by reading the U.S. Securities and Exchange Commission’s fact sheet, Exchange Traded Funds (ETFs), found at http://www.sec.gov/answers/etf.htm or the <a href="http://www.extension.org/pages/A_Comparison_of_Mutual_Funds_and_Exchange_Traded_Funds_(ETFs):_Twelve_Factors_to_Consider" target="_blank">eXtension publication</a> that compares characteristics of exchange traded funds (ETFs) and mutual funds. Record 3 to 5 points that you didn’t previously know about investing in exchange traded funds and two personal applications.
</p>
</td>
</tr> </tbody>
</table>
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6 - Collectibles, Business, Commodities
<h3>Collectibles</h3>
<p>People collect just about anything: stamps, coins, art, cars, autographs. To be financially successful with collectibles as an investment, however, a high level of knowledge is required. Some people collect as a hobby and enjoy spending their time this way. </p>
<p>To make money with this type of investment, you need a collection of items in top condition. You probably cannot regularly use or touch the collectibles and will need to safely store them in a protective environment. Keep documented evidence of the value of your collection, (e.g. an appraisal of antiques). Regular maintenance and insurance may be necessary, and there could be storage costs. The specific needs and the type of collectible will determine costs. </p>
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<p>Generally, collectibles do not provide a regular or periodic income. When you sell an item, you see the gain in value. When you want to sell, you may take a while to find the buyer willing to pay what you think your collectible is worth. A professional appraiser or auction house may also be required to sell items to other investors. As you make investment decisions about collectibles, it is important to be sure that you are truly focusing on the value of the investment and that you are not unduly influenced by the psychological pleasure you receive from owning it. </p>
<p>Remember that, in order to make money with collectibles, you must be willing to sell them, as well as finding a willing buyer and agreeing on an acceptable price. Being willing to part with collectibles distinguishes them as an investment versus a hobby. </p>
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Exercise: Collectibles
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Contact an appraiser (see http://www.appraisers.org/FindanAppraiser/FindAnAppraiser.aspx for local names) and have a professional appraisal done of one or more collectible items to determine its value in the event of a future sale. </p>
</td>
</tr> </tbody>
</table>
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<h3>Business</h3>
<p>Ownership of a business, such as a farm, is another investment option. There are many different kinds of businesses and many ways to be involved. You may own and operate a business yourself or hire someone to operate it. You can start your own business or purchase a franchise of a larger business. While businesses certainly offer opportunity for income, they also have many risks. Careful attention must be given to the financing, cash flow needs, and reserves. It is important to separate businesses from the family budget. You want to avoid putting your shelter, for example, at risk because your business has difficult financial times. </p>
<p>In many states Cooperative Extension offers education on micro- and home-based businesses. The Small Business Administration offers assistance. Other organizations in communities and in state government have valuable resources. If you are considering such an investment, search widely for information. The failure rate of small businesses is very high. Planning, especially development of a business plan, is critical. </p>
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<h3>Commodities</h3>
<p>At the very top of the investment risk pyramid are commodities. These include pork, grain, coffee, sugar, etc. You have high potential for return, but also high risk. To invest there, you need to be able to afford to lose your entire investment. </p>
<p>Costs include brokerage fees. You also need considerable knowledge of the commodity in question and the markets in which it is created and sold as well as the changing situations of the buyers. </p>
<p>Farm households are already involved with the production of commodities as part of their livelihood. Therefore, they already have some exposure to this asset class. </p>
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7 - Equity Investments
<p>There are many ways to purchase equity investments. The specific type of investment you select will affect your choices. For example, you may trade collectibles and real estate directly with other buyers and sellers. When you purchase stock or REITs, you may work with a broker. Full-service brokers generally provide more assistance with research and advice and charge higher commissions than discount brokers. Use the "Rule of Three": compare the costs of buying and selling with at least three firms. Other ways to make investment purchases include: </p>
<ul>
<li>Direct Purchase Plans (DPPs) or "no load" stocks are sold directly to investors. Corporations that offer stock may offer DPPs to their shareholders so they can save the cost of a broker. </li>
<li>By participating in an investment club, you can purchase equity investments. See Unit 9 for the details.</li></ul>
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<ul><li>You can also invest via the Internet. Of course, the downside to online trading is "no handholding." In addition, online investors need to be very careful typing in their order. A careless extra zero (e.g., 100 shares instead of 10) can cost you plenty. Online brokerage firms will generally execute trades of reasonable amounts in excess of an investor’s account balance. It is assumed that investors will "settle up"within three business days as per current Securities and Exchange Commission (SEC) regulations.</li></ul>
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<p>The process for executing an online trade is as follows. </p>
<ol>
<li>First, you need a computer with access to the Internet.</li>
<li>Once connected, log onto the Web site of online brokerage firms such as Accutrade, Datek, E*Trade, Fidelity, and Schwab.</li>
<li>Complete an online application.</li>
<li>Mail additional forms and a check to open an online trading account. The minimum amount required by most online brokerage firms to establish an account is generally between $1,000 and $15,000.</li>
<li>You will be notified by e-mail when your application is received and you are approved to make online transactions. Stock trades are generally executed within seconds of placing an order.</li>
</ol>
<p>Regardless of the method you use to buy and sell equities, be sure that you fully understand the types of orders used to buy and sell. Be sure that when you make an offer to buy or sell you know when it will be placed and what costs are involved. Know what will happen if your offer is not processed immediately or if the market changes significantly before your offer reaches it. </p>
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Exercise: Equity Investments
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Visit the Web sites of three competing online and/or “brick and mortar” brokers and compare their costs and services using the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U4Ex10_Investing_Rule_of_Three.doc">Investing Rule of Three Worksheet</a> that lists criteria for comparison shopping.</p>
</td>
</tr> </tbody>
</table>
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8 - Diversification
<p>Whatever investments you make, remember to diversify. You can either select investments, such as mutual funds, that invest in a variety of securities, or you can purchase a variety of securities yourself. If you do it yourself, be sure to invest in different sectors of the market (e.g. energy, financial services, technology) as well as in different specific investments. </p>
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<h3>Summary</h3>
<p>Equity investing means becoming a partial owner of a company or piece of property through the purchase of investments such as stock, equity mutual funds, and real estate. Capital appreciation over time is the primary objective, although some equity investments, such as REITs and equity-income mutual funds, also provide dependable dividend income. This unit has reviewed general characteristics of equity investments and "nitty gritty" details such as how to purchase them. Diversification and asset allocation, as they relate to equity investing, were also discussed. The unit concluded with a discussion of specific equity investments. Now you need to consider appropriate equity investments that will mesh with your personal financial goals. </p>
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<p>Congratulations! You've reached the end of the unit. Select continue to start Unit 5 or use the lesson menu on the left to skip to any part of Units 1-11.</p>
<p><br /> </p> <hr style="width: 100%; height: 2px;" />
<h3 style="font-weight: bold;">About the Author</h3>
<p><strong>Irene Leech, Ph.D., CFCS</strong>, is an Associate Professor of Consumer Affairs at Virginia Tech and former Consumer Education Specialist for Virginia Cooperative Extension. She teaches in the undergraduate and graduate resource management program at Virginia Tech. Her professional memberships include the Association for Financial Counseling and Planning Education and the American Council on Consumer Interests.</p>
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UNIT 5: FIXED-INCOME INVESTING
<img valign="top" align="left" hspace="10" vspace="1" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$monitor_investingcorrected.png" alt="Computer monitor" />
<p>In Unit 4, you explored characteristics of equity investments such as real estate and stock. This unit will discuss general characteristics of fixed-income securities and describe specific types of these investments. There are two general categories of investments: ownership and loanership. With "ownership" assets, investors own all or part of an asset (e.g., real estate, corporation). They buy shares of company stock or growth mutual funds or, perhaps, a rental property. In other words, as an owner, they have an equity or ownership interest in a company or property, and their principal and investment earnings fluctuate with market conditions and other factors (e.g., company earnings) that affect an asset’s selling price. </p>
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Learning Objectives
<p>This unit will help you: </p>
<ul>
<li>Identify fixed-income investments that match your goals and available cash flow</li>
<li>Research these investments</li>
<li>Investigate fixed-income investments (e.g., bond funds) available through your employer (e.g., 401(k) plan)</li>
<li>Calculate the percentage of your portfolio allocated to fixed-income investments</li>
</ul></p>
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<p>Fixed-income investments are "loanership" assets; investors loan their money to a government entity (e.g., state), corporation, or financial institution (e.g., bank, credit union) and receive interest on a regular basis (e.g., monthly, semi-annually). The rate of interest paid can either be fixed for the life of an investment (e.g., Treasury securities) or can fluctuate with the general movement of interest rates (e.g., Series EE savings bonds). The principal (amount of original investment) is returned at maturity (the date on which principal must be repaid), although its value can fluctuate (if sold beforehand) according to changes in interest rates. For many fixed-income securities (e.g., bonds), as interest rates rise, asset prices decline and, as interest rates decline, asset prices rise. This inverse relationship of interest rates and asset value, called interest rate risk, affects the value of fixed-income securities if you have to sell them prior to maturity. In other words, you could lose principal if interest rates rise and you have to sell early. </p>
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1 - Why Buy Fixed-Income Investments?
<p>There are many reasons to consider fixed-income investments. One is that they add diversification to an investor’s portfolio. Research by several Nobel prize-winning economists found that, for every level of investment risk, there is a "best combination" of assets that produces the highest rate of return. Investing in just one asset class (e.g., stock, bonds, or cash), however, is less desirable than selecting a combination of assets because doing so increases investment risk. It’s like the old saying "don’t put all of your eggs in one basket." By combining investments that are affected differently by economic events, investment risk is reduced. While both stocks and bonds often are similarly affected by interest rates in the short run today, over the long term they have had a relatively low relationship to each other. The technical word for this is correlation, which is a statistical term that indicates the degree to which the movement of one variable (in this case, an asset class price) is related to another. </p>
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<p>Besides diversification, there are several other reasons to consider fixed-income securities. First, they are a good option for conservative investors who are fearful of ownership assets. If the price fluctuations of the stock market are likely to cause sleepless nights, fixed-income investments like bonds are less risky because investors are less likely to lose principal. Most fixed-income securities also provide a predictable stream of income. This can be an advantage for current or near retirees who seek regular income to supplement Social Security and other income sources. </p>
<p>Predictability of investment return is a third feature of fixed-income securities. The rate of return is fixed for the life of most investments and a certain amount of income can be counted upon (e.g., a 6% interest rate on a $1,000 corporate bond will pay $30 semi-annually). Some fixed-income investments also provide tax advantages. Fixed annuities, for example, are tax-deferred and municipal bond interest is federally tax-exempt. </p>
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<p>Some investments (e.g., bond funds) also allow investors to reinvest earnings, plus most fixed-income securities typically earn a higher return than bank accounts. This is especially true for substandard grade bonds rated less than Baa by Moody's or BBB by Standard & Poor's. Investment yields generally increase as the credit quality of a bond issuer drops. Thus, investors can increase their income by purchasing lower-rated bonds. Further information about bond ratings is available in many public libraries. Fixed-income securities with longer maturities (e.g., 30-year bonds) typically pay a higher interest rate than shorter-term investments (e.g., 10-year bonds) to compensate investors for having their money "tied up" for additional years and for increased exposure to price fluctuations caused by interest rate risk. </p>
<p>Fixed-income securities are subject to default risk, which makes the predictability of investment returns uncertain. In addition, the potential for capital gains or losses, mentioned previously, also adds a layer of uncertainty. </p>
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<p>Some fixed-income securities also have capital gain (or loss) potential. Capital gains can accrue if investments are sold in secondary markets at a premium (more than their face value) prior to maturity. Gains occur when interest rates decrease and bond prices rise. A final feature of fixed-income investments is affordability. Most investment products in this category require a minimum purchase of $1,000 or less. Treasury bills and notes, for example, all require minimum initial deposits of $100. Even among municipal bonds, which generally require $5,000, some issuers offer $100 or $500 "minibonds" that provide tax-exempt income to small investors. Ginnie Maes, which require $25,000 to purchase directly, can be bought in $1,000 units through unit investment trusts (UITs). Series EE bonds can be purchased for as little as $25 and I bonds for $50. </p>
<p>Next, we will briefly examine fixed-income investments and five general tips for fixed-income investing. The list begins with securities sold at banks, followed by various types of bonds and other fixed-income investments that are generally sold by brokers. </p>
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Exercise: Why Buy Fixed-Income Investments?
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Make a list of all of the fixed-income investments (e.g., bonds, bond funds, fixed annuities) that you own and their current value and calculate their percentage in your overall investment portfolio (e.g., $35,000 in U.S. savings bonds and Treasury bills ÷ $92,000 in total invested assets = 38%). </p>
</td>
</tr> </tbody>
</table>
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2 - Certificates of Deposit
<p>Also known as "time deposits," certificates of deposit (CDs) are an insured bank product that pays a fixed rate of interest for a specified period of time (e.g., 18 months). Typical CD maturities range from seven days to five years, with higher rates of return paid on CDs with longer maturities. A penalty is assessed if funds are withdrawn prior to maturity, resulting in the loss of a certain number of days of interest (the amount varies among financial institutions). If an early withdrawal penalty exceeds the interest earned, the difference will be deducted from an investor’s principal. </p>
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<p>Many people think that CDs can only be purchased at banks. Many credit unions and full-service brokerage firms also sell federally insured CDs to investors. Investment firms purchase the CDs of banks nationwide in large blocks and sell them to investors in small denominations. The difference between their buying and selling price, called "the spread," is how they make a profit. Since brokers shop the entire country for high yields, brokered CDs often pay more attractive rates than CDs at local banks. CDs can be redeemed prior to maturity, often without penalty, but, due to interest rate risk, the value of a brokered CD can be higher or lower than someone’s initial investment. </p>
<p>Another relatively new type of CD is the equity-indexed CD. Sold through both banks and brokers, these CDs base returns, in part, on appreciation of a stock market index like the Standard & Poor’s 500 (S&P 500). Many require a $5,000 initial investment (often less for IRAs). Unfortunately, equity-indexed CDs rarely include the full appreciation potential of the S&P 500 because they exclude the portion derived from company dividends. Many also cap the maximum growth rate, which further reduces upside potential. As a result, most financial advisors suggest avoiding these CDs and buying regular CDs for income and a stock index fund for capital growth.</p>
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Exercise: Certificates of Deposit (CDs)
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Compare the interest rates offered on CDs of three different maturity lengths (e.g., 3 month, 6 month, and 12 month) at three different financial institutions (e.g., banks, credit unions, online banks, and/or brokerage firms). Determine the best CD for your personal investment goal(s). </p>
</td>
</tr> </tbody>
</table>
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3 - Series EE and I U.S. Savings Bonds
<p>U.S. savings bonds are the lowest-denomination securities issued by the Federal government. Income earned is exempt from state and local taxes. Federal taxes can be deferred for up to 30 years or until the owner cashes a bond. Both the Series EE and I bond are available at most banks and many credit unions and other financial institutions in denominations starting from $50. Many employers offer both Series EE and inflation-adjusted I bonds through convenient payroll savings plans. </p>
<p>The purchase price of Series EE bonds is one-half their face value (e.g., $50 for a $100 bond). Series I bonds are sold at face value in the same denominations as Series EE. Effective January 1, 2008, individuals or entities may purchase up to $5,000 worth of each series in paper form (a total of $10,000 in paper bonds) in one calendar year. In addition, individuals can buy up to the same amount of each series in Treasury Direct online accounts or a total of $20,000 (issue price) in single ownership form per calendar year. The accrued interest on both series is paid when the bonds are redeemed. Bonds can be redeemed at most financial institutions. </p>
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<img valign="top" align="right" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$savings_bonds.png" alt="Savings bonds" />
<p>Series EE and Series I bonds must be held one year before being eligible for redemption. Redemptions prior to 5 years from issue are subject to a 3-month interest penalty (e.g., 21 months of interest for a bond cashed in after 24 months). Redemption values are available using the tables and Savings Bonds Wizard software available free at the Treasury Department Web site http://www.treasurydirect.gov/indiv/tools/tools_savingsbondwizard.htm or by consulting tables available at most banks, credit unions and other financial institutions. You may also request a free table by writing to Bureau of the Public Debt, Savings Bond Operations Office, Parkersburg, WV 26106-1328. </p>
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<p>Effective May 1, 2005, Series EE bonds pay a fixed interest rate for the life of the bond based on whatever rate is in effect at the time of purchase. Interest rate changes are made on May 1 and November 1. Series I bonds earn a fixed rate over and above an inflation adjustment based upon changes in the Consumer Price Index. Interest accrues federally tax-deferred for as long as 30 years or until the bond is redeemed. Earnings on both series are subject to federal tax, but may be tax-free if cashed in a year when the owner pays qualified higher education expenses. Income limits and other restrictions apply; see IRS Form 8815 for details. Earnings from all savings bonds are exempt from state and local taxes. Current rate information can be obtained by phoning 1-800-4US-BOND (1-800-487-2663) or visiting the Web site www.savingsbonds.gov. </p>
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<p>It is sometimes confusing to determine the current redemption value of Series EE bonds or when they have doubled in value. If interest rates are so low that a bond is not worth its face value in 17 years, the U.S. Treasury will add a one-time "make-up" to ensure that it is worth twice as much as an investor paid (e.g., $50 for a EE bond originally purchased for $25). Basic bond redemption tables are free and available at many banks or from the Bureau of the Public Debt, (see above). Another way to determine the value of a Series EE bond is to use the Savings Bond Wizard feature of the Treasury Department’s Web site: http://www.treasurydirect.gov/indiv/tools/tools_savingsbondwizard.htm. If your grandmother gave you a savings bond 20 years ago, for example, you can check a table or the Web site to find what it is worth. </p>
<p>There is also another U.S. savings bond: HH bonds. They were discontinued by the U.S. Treasury as of September 2004 but some investors still hold them. HH bonds were issued at full face value through an exchange of Series EE bonds, thus deferring federal income tax due on EE bond earnings for as long as 20 additional years. Denominations range from $500 to $10,000 and interest is paid semi-annually. The last fixed rate offered on HH bonds was 1.5% (as of January 2003). </p>
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Exercise: Series EE and I U.S. Savings Bond
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Increase your investment knowledge by reading the EE/E Savings Bonds in Depth, I Savings Bonds in Depth, Savings Bonds as Gifts, and Savings Bonds Rates sections of www.savingsbonds.gov and visiting www.treasurydirect.gov. Record 3 to 5 points that you didn’t previously know about U.S. Savings Bonds and two personal applications. </p>
</td>
</tr> </tbody>
</table>
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4 - Money Market Mutual Funds
<p>Money market mutual funds are a type of mutual fund consisting of high quality, short-term debt instruments such as Treasury bills and short term corporate IOUs. Like all mutual funds, money market mutual fund (MMMF) portfolios are professionally managed and a management fee is charged against fund assets to cover this expense. MMMFs offer market-based rates and are quick to respond to changing conditions because the average maturity of securities in their portfolio is 90 days or less. The minimum initial deposit is set by individual investment firms and can range from $250 to $25,000. MMMFs can be purchased directly from investment companies or with the assistance of financial advisors. </p>
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<p>Unlike bank-sponsored money market deposit accounts (MMDAs), there is no FDIC insurance if a MMMF fails to maintain a $1 share price. Failures have happened infrequently in the last 20 years, however, and most investment firms have shored up MMMF prices with other company assets to avoid a loss of principal by investors. Limited check writing is generally available on MMMFs with a minimum amount (e.g., $250) per check. Investors seeking both safety of principal and tax advantages can select tax-exempt MMMFs that include short-term securities issued by state and local governments. Other conservative choices are MMMFs that invest solely in Treasury bills and/or Treasuries plus debt of federal government agencies. While FDIC insurance is generally not available for money market mutual funds, it did become available on some funds during the financial crisis of 2008-2009.</p>
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Exercise: Money Market Mutual Funds
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Compare the interest rates currently available on three money market mutual funds with those available on money market deposit accounts at three local or online banks. To obtain money market mutual fund performance data, visit the Web sites of investment companies that offer money market funds, consult the financial pages of a newspaper, or visit www.bankrate.com. </p>
</td>
</tr> </tbody>
</table>
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5 - Bonds and Treasury Securities
<h3>Bonds</h3>
<p>Before discussing various types of bonds, some background is in order. Bonds are debts or IOUs of corporations or government entities. Bond issuers promise to pay a specified rate of interest, called a coupon rate, periodically and to repay the face (a.k.a., par) value of the bond (e.g., $1,000) at maturity. Corporate and municipal bonds are typically sold by brokers, who receive a sales commission. Bonds are subject to interest rate risk. If interest rates rise, the value of previously issued bonds will drop as investors demand a price adjustment equivalent to earning the prevailing interest rate. If interest rates drop, a previously issued bond will be worth more than its face value because investors would be willing to pay a premium to obtain a bond paying more than the currently available rate. The value of long-term bonds is affected more than short-term bonds by interest rate fluctuations. Bonds are also subject to call risk. This means that a bond issuer may choose to retire existing bonds, issued when interest rates were high, and reissue them with new debt at a lower interest rate. </p>
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<p>The capacity of bond issuers to repay their debt is rated by various commercial firms such as Moody’s and Standard & Poor’s. Bonds rated Baa to Aaa by Moody’s and BBB to AAA by Standard & Poor’s are considered investment grade. Those with lower ratings are termed substandard grade or, in more popular language, "junk bonds." Since it is not good marketing to use the word "junk" to sell something, substandard grade bonds or bond funds can often be recognized by the words "high yield" in their title. </p>
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<h3>U.S. Treasury Securities</h3>
<p>Treasury securities are an obligation of the U.S. government and are considered the safest of all debt instruments because there has never been a default in payment. This concept is sometimes stated with the words "full faith and credit of the U.S. government." Treasury securities are sold at periodic government auctions. They are exempt from state and local income taxes due to the principal of reciprocal immunity. This means that the federal government doesn’t tax state and local debt (e.g., municipal bonds) and state and local governments don’t tax federal debt (e.g., Treasury securities). </p>
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<p>There are two types of Treasury securities currently available for purchase: bills and notes. All require a $100 minimum deposit with larger amounts purchased in multiples of $100. Treasury bills have the shortest term of all Treasury securities and come in 4-, 13-, 26- and 52-week maturities. They are bought at a discount with investors paying the face amount up front and receiving back an amount, called "the discount," equal to the interest rate determined by the most recent auction. At maturity, an investor’s original purchase amount (principal) is returned. If interest rates are 4%, for example, an investor with a $1,000 Treasury bill would receive a discount of $40 ($1,000 x 0.04) shortly after purchase and their $1,000 principal back at maturity. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$anna.png" alt="Anna outdoors" title="Anna outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$05_anna$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Anna</h3>
<p>Anna's got some thoughts about bonds and treasury securities. Select the Play icon to hear more.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$05_anna$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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</table>
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<p>Treasury notes currently come with 2-, 5-, and 10-year maturities. They pay a fixed rate of interest semi-annually until maturity, when investors get their principal back. For example, a $1,000, 5-year Treasury note with a 5% yield pays $25 every six months ($50 per year). The yield on Treasury notes is generally higher than that of bills to compensate for the risk of investing longer and the greater volatility that accompanies interest-rate changes. </p>
<p>Treasury bonds are issued for a term of 30 years. Like Treasury notes, they pay a fixed rate of interest every six months until maturity. The yield on Treasury bonds is generally higher than that of notes to compensate for the risk of investing longer and the greater volatility that accompanies interest-rate changes. </p>
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<p>Treasury securities can be purchased from a bank or brokerage firm for a fee of about $50 or with no fee from the Federal Reserve Bank’s "Treasury Direct" program. An application, called a tender form, is required and can be obtained by calling 202-874-4000 for a list of Federal Reserve Banks or through the Treasury Department Web site https://www.treasurydirect.gov/indiv/indiv.htm. With Treasury Direct, an investor must specify a bank account where their interest payments can be deposited electronically. Treasury securities also can be sold through the Treasury Direct program for a nominal charge. </p>
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<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" title="Earl outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$05_earl$@SLASH@$0.mp3"></a><br /><br /></div><br />
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<td>
<h3>Earl</h3>
<p>Earl just learned about fixed-income investing. Select the Play icon to hear more.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$05_earl$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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<h3>Municipal Bonds</h3>
<p>Municipal bonds are debt instruments of state and local governments or government-related entities (e.g., bridge or highway authorities). General obligation (GO) bonds are backed by the full taxing ability of the issuer and are considered the safest of municipal bonds. A second type of municipal bond, the revenue bond, is backed by some type of revenue-generating source (e.g., fares, tolls, fees) and generally pays a slightly higher rate of return. </p>
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<p>Municipal bonds are generally attractive to persons in the 25% marginal tax bracket and higher. Investors keep more of what they earn because the interest is generally federally tax-exempt. Interest is also state tax-exempt, if bonds are issued by an investor’s state of residence. An exception is the so-called private purpose municipal bond sold to finance sports stadiums, airports, hospitals, and the like. Municipal bonds are generally sold by brokerage firms in $5,000 increments with less expensive "minibonds" requiring a lower amount (e.g., $500). Interest is paid semi-annually. Investors can also obtain the tax advantages of a municipal bond by purchasing a municipal bond mutual fund, often for an initial investment of $1,000 or less. To determine your marginal tax bracket, refer to <a href="$@FILEPHP@$$@SLASH@$html_pages$@SLASH@$fig_1.html" target="_blank">Figure 1 in Unit 7</a>, Tax-Deferred Investments. </p>
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<h3>Corporate Bonds</h3>
<p>Corporate bonds are debt instruments issued by for-profit companies to raise capital for expansion and/or ongoing operations. They are generally sold in $1,000 increments and pay taxable interest twice a year. Corporate bonds generally pay higher interest rates than government bonds with comparable credit ratings and maturities. Investing in a corporation is a greater risk than a government entity that has the ability to raise revenue through taxes. Thus, investors must be compensated accordingly. The least risky of all corporate bonds is a mortgage bond because it is backed by a company’s land and buildings. Bonds backed by non-real estate assets (e.g., airplanes, securities) have more risk. The highest risk corporate bond is a debenture, which is a corporate bond backed only by a company’s future earnings and promise to repay. Conservative investors will want to select mortgage bonds issued by investment grade (i.e., highly rated) companies. </p>
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<h3>Convertible Bonds</h3>
<p>As their name suggests, convertible bonds are a type of corporate bond that allows investors to "have their cake and eat it too," almost. They provide the upside potential of stocks (the opportunity to participate in company earnings) with the downside protection of bonds (a fixed return and repayment of principal at maturity). Convertible bonds can be exchanged for a specified number of shares of common stock of the issuing company. As the price of the company stock increases, the convertible bond price also increases because the option to convert becomes more valuable. This relationship is true whether an investor chooses to convert or not. The trade-off is that convertible bonds generally convert to fewer shares of stock than you could buy for the cost of a bond. Almost all convertible bonds are callable. Even though they are a "hybrid" investment, convertibles (like all bonds) are sensitive to interest rate fluctuations. They can be purchased as individual securities in $1,000 increments or through convertible bond mutual funds. </p>
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<h3>Zero-Coupon Bonds</h3>
<p>As their name implies, zero-coupon bonds pay no (zero) annual interest. Instead, they are sold at a deep discount and eventually grow to full face value ($1,000). An investor might pay only $200 or $300, for example, for a bond that matures in 15 or 20 years. Brokers may require a $5,000 purchase, however, or five times the initial cost. For example, an 8% zero-coupon bond with 15 years to maturity would cost $308. To purchase five such bonds ($5,000 face value) would cost $1,540 (5 x $308). So, in this example, if you invest $1,540 now, you know you'll get back $5,000 in 15 years. This return might be suitable for a goal you want to achieve in 15 years (e.g., future education expenses of a young child). </p>
<p>Many investors like zero-coupon bonds for their relatively low upfront cost and predictability. An investor knows exactly how much they’ll have at maturity. Two disadvantages of zero-coupon bonds are their extreme volatility with interest rate changes and the fact that annual increases in value are considered taxable income. Immediate taxation can be avoided, however, by using zero-coupon bonds for tax-deferred retirement plans, such as IRAs, or by buying tax-exempt (e.g., municipal) zero-coupon municipal bonds. </p>
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Exercise: Bonds (U.S. Treasury, Municipal, Corporate, Convertible, Zero-Coupon)
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Increase your investment knowledge by reading the Learn About Treasury Bills, Notes, Bonds, and TIPS sections of the Treasury Direct Web site http://www.treasurydirect.gov/tdhome.htm. Record 3 to 5 points that you didn’t previously know about U.S. Treasury securities and two personal applications. </p>
</td>
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6 - Unit Investment Trusts
<p>Unit Investment Trusts (UITs) are a professionally selected portfolio of similar securities (e.g., 30-year municipal bonds) packaged together and sold by brokerage firms. Unlike mutual funds, UITs are a "buy and hold" investment, and there is no ongoing portfolio management. UIT sponsors simply buy a collection of bonds (and, with some UITs, stocks) and hold them. Investors receive periodic interest payments and a return of principal at maturity. If bonds within a UIT portfolio are sold or called prior to maturity, some principal may be returned sooner. </p>
<p>UITs are generally sold in $1,000 increments called units. The interest earned is taxable unless a UIT invests in tax-exempt bonds. If an investor needs his/her money prior to maturity, units can be redeemed at their current market value, subject to interest rate risk. Two advantages of UITs are broad diversification and steady cash flow. A specified rate of return is locked in for the duration of a UIT. Two disadvantages are high upfront costs (typically a 3% to 5% sales charge) and the potential for loss if units are sold prior to maturity. For some UITs, selling units prior to maturity may be difficult or costly because secondary markets are small. For more information on UITs, see Unit 8. </p>
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<h3>Bond Mutual Funds</h3>
<p>Instead of purchasing individual securities, an investor might decide to purchase shares of a bond mutual fund. Advantages include broad diversification, liquidity, and ongoing professional management. In addition, bond fund accounts can sometimes be opened for $500 or less, making them attractive for persons with small dollar amounts to invest. The biggest disadvantage of bond mutual funds is that, unlike individual securities and UITs, there is no fixed maturity date. Thus, the price of shares is always subject to fluctuation with changes in interest rates, and an investor could lose principal if interest rates increase. </p>
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<p>As with all mutual funds, the key factors to look for when selecting a bond fund are historical performance and expenses. Unlike stock funds, that have the potential for capital appreciation to offset fund expenses, bond funds must rely on low management costs to enhance their returns. In addition, bond funds generally invest in similar securities (e.g., Treasuries), so most of the difference in return among bond funds is due to differences in cost. The average annual expense ratio (expenses as a percentage of fund assets) for bond funds is about 1% ($1 for every $100 invested), but there are some low-cost fund families like Vanguard, T. Rowe Price, TIAA-CREF, and Fidelity that charge significantly less. </p>
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<p>Studies have found that, among government bond funds, funds with low expense ratios generally outperform their peers. One low-cost bond mutual fund is a bond index fund. Bond index funds purchase the same securities that comprise a benchmark bond index, such as the Lehman Brothers Aggregate. Since the portfolio of securities is pre-determined by whatever bonds comprise an index, trading costs are minimal and bond index fund management expenses are low. Like individual bonds, bond funds with the longest maturities are extremely volatile when interest rates fluctuate. Conservative investors should select short-term bond funds consisting of investment grade securities. </p>
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<h3>Bond Exchange Traded Funds</h3>
<p>Exchange-traded funds (ETFs) exist for many of the categories of fixed-income investments discussed previously. As noted in Unit 4, ETFs are a “hybrid” investment with characteristics of both stocks and index mutual funds. Like stocks, ETFs trade on stock exchanges and experience price changes throughout each market trading day. Like index funds, they consist of a portfolio of securities that is passively managed. This means that, by definition, ETFs consist of the securities that comprise a specific benchmark market index. Bond ETFs track benchmark indices for both foreign and domestic bonds such as the Lehman Brothers Aggregate Bond Index. </p>
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7 - Mortgage-Backed Securities
<p>Mortgage-backed securities are investments in a portfolio of home mortgages and are sometimes referred to as "pass-through" securities because homeowners’ mortgage principal and interest payments are "passed through" to investors. The most well-known mortgage-backed security is the Ginnie Mae, which is issued by the Government National Mortgage Association (GNMA). Ginnie Maes carry the "full faith and credit" guarantee of the federal government and require a $25,000 minimum purchase through a broker. You can also sometimes buy them at a discount for less than $25,000 if their interest rates are low compared with current interest rates. Ginny Maes can also be purchased indirectly for $1,000 through units in a Ginnie Mae unit investment trust and through mutual funds that invest in U.S. government agency securities (minimum amounts vary per fund). </p>
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<p>The biggest disadvantages of mortgage-backed securities are an uncertain maturity and irregular monthly payments. Although the mortgages in their portfolios are issued for 30 years, the average life of a mortgage-backed security is only 10 to 12 years because homeowners frequently move or refinance. Also, if investors spend the part of their monthly check that is a return of principal, instead of reinvesting it, they will have nothing left when the last mortgage in their Ginnie Mae portfolio is repaid. </p>
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<p>Collateralized mortgage obligations (CMOs) are another type of mortgage-backed security. CMOs were developed to address investors’ concern about receiving income from other mortgage-backed securities in unpredictable increments. With CMOs, the portfolio of mortgages is divided into various classes, called tranches, thus offering investors a choice of estimated maturity dates to match financial goals. Investors in a particular tranche receive periodic income payments (typically monthly) that differ from period-to-period and from other tranches. Tranches with a longer maturity generally pay a higher return to compensate investors for incurring greater interest rate risk. The principal portion of mortgage payments corresponding to all tranches goes to investors in a single tranche until that tranche is retired. Each tranche gets its principal back when all the tranches before it have been repaid. </p>
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<p>CMOs are available in $1,000 increments through brokerage firms and pay a higher yield than comparable mortgage-backed securities. Two disadvantages are their complexity and the fact that principal prepayment can still come sooner (or later) than expected. Just as with other mortgage-backed securities, investors must realize that principal is being repaid throughout the life of a CMO, not at maturity like bonds. Investors who mistakenly think that CMO payments are just interest may inadvertently spend their principal. </p>
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8 - Annuities
<p>An annuity is a contract with an insurance company to provide regular income immediately or at some time in the future for a specified period (e.g., the lifetime of an annuitant or an annuitant and his/her spouse), typically during retirement years. In return, an investor deposits a sum of money with an insurance company, which grows tax-deferred until withdrawal, or makes periodic payments. </p>
<p>There are two types of annuities: variable annuities which provide access to growth-oriented (ownership) and income-oriented (loanership) investments through a choice of mutual fund subaccounts, and fixed annuities that guarantee a fixed rate of return for a specified period of time. Thus, fixed annuities are like a CD, but are tax-deferred. A rate of return is locked in for a period of 1 to 5 years after purchase and then adjusted annually according to market conditions. </p>
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<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$financial_advisor.png" alt="Financial advisor meeting clients" />
<p>An annuity is a combined insurance and investment product. Sellers of annuities must maintain licenses to sell both types of products. Annuities have two layers of expenses, one for the insurance component and one for the investment component. Many annuities have high surrender charges which can amount to as much as 10% of the initial investment if the money is needed sooner than expected. </p>
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9 - Preferred Stock
<p>Although technically a form of stock, preferred stock is often listed as a fixed-income investment because it behaves more like a bond, but has no fixed maturity date. The word "preferred" refers to the fact that shareholders receive preferential treatment. They are paid dividends before common stock shareholders and, in the event of a corporate liquidation, can claim corporate assets after bondholders but before common stock shareholders. </p>
<p>Preferred stock typically pays a fixed dividend rate similar to the coupon rate on a bond. Share prices fluctuate inversely with changes in interest rates. Par value on preferred stock is usually about $25 per share so a round lot (100 shares) would cost $2,500. Dividends paid are a fixed percentage of par value. Preferred stock shares are available through brokerage firms. </p>
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Exercise: Bond Unit Investment Trusts, Bond Mutual Funds, Mortgage-Backed Securities, Collateralized Mortgage Obligations (CMOs), Annuities, and Preferred Stock
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
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<td>
<p>Contact a full-service or discount broker to request information about one or more of these fixed-income investments. Read the sales literature and/or investment prospectus and make a list of questions or topics that you don't understand. Consult back with the broker to get your questions answered and determine whether the investment(s) are an appropriate choice.</p>
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Exercise: Bond Unit Investment Trusts, Bond Mutual Funds, Mortgage-Backed Securities, Collateralized Mortgage Obligations (CMOs), Annuities, and Preferred Stock
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
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<td>
<p>Visit The FINRA Smart Bond Investing Web site at http://apps.finra.org/Investor_Information/Smart/Bonds/000100.asp. Review the content and record 3 to 5 points that you didn’t previously know about bonds and two personal applications.</p>
</td>
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10 - Guaranteed Investment Contracts
<p>Called GICs for short, guaranteed investment contracts are fixed-income contracts issued by insurance companies as an investment option for 401(k) retirement plans. Another commonly used name for GICs is "stable value funds." Like CDs, only tax-deferred, GICs pay a fixed-interest rate for a specified period of time (e.g. 3 to 5 years). Because they are backed by an insurance company, and not the federal government, GICs generally pay a higher return than CDs and other cash investments. Their return is lower than stocks, however, leading to criticism that they are inappropriate for long-term financial goals like retirement. </p>
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<h3>Five Tips for Fixed-Income Investors</h3>
<ol>
<li>Know the risks. All investments have risks, including fixed-income securities. To earn a higher return, for example, an investor may need to consider bonds from a less creditworthy issuer.</li>
<li>Beware of guarantees. Even with a portfolio of Treasury securities, an investor can lose money via interest rate risk. Beware of promises that "you can never lose principal." You can.</li>
<li>Ladder your portfolio. Stagger the purchase of bonds, CDs, and Treasury securities to spread out the tax owed and expose only a portion of your portfolio to interest rate changes at any one time.</li>
<li>Use bonds to hedge stock investments. Have your cake and eat it too. Buy a zero-coupon bond to guarantee the return of principal and use the balance of principal to invest in ownership assets (e.g., stock).</li>
<li>Match investments with financial goals. Invest with a goal in mind. For example, use a 2-year Treasury note for an upcoming car purchase or an 8-year zero-coupon bond for a child’s education.</li>
</ol>
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<h3>Summary</h3>
<p>Fixed-income investments involve loaning money for a period of time in exchange for periodic interest. Income is the primary objective and some investments also have growth potential if sold for a premium prior to maturity. This unit has reviewed characteristics of specific fixed-income investment products, including advantages, disadvantages, and required minimum investments. Now you need to consider appropriate fixed-income investments that mesh with your personal financial goals. </p>
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<p>Congratulations! You've reached the end of the unit. Select continue to start Unit 6 or use the lesson menu on the left to skip to any part of Units 1-11. </p>
<p><br /></p><hr style="width: 100%; height: 2px;" />
<h3><span style="font-weight: bold;">About the Author</span></h3>
<h3><span style="font-weight: bold;"></span></h3><b>Barbara O'Neill</b>, Ph.D., holds the rank of full professor at Cook College, Rutgers University. She was a family and consumer sciences educator in Sussex County, New Jersey from 1978 to 2004 and is currently an Extension Specialist in Financial Resource Management. She is a Certified Financial Planner (CFP), an Accredited Financial Counselor (AFC), and a Certified Housing Counselor (CHC). Dr. O'Neill has written over 1,500 consumer newspaper articles and over 100 articles and abstracts for professional journals and conference proceedings. She is also the author of five books, three financial case-study books published by Rutgers University, and <i>Saving On A Shoestring</i> and <i>Investing On A Shoestring</i>, trade books published by Dearborn Financial Publishing.<br />
<p><br /></p>
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UNIT 6: MUTUAL FUND INVESTING
<img valign="top" align="right" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$mutual_fundscorrected.png" alt="Newspaper" />
<p>In Units 4 and 5 you learned how to purchase individual securities such as stocks and bonds. Another popular investment choice is mutual funds. Mutual funds are an investment through which many people invest in stocks and bonds indirectly. Almost everyone who is investing has a need to learn the basics of mutual funds. Some investors might need to know how to choose investments for a 401(k) or other retirement plan; others, how to invest money received from an insurance or divorce settlement. Many people just want to know how to get started as an investor using mutual funds. Still others own a hodge-podge of funds bought at various times without much thought as to how they complement each other. Getting a year-end bonus, a tax refund, or reading that a popular mutual fund is about to close also prompt many would-be investors to buy a fund.<p>
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Learning Objectives
<p>This unit will help you: </p>
<ul>
<li>Investigate mutual fund investment choices (e.g., stock funds) available through employer retirement savings plans </li>
<li>Decide upon your selection criteria (e.g., minimum deposit, low expense ratio)</li>
<li>Identify specific mutual funds that match your investment goals </li>
<li>Complete a mutual fund application and make an investment </li>
<li>Track the progress of your funds at least quarterly</li>
</ul>
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<p>An individual's investment portfolio should be more than just a collection of mutual funds. Before you select funds to invest in, you will want to determine your investment goals, your time-frame for needing the money, and the amount of risk you are willing to take. This unit will help you learn how to invest in one of the best investment vehicles ever created in the context of your own overall financial plan. One of the top reasons for learning about mutual funds is that you can save money if you choose the funds and maintain your portfolio yourself. </p>
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1 - What is a Mutual Fund?
<p>A mutual fund is a portfolio of stocks, bonds, or other securities that is collectively owned by hundreds or thousands of investors and managed by a professional investment company. The shareholders are people who have similar investment goals. Each fund has specific investment criteria, which are spelled out in its prospectus, the official booklet that describes the mutual fund. Investors then know what they are getting and can match their objective to that of a fund. The pooled money has more buying power than one investor alone, so that a fund can own hundreds of different securities. Thus, its success is not dependent on how just one or two companies perform. </p>
<p>A mutual fund makes money in several ways: by earning dividends or interest on the investments it owns and by selling securities that have appreciated in value. You, in turn, make money in the form of dividends and interest that are passed on to you and the increase (or decrease) in the fund's value. The mutual fund manager keeps constant watch on financial markets and adjusts the portfolio to achieve the strongest returns. By owning part of a fund, the hard work of selecting and monitoring stocks and bonds is done for you. </p>
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<p>The majority of mutual funds available are open-end funds, which are the focus of this unit. Open-end funds can have an unlimited number of investors or money in the fund. Managers of closed-end funds, on the other hand, decide upfront how many shares they will issue and when they will sell them. The only way to purchase shares in a closed-end fund, once the original shares have been sold, is to buy them from a current investor. Occasionally, open-end funds can and do close to new investors, often because of high cash inflows that cannot be invested in a timely manner. They do not become closed-end funds, however, because current shareholders can still buy additional shares from the fund company. </p>
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<p>When investors purchase a mutual fund, they own a piece of an investment portfolio. They share in the gains, losses, and expenses in proportion to the amount they have invested in the fund. At the close of every trading day, a mutual fund company tallies the value of all the securities in its portfolio and deducts its expenses (e.g., management fees, administrative expenses, advertising costs). The balance is divided by the number of shares owned by shareholders to arrive at the dollar value of one share of the mutual fund. This value, the net asset value or NAV, is the price your fund pays you per share when you sell. </p>
<p>At this point, you may want to review Units 4 and 5 to understand the underlying instruments in most mutual funds. </p>
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<h3>Why Mutual Funds?</h3>
<p>For a majority of people, mutual funds should be a major part of their investment portfolio--unless they have a lot of money and ample time to devote to investing in individual securities. While there are arguments for buying stocks and bonds directly, consider buying mutual funds first, or at least use them as a core holding, because of the following drawbacks to individual stock and bond picking and trading: </p>
<ul>
<li>First, a great deal of time and expertise is required to analyze a company—its prospects for earnings growth, its performance over the short and long term in comparsion to its competitors, its debt level and creditworthiness, its new products in the pipeline, and technological changes looming that might harm or improve business.</li>
<li>Second, purchasing individual securities generally involves higher transaction costs. Even when you use a discount broker, the commissions you pay to buy and sell are not cheap. Online trading may be an even less expensive option, but it, too, involves transaction costs.</li></ul>
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<ul><li>Third, owning individual stocks means you are less likely to have proper diversification. To diversify a stock portfolio, you need to own at least 10 to 20 different companies in different industries, which could cost thousands of dollars. For the same price you might pay for 100 shares of one security, you can buy shares in a fund that owns 100 securities. Diversification lowers your investment risk—if one or two stocks plunge, others may gain in value, offsetting the loss.</li>
</ul>
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<p>Nevertheless, there are several circumstances when you do not need mutual funds: </p>
<ul>
<li>If you are adept at picking individual stocks,</li>
<li>If you have at least $20,000-50,000 to buy at least 10 to 20 stocks (depending on stock prices),</li>
<li>If you decide to invest in exchange traded funds (ETFs), and</li>
<li>You plan to invest in Treasury bills or notes.</li>
</ul>
<p>In the last case, you would do better purchasing them directly through the Federal Reserve's Treasury Direct program http://www.treasurydirect.gov/indiv/products/products.htm. </p>
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2 - Advantages of Mutual Fund Investing
<img valign="top" align="left" hspace="10" vspace="3" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$financial_advisors2.png" alt="Financial advisors" />
<h3>Ten Advantages of Mutual Fund Investing</h3>
<p>1. You get full-time, professional money management. Most people do not have the time or skill to select and monitor individual stocks and bonds. </p>
<p>2. You get reduced risk through diversification because a mutual fund owns many stocks or bonds. You can also pick your level of market risk by choosing particular types of funds (e.g., money market funds to insure your principal will not drop in value, bond funds if you want current income and some stability in your portfolio, stock funds if you want your money to grow over the long term.) </p>
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<p>3. You will earn competitive returns on your investment. Mutual funds can furnish the kinds of returns you need to reach your goals. In fact, by choosing an index fund, (a fund that invests in securities of one of the broadly based market indexes such as Standard and Poor’s 500), you can expect to match the market’s performance, minus the expenses of running the fund. This is an assurance that no other investment can provide. </p>
<p>4. You don’t need a lot of money to get started. Many funds require only $1,000 to open an account, and some funds require minimum initial investments as low as $250 to $500. Subsequent deposits can be as small as $25 to $100 if an automatic investment plan (AIP) is adopted. An AIP is an arrangement where you agree to have money automatically withdrawn from your bank account on a regular basis, (e.g., once a month or every quarter) and used to purchase fund shares. </p>
<p>5. You retain ready access to your money. A mutual fund is required to buy back your shares, which makes withdrawals easy. It will mail your check within seven days of the request at the closing price (NAV) on the day it is received. (An exception to receiving NAV at sale time is back-end load funds that charge a redemption fee). </p>
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<p>6. Mutual funds are often a cheaper way (than individually purchased securities) to get the investing job done. Research and operating costs are shared by the thousands of shareholders. The most efficiently run funds have an expense ratio (the percentage of fund assets deducted for management and operating expenses) of less than 1% a year. Some well-established funds charge annual fees as low as 0.2% to 0.5%. Also, many funds are sold directly through their sponsors with no sales charge-known as "no-load" funds. Funds that charge a sales commission are called "load" funds. </p>
<p>7. Mutual funds are convenient. They can be purchased (and sold) directly from a mutual fund company by mail and by telephone and from full-service brokers, financial planners, banks, or insurance companies. (Important note: when mutual funds are purchased from banks, they are not insured by the FDIC like other bank products.) In addition, some discount brokers have established mutual fund "supermarkets" where investors can own funds from many different fund families in one consolidated account without any sales charges or transaction fees. Earnings from mutual funds can also be automatically reinvested in additional shares. Reinvesting and compounding are keys to building wealth. </p>
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<p>8. Automatic withdrawal plans are available, making it possible to have a steady stream of income for retirement (e.g., withdrawals of $250 per month). </p>
<p>9. Mutual funds have less risk of bankruptcy or fraud than many other securities because they are highly regulated by the federal government through the SEC, which is charged with assuring that mutual funds and investment advisors follow specific rules of disclosure. </p>
<p>10. Monitoring mutual funds is simple. Prices are reported daily in the financial section of many newspapers and more in-depth information is available in the Sunday business sections (See Unit 9 for details). </p>
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<h3>Disadvantages</h3>
<p>1. If there is a broad market drop, your fund’s value will dip with it. The diversification of most mutual funds protects you when one or several securities fall, but not when the whole market takes a downturn. The fact that funds can fluctuate up and down, sometimes wildly, is par for the course and should not deter you from investing or scare you out of the market. </p>
<p>2. There is no guaranteed rate of return with mutual funds as there is with CDs and Treasury securities. Since risk is higher, the liklihood of greater earnings is increased. You must also expect investment performance to fluctuate. </p>
<p>3. Unwanted taxable distributions can also be a disadvantage. Funds are required to pay out 98% of their dividends, interest, and capital gains annually. Taxes must be paid on these distributions, even if you never received them but instead reinvested them in additional shares. Unfortunately, sometimes you can also owe taxes even if your fund lost money for the year. For the time being, however, this is a non-issue, if funds are held in a tax-deferred account such as a 401(k) or IRA. </p>
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<p>4. Record-keeping for tax purposes can be hard work. Investors who are not meticulous about keeping track of fund purchases and sales may end up paying higher taxes than are actually owed at the time of sale because of a miscalculation of their cost basis. This is the amount of your original deposit, plus additional contributions and reinvested dividends and capital gains. The amount of taxes you pay will vary depending on the method you use to calculate your gain or loss (e.g., average price, first-in, first-out, or specific identification). Thus, it is important to keep every annual statement for as long as you own the fund. </p>
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Exercise: What is a Mutual Fund?
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Take the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U6Ex1_Mutual_Fund_Knowledge_Quiz.doc" target="_blank">Mutual Fund Knowledge Quiz</a> to determine mutual fund topics that are already familiar and topics where more information is required.</p>
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3 - Marketplace
<h3>Marketplace</h3>
<p>Mutual funds fall into three main categories: </p>
<ul>
<li>Stock (investing primarily in stocks), </li>
<li>Bond (investing in debt issues), and</li>
<li>Money market (investing in short-term cash assets).</li>
</ul>
<p>All are established to achieve one of the following investment objectives: </p>
<ul>
<li>Growth,</li>
<li>Income,</li>
<li>Growth and Income, or</li>
<li>Preservation of Capital.</li>
</ul>
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<p>A mutual fund's stated objective might read something like "this fund seeks capital appreciation," meaning it is appropriate for investors who want to grow their money over the long term. Or it could state, "this fund seeks current income," indicating that the fund should be considered by investors who need a regular stream of income from their investments. The way these objectives are to be accomplished is outlined in the fund's prospectus and is the responsibility of the professional money manager hired by the mutual fund company. </p>
<p>To be a successful investor, you must match your objectives to that of the fund (e.g., long-term growth for retirement in 15 years). Equally important is matching the fund's risk level to your own risk tolerance. Study the fund's objective and understand the strategies it uses to achieve its goal in light of what you want to accomplish. Refer to Figure 1 to put various categories of mutual funds into perspective according to their level of risk and return: </p>
<a href="$@FILEPHP@$$@SLASH@$image$@SLASH@$Risk_return_unit6.gif" target="_blank">Select this link to see Figure 1.</a> Adapted from AAII Mutual Funds Video Course Workbook.
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td>
<p>The worksheets which follow break down mutual fund types by their basic investment objectives. Use them to help you match your goals with the appropriate funds. Examples for each category are provided. Any of the sample objectives could be met by any of the mutual fund types in each category. Write in your goals in the space provided on the left under Your Objective in each chart. Select the worksheets you want to view below. </p>
<p><a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U6Ex2a_Mutual_Funds_Growth_Objective.doc" target="_blank">Worksheet 1 - Mutual funds with a growth objective</a>. </p>
<p><a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U6Ex2b_Mutual_Funds_Income_Objective.doc" target="_blank">Worksheet 2 - Mutual funds with an income objective</a>. </p>
<p><a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U6Ex2c_Mutual_Funds_Growth_And_Income_Objective.doc" target="_blank">Worksheet 3 - Mutual funds with growth and income objectives</a>. </p>
<p><a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U6Ex2d_Mutual_Funds_Preservation_of_Capital_Objective.doc " target="_blank">Worksheet 4 - Mutual funds with a preservation of capital objective</a>. </p>
<p><a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U6Ex2e_Mutual_Funds_All_Four_Objectives.doc" target="_blank">Worksheet 5 - Mutual funds with all four objectives</a>. </p>
</td>
</tr> </tbody>
</table>
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Exercise: Marketplace
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Review <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U6Ex2_Mutual_Funds_Worksheets_1_through_5.doc" target="_blank">Worksheets 1-5</a> and make a list of personal investment goals for which mutual funds are an appropriate selection and the best types of mutual funds to consider for each objective.</p>
</td>
</tr>
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Exercise: Marketplace
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Use the X-ray feature of the Morningstar Web site to analyze existing mutual fund holdings and identify asset allocation gaps. See <a href="http://portfolio.morningstar.com/NewPort/Free/InstantXRayDEntry.aspx?dt=0.7055475" target="_blank">http://portfolio.morningstar.com/NewPort/Free/InstantXRayDEntry.aspx?dt=0.7055475</a>.</p>
</td>
</tr>
</table>
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4 - Index Funds
<p>Index funds are mutual funds that track a stock or bond index. Index funds buy all of the securities in an index, or a representative sample of it, thus providing about the same performance as the index they are tracking, minus fund expenses. In other words, index funds earn approximately the market rate of return. If stock prices rise, index fund performance (i.e., the value of index fund shares) will rise accordingly. The opposite is true, however, if stock prices plummet. In this case, the share prices of index funds will fall. Index funds have been in existence since 1976 when the fund known today as the Vanguard 500 Index Fund was launched. </p>
<p>An index is an unmanaged collection of securities whose overall performance is used as an indication of stock or bond market trends. Examples of indexes include the widely-reported Dow Jones Industrial Average or DJIA, which tracks 30 large companies; the Standard & Poor’s (S&P) 500, which tracks 500 large U.S. companies; the Russell 2000, which tracks small companies; the Wilshire 5000, which tracks almost every listed U.S. stock; and the Lehman Aggregate Bond Index, which mirrors the performance of U.S. bonds. </p>
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<p>There are also indexes that track the performance of foreign securities. Among the most widely quoted is the Morgan Stanley Capital International EAFE (MSCI EAFE) index. EAFE is an acronym that stands for “Europe, Australasia, and Far East” and the EAFE index is used to track the performance of international stocks much like the S&P 500 is used as a benchmark for American stocks. </p>
<p>In both bull (rising) and bear (declining) markets, index fund returns beat those of most actively managed (non-index) mutual funds. One reason is that index funds have relatively low turnover, which helps keep taxable capital gains distributions and trading costs low. Turnover is the frequency with which stocks and bonds are traded in a mutual fund portfolio. </p>
<p>Due to their low turnover, some index funds have expense ratios (expenses as a percentage of a mutual fund’s assets) of 0.2 (one fifth of one percent), compared to an average expense ratio of 1.5% for actively managed funds. Over time, this difference in fund expenses can really add up and provides index funds with a significant and ongoing performance advantage. </p>
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<h3>Recommendations</h3>
<p>Below and on the next two pages are some recommendations about index funds provided by investment experts: </p>
<ul>
<li>Purchase index funds directly from investment companies instead of through brokers. First, you already know what you are purchasing: the same securities that comprise a market index. Thus, your need for advice is limited. In addition, mutual funds that are sold by brokers often have front or back-end loads (fees) and/or a 12b-1 fee for marketing expenses, which increases the fund’s expense ratio.</li></ul>
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<ul> <li>Consider investing in index funds especially for “efficient” segments of the stock market where detailed information about stocks is readily available. An example is U.S. large company stocks. When there are many stock analysts following the performance of certain market segments, it is difficult for an actively managed mutual fund to find an “undiscovered” gem of a stock that will grow enough in value to offset the inherent cost advantage of index funds. On the other hand, an actively managed fund that invests in so-called less-efficient market segments, such as small company stocks, might have a better chance of beating the returns of an index fund.</li>
</ul>
<p>Continued on the next page.</p>
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<ul>
<li>Appreciate the fact that fund expenses really matter! According to an article in the AAII (American Association of Individual Investors) Journal, a 1% difference in returns due to expenses, for an index fund earning 8% after expenses versus an actively managed fund earning 7% after expenses, results in an advantage of over $79,000 for the index fund on a $100,000 initial investment over 20 years.</li>
<li>Diversify your portfolio. Successful investors should own a variety of asset classes (e.g., stocks and bonds) and diversify their investments within each (e.g., large and small company stocks) because no one has a “crystal ball” with respect to market performance. This is very easy to do with index funds. For example, an investor could purchase a total stock market index fund, a total bond market index fund, and a total international index fund for exposure to securities in overseas markets.</li>
</ul>
<p>Many people select actively managed funds because it is human nature to want to believe that there are “wizards” who can quickly grow your money. It is often impossible, however, to determine whether a fund manager’s superior performance was due to skill or luck. With index funds, you know what you’re investing in and you can regularly track the benchmark index on which your fund is based. </p>
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Exercise: Index Funds
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
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<p>Complete the worksheet, <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U6Ex4_Mutual_Funds_Comparison.doc">Mutual Funds Comparison</a>, to compare the features of an index fund with two actively managed funds with the same investment objective (e.g., growth fund or income fund).</p>
</td>
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5 - Cost and Where to Buy
<img valign="top" align="right" hspace="10" vspace="3" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$report_calculator245.png" alt="Report and calculator" />
<p>What you pay to purchase or sell a mutual fund, as well as the ongoing fund operating expenses, can have a great impact on the rate of return on your investments. So, keeping fees to a minimum is in your best interest. Generally, there are four categories of expenses—direct sales commissions, management fees, marketing costs, and overhead expenses. </p>
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<p>Mutual funds come in two types: load and no-load. Load funds carry an up-front sales charge of 4% to 8.5% of the amount invested for "Class A" shares and are bought from a stockbroker, commission-based financial planner, and others who earn their living on sales commissions. A mutual fund is considered low-load if it carries a smaller up-front sales charge of 1% to 3%. Some funds charge a back-end load, also known as a contingent deferred sales charge (CDSC). You don’t pay a sales fee to get into the fund, but you will incur a sales charge on the way out if you sell early. These funds, commonly called "Class B" shares, were created to combat the negative image of up-front loads. Typically, the charge declines 1% each year until it disappears after the fifth or sixth year. However, management and marketing fees are usually higher on this version of a load fund. Try to avoid this arrangement if you don’t know how long you will hold the fund. </p>
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<p>No-load funds, on the other hand, require no upfront fees to purchase shares and usually have no marketing fees. Investors deal directly with the fund company, a mutual fund supermarket (e.g., Charles Schwab, Fidelity), or a fee-only financial planner, rather than with a broker. Some load and no-load funds also impose redemption fees to discourage investors from moving in and out of certain funds too frequently. </p>
<p>Both no-load and load funds charge annual money management and administrative fees. These costs are a percentage of the assets in the portfolio. These costs, in addition to the marketing/advertising fees, called a 12b-1 fee, make up a fund’s expense ratio. The 12b-1 fee pays for advertising and distribution costs, as well as broker compensation. Deducted from shareholder assets, 12b-1 fees can range from 0.1 to 1.00%, and every shareholder pays a pro rated share. Typical expense ratios, which can include a 12b-1 fee, range from 0.5% to 2% of fund portfolio assets. Beware of funds with expense ratios greater than 1.4% for stock funds, 1% for bond funds, and 0.5% for money market funds as this indicates that you are paying above-average costs. </p>
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<p>Generally, no-load funds have lower fees than load funds, resulting in lower expense ratios. However, there is an exception—"Class C" shares—another version sold by a broker that has no sales charge but has a higher 12b-1 and management fee than either Class A or B shares. All things being equal, low cost funds will net you higher returns than high cost funds. Costs matter! </p>
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Exercise: Cost and Where to Buy
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
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<td>
<p>Read Mutual Funds: Maybe All You’ll Ever Need (14 pages) at http://www.investorprotection.org/downloads/pdf/learn/Mutual_Funds_2008.pdf and make a list of 10 key things to look for when selecting a mutual fund.</p>
</td>
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Exercise: Cost and Where to Buy
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
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<p>Use FINRA’s Mutual Fund Expense Analyzer online calculator ( http://apps.finra.org/investor_Information/ea/1/mfetf.aspx) and compare the costs of holding three different mutual funds over a period of 20 years.</p>
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6 - Find the Right Mutual Fund
<p>Now that you are familiar with the various types of mutual funds, here are some specific guidelines for picking them. </p>
<p>Step 1. Identify the types of funds you need (e.g., growth) to reach your goals. </p>
<p>Getting started will be easier if you first focus your search on a specific type of fund with a specific investing objective. Eventually, your goal should be to build a portfolio that includes both stock and bond funds with various investment objectives and investment styles for maximum diversity. This portfolio allocation process involves assigning appropriate percentages of your total investment portfolio, no matter the size, to interest-earning (income) and stock (growth) investments. You can purchase them gradually, perhaps starting out with a balanced fund, an asset allocation fund, a lifestyle fund, or a broad-based index fund such as a "total stock market" fund. The latter tracks 7,000+ large, medium, and small U.S. companies and is offered by fund families like T. Rowe Price, Vanguard, Fidelity, Charles Schwab, and others. </p>
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<p>Step 2. Do more reading. </p>
<p>Visit the library or buy some specialized books on mutual fund investing that will build on what you have learned from this unit. Some useful references are: Mutual Funds For Dummies by Eric Tyson, (For Dummies, 2007), Morningstar Guide to Mutual Funds: Five-Star Strategies for Success (Wiley, 2007) and Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor by John C. Bogle (Wiley, 2000). </p>
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<p>Step 3. Do some research on specific funds. </p>
<p>There are excellent tools to help with the process of narrowing the list. Personal finance magazines publish their "best buy" lists generally twice a year in February and August (e.g., Money, Kiplinger’s Personal Finance Magazine, Business Week and Forbes). Barron’s and The Wall Street Journal publish a quarterly Mutual Fund Review that reports on all funds’ categories and objectives, current and past performances, as well as fee structures. Also, the Investment Company Institute http://www.ici.org has excellent, free publications on mutual funds. </p>
<p>Once you spot several funds that have consistently performed well and are aligned with your goals, go to your library’s reference section to complete your research. Rating services such as Morningstar and Value Line Mutual Fund Survey provide current data on mutual funds with a one-page report on each. This makes it easy to review and compare funds you are considering. Look at 3-, 5-, and 10-year periods. Last year’s high flyer could be this year’s dud. </p>
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<p>Step 4. Determine your selection criteria and eliminate funds. </p>
<p>You can whittle down the over 8,000 fund universe to a manageable list in short order by using a few criteria to help with the elimination process. For example, suppose you are looking for a stock fund to invest for retirement. Right there, you have cut the number to a little over 5,000 funds by eliminating all the bond and money market funds. Perhaps you will toss out all funds that have a sales commission, all stock funds with an expense ratio over 1.4%, funds that have an investment minimum over $3,000, any fund where the manager’s tenure is less than 5 years, and all funds that have not outperformed 60% of comparable funds over the last 3 and 5 five years, etc. Applying these criteria as you research your favorites, pay most attention to performance, cost to invest, and risk. </p>
<p>Step 5. Call or write for a prospectus. </p>
<p>A prospectus for a mutual fund is the selling document legally required to be distributed to mutual fund investors. It describes the fund’s investment strategy as well as the risks and costs of an investment. Many mutual fund companies also make their prospectuses available online. </p>
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<p>Step 6. Make your purchase. </p>
<p>While you can always do business by mail, and in some cases, at a local investment center, most mutual fund groups offer a toll-free number for telephone assistance. Of course, if you are buying a fund with a sales commission, the broker or financial planner executes your order. </p>
<p>Step 7. Continually buy more shares. </p>
<p>One of the best ways to grow your investments is to use a dollar-cost averaging strategy—investing a fixed number of dollars (e.g., $50) in a mutual fund(s) at periodic intervals, usually monthly or quarterly. (See Unit 8.) When the price of the fund is low, your dollars buy more shares. When the fund’s NAV moves higher, you will buy fewer shares. Although dollar-cost averaging does not guarantee you a profit, in most cases your average cost per share will be less than the current price. </p>
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Exercise: Find the Right Mutual Fund
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Read a mutual fund prospectus cover to cover. Record 3 to 5 key points about the mutual fund. Prospectuses can be downloaded from many investment company Web sites or requested via their toll free numbers. For information about what to look for in a fund prospectus, review page 8 of Mutual Funds: Maybe All You’ll Ever Need (14 pages) at http://www.investorprotection.org/downloads/pdf/learn/Mutual_Funds_2008.pdf. </p>
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</table>
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<h3>Summary</h3>
<p>Successful mutual fund investing requires a plan and the discipline to stick to your plan. Mutual funds are a proven winner and one of the best ways for the small investor to build wealth while managing risk. This unit has reviewed what mutual funds are and how they work, their advantages and disadvantages, fund categories and investing objectives, and, finally, the mutual fund selection process. You have what you need to get going. As the NIKE advertising slogan says, "Just do it." </p>
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<p>Congratulations! You've reached the end of the unit. Select continue to start Unit 7 or use the lesson menu on the left to skip to any part of Units 1-11. </p>
<p><br /></p><hr style="width: 100%; height: 2px;" />
<h3><span style="font-weight: bold;">About the Author</span></h3>
<p><b>Patricia Brennan</b>, a Certified Financial Planner® licensee (CFP), was an Extension educator with Rutgers Cooperative Extension of Morris County (New Jersey) from 1981 to 2008. She held the tenured faculty rank of Associate Professor at Cook College, Rutgers University, and taught 80+ personal finance classes for approximately 4,000 adults annually. Brennan is a Chartered Retirement Planning Counselor (CRPC), an Accredited Financial Counselor (AFC), and a Certified Housing Counselor (CHC). She appeared regularly on the Cablevision cable TV show 'Money Counts,' and made guest appearances on CNBC and News 12 New Jersey. Brennan is the co-author of Money Talk: A Financial Guide for Women. She has made more than 35 national professional conference presentations and contributed numerous articles for professional journals and proceedings. Ms. Brennan earned a B.S. in Home Economics from Immaculata University and a M.A. in Education from Montclair State University.</p>
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UNIT 7: TAX-DEFERRED INVESTMENTS
<img valign="top" align="left" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$tax_bracketcorrected.png" alt="Tax brackets" />
<p>This unit discusses different plans for investing money and deferring the taxes on investment earnings until a later date. Tax reduction is not the primary criterion for choosing investments, but it certainly is an important one. Tax-exempt or tax-deferred refers to the tax status of the earnings on an investment. Although these terms sound similar, they are quite different. Understanding how taxes affect different investments will help you to choose the investments that are best for you.</p>
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Learning Objectives
<p>This unit will help you: </p>
<ul>
<li>Learn about retirement plans available for self-employed persons</li>
<li>Learn about tax-deferred employer retirement savings plans (if you and/or a spouse have off-farm income)</li>
<li>Investigate IRAs and determine which is best for your age and income level </li>
<li>Learn about tax-advantaged college savings plans</li>
<li>Learn about tax-deferred annuities</li>
</ul>
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<p>If no taxes are owed on money you earn from an investment, it is in the tax-exempt category (a.k.a. tax-free). An example of a tax-exempt investment is municipal bonds. The interest only (not any capital gains) from these investments is free of federal taxes, as well as state and local taxes, if the investor lives in the state that issued the bond. Another example of a tax-free investment is Roth IRAs if rules to qualify for tax-free withdrawals of earnings are followed. For additional information about tax-exempt securities, refer to Unit 5, Fixed Income Investing.</p>
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<p>With a tax-deferred investment, taxes are not owed on the investment until it is sold; i.e., taxes are deferred until that time. This unit focuses on the plans available for investing on a tax-deferred basis. Upon completion of this section, you will be better able to recognize the benefits and drawbacks of tax-deferred investments. You also will be knowledgeable about various options for tax-deferred investments. After determining which plan is right for you, you will need to select investment product(s) to be included in the plan. Units 4, 5, and 6 provide information about the characteristics of various investment products, such as stocks, bonds, and mutual funds. </p>
<p>One of the best ways to save for retirement is through tax-deferred investments. Contributions (money added to an investment plan) to employer retirement plans (if you and/or a spouse have off-farm income) and some IRAs can be made with pre-tax dollars (i.e., income you don't have to pay tax on), allowing you to defer taxes until you start making withdrawals. Tax-deferred investing allows you to keep money that would have been paid in taxes at the time you earned the money, leaving a greater amount available for investing. </p>
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1 - Advantages of Retirement Accounts
<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$woman_taxes.png" alt="Woman working on paperwork" />
<p>A major advantage of tax-deferred investing is making contributions to a retirement account with pre-tax dollars. In many instances [e.g., 401(k) plans], the government allows taxable income to be reduced by the amount of the contribution to a tax-deferred retirement plan. As a result, you can have the same amount of money in your pocket and invest what you would have paid the government. For instance, if you are in the 25% marginal income tax bracket and you contribute $1,000 to a tax-deferred retirement plan, you would lower your federal income taxes by $250 (0.25 times $1,000). The savings is based on your marginal tax rate, i.e., the rate you pay on the highest dollar of earnings. </p>
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<p>There are six different tax rates in 2009: 10%, 15%, 25%, 28%, 33%, and 35%. The higher your marginal tax rate, the more you, as an investor, benefit from pretax dollar contributions and tax-deferred earnings. These <a href="$@FILEPHP@$$@SLASH@$html_pages$@SLASH@$fig_1.html" target="_blank">2009 Tax Rate Schedules</a> are your reference in determining marginal tax rates. These figures are adjusted annually for inflation. </p>
<p>A second advantage of tax-deferred investing is that earnings grow faster because they aren't taxed until withdrawn. Instead of paying tax on the interest earned, it continues to compound until the investment is sold. Over time, the gap between the value of a taxable and a tax-deferred account, earning the same rate of interest, increases sharply. <a href="$@FILEPHP@$$@SLASH@$html_pages$@SLASH@$fig_2.html" target="_blank">This table</a> provides an example. </p>
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Exercise: Advantages of Retirement Accounts
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Determine your marginal tax bracket for the current tax year from the <a href="$@FILEPHP@$$@SLASH@$html_pages$@SLASH@$fig_1.html" target="_blank">2009 Tax Rate Schedules</a> and research the rate of return on comparable taxable and tax-free investments (e.g., a taxable and tax-free bond, bond fund, or money market fund). Use the table at http://njaes.rutgers.edu/money/taxinfo/ to determine which type of investment will pay you a higher after-tax return.</p>
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2 - Retirement Plans
<img valign="top" align="left" hspace="10" vspace="10" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$retirement_plancorrected.png" alt="Retirement Plan folder" />
<h3>Employer-Sponsored Retirement Plans</h3>
<p>Salary-reduction plans allow employees to deposit, through payroll deduction, part of their salary into a retirement account. There are a number of ways you, as an employee, can invest on a tax-deferred basis so that your investment will grow free of taxes and will not be taxed until you start making withdrawals. Types of employer-sponsored retirement plans are on the next two pages.</p>
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<p>Types of employer-sponsored retirement plans include:</p>
<ul>
<li>401(k) A retirement plan for employees in private corporations which defers the taxes on employee contributions and earnings on these contributions until retirement withdrawals are made. You can contribute up to 20% of your earnings up to a set maximum. The 2009 limit on the amount that can be contributed from income before taxes is $16,500 ($20,500 for workers age 50 and over with the additional $5,500 catch-up contribution). Contributions are deducted directly from your paycheck (e.g., 5% of your salary). Some employers contribute a match or a percentage of your contribution. Many companies also allow their employees to borrow up to one-half of the funds from their 401(k) plan for any reason. Interest paid by the employee on the money that is borrowed from his 401(k) is paid into the employee's own account.</li></ul>
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<ul><li>403(b) A tax-deferred retirement plan that is similar to corporate 401(k) plans. A big difference is fewer employers match contributions because participants are often public (read: taxpayer-funded) employees. 403(b) plans are available to employees of schools and non-profit organizations. The 2009 limit for contributions is $16,500 ($20,500 for workers age 50 and over). The mix of available investment choices differs among institutions. Many allow participants to borrow from their account and have a catch-up provision if you have not contributed fully in the past.</li>
<li>Section 457 This plan is similar to the 401(k) and 403(b) but is for state and local government employees. With Section 457 plans, employer matching is virtually non-existent. The 2009 limit that you can contribute is $16,500 ($20,500 for workers age 50 and over).</li>
</ul>
<p>Note: Contribution limits for all of the employer plans listed above will be adjusted for inflation in future years. The Pension Protection Act of 2006 made permanent increased contribution limits and catch-up contributions for individuals age 50 and older that were originally set to expire after 2010. </p>
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<h3>Self-Employed or Small Business Retirement Plans</h3>
<p>There also are tax-deferred plans available to individuals who are self-employed or employees of small businesses. These include: </p>
<ul><li>Keogh Plans,</li>
<li>Simplified Employee Pension Plan (SEP), and</li>
<li>Savings Incentive Match Plan for Employees (SIMPLE).</li></ul>
<p>The following descriptions can help determine which plan could work for you. </p>
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<h3>Keogh Plan</h3>
<p>Named after U.S. representative Eugene James Keogh, who first introduced the idea in 1962, this plan is available to anyone who has self-employed income. This is generally income from any unincorporated business that you conduct, whether it is your primary job or a business "on the side." Self-employed persons may contribute as much as the lesser of 100% of compensation or $49,000 in 2009, with periodic adjustments for inflation. For purposes of a Keogh, the definition of earned income is net profit (i.e., net income after subtracting business expenses). The money contributed to a Keogh plan is not taxed and grows in value until it is withdrawn. You may have both a Keogh plan and an IRA. If you work for an employer and are self-employed, you may pay into a Keogh and also belong to the employer's retirement plans. In addition, if you have employees, you can enroll others who work for you. </p>
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<p>To set up a Keogh plan, you must first select a bank, mutual fund, or other financial institution. Usually they will supply the needed paperwork and provide you with a prototype plan. You will be asked to choose a defined-contribution and/or a defined-benefit Keogh plan. These two options are not mutually exclusive - your plan can include both. There are three forms of defined-contribution Keogh plans: </p>
<ol>
<li>A money-purchase Keogh requires you to choose a fixed percentage of your earnings and contribute that percentage every year to the plan.</li>
<li>A profit-sharing Keogh allows you to contribute a fixed percentage of business profits. You can contribute the full amount one year and less or nothing the next, depending on how the business does.</li>
<li>A combination of money-purchase and profit sharing offers the option of contributing up to the maximum allowed, but doesn't lock a business owner into high payments.</li>
</ol>
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<p>Under a defined-benefit Keogh plan, rather than contribute a percentage of your earnings, you are allowed to contribute more than the annual limit imposed on defined-contribution plans. Also, the amount contributed each year can vary greatly. These plans can be complicated and costly to set up and administer because a professional actuary is required to oversee the plan. Generally, defined-benefit Keogh plans are used as a catch-up strategy by older business owners who have put off setting up a retirement plan. </p>
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<h3>SEP or SEP-IRA (Simplified Employee Pensions)</h3>
<p>Simplified Employee Pensions (SEPs) allow business owners to make contributions to their own individual retirement account (IRA) and the IRAs of their employees. Certain dollar limits and percentages of pay apply. Employers must contribute the same percentage to their employees' IRA as they do to their own. One advantage to the employer or self-employed person is that contributions do not have to be made every year. Little paper work is required, it is much simpler than setting up a Keogh plan, and does not have the reporting requirements of a Keogh. A disadvantage is that you cannot contribute as much to a SEP as you can to a Keogh plan. Generally, contributions are made by the employer and are tax-deductible to the employer. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$anna.png" alt="Anna outdoors" title="Anna outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$07_anna$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Anna</h3>
<p>Anna's considering Keogh plans and SEPs. Select the Play icon to hear more.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$07_anna$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" title="Lee Ellen at table with laptop and paper" alt="Lee Ellen at table with laptop and paper" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$07_lee_ellen$@SLASH@$0.mp3"></a><br /><br /></div>
</td>
<td>
<h3>Lee Ellen</h3>
<p>Lee Ellen has some questions about SEP plans. Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$07_lee_ellen$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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<h3>SIMPLE Plans</h3>
<p>A SIMPLE plan is a tax-deferred savings plan that can be set up by owners of a business that employs 100 or fewer employees to cover all employees and themselves. To be covered, employees must earn at least $5,000 a year. The maximum annual contribution for SIMPLE plans in 2009 is $11,500 with an additional $2,500 catch-up contribution for workers age 50 and older. The contribution limit is adjusted periodically for inflation. The employer can match up to 3% of the employee's compensation. </p>
<p>The employee's contribution reduces taxable income and the employer's contribution reduces the business's taxable income. A SIMPLE-IRA is owned by the employee and belongs to the employee, even if employment is terminated. The employer can't sponsor another retirement plan in addition to a SIMPLE. Like SEPs, SIMPLE-IRAs have low administrative responsibilities and costs compared to Keogh plans. </p>
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<h3>Individual Retirement Accounts (IRAs)</h3>
<p>For individuals who qualify, another smart way to build a retirement nest egg is to take advantage of the tax-deferred growth offered by an Individual Retirement Account (IRA). An IRA is a personal retirement savings plan, which may be set up with banks, mutual fund companies, brokerage firms, or similar investment organizations. Three types of IRAs are described as follows: </p>
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<h3>Traditional IRAs</h3>
<p>For tax-deferment purposes, an IRA can be funded until April 15 of the following year (e.g., April 15, 2010 for the 2009 tax year). Of course, the earlier in the year an IRA is funded, the quicker the interest will begin to accumulate. The maximum that can be contributed in any one year is the lesser of the amount of the annual limit or up to 100% of earned income. Your spouse can do the same. However, you don't have to make the entire contribution all at once. You can start with whatever money is available (e.g., $500) that meets the minimum amount set by a financial institution (e.g., bank or mutual fund). </p>
<p>The maximum IRA contribution limit is $5,000 for 2009 and, thereafter, to be adjusted for inflation in $500 increments. In addition, people age 50 and over can contribute an additional $1,000. The Pension Protection Act of 2006 made permanent these increased contribution limits and catch-up contributions for individuals age 50 and older that were originally set to expire after 2010. Contributions can be made as long as you are under age 70 1/2. </p>
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<p>Traditional IRAs may be: </p>
<ul>
<li>Tax-deductible (for taxpayers who are not participants in an employer retirement plan or plan participants with income below certain levels), or,</li>
<li>Non-deductible (for taxpayers with earned income who fail to qualify for a deductible IRA).</li>
</ul>
<p>Deductible IRAs provide a double tax benefit: contributions—and all earnings—are tax-deferred until retirement. You can also deduct (from taxable income) the full amount contributed if you are in an employer-sponsored retirement plan, but your adjusted gross income (AGI) is $55,000 or less if you are single or $89,000 or less if you are married and filing jointly (2009 amounts). Once you reach this level, a phase-out range begins. The deduction is eliminated at a maximum AGI of $65,000 for single filers and $109,000 for married joint filers (2009 amounts). </p>
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<p>The IRS no longer considers one spouse an "active participant" in a retirement plan simply because the other spouse has an employer-sponsored retirement plan. As a result, the spouse who does not have an employer-sponsored retirement plan can make a tax-deductible contribution to an IRA, provided the couple's AGI is less than $176,000 in 2009 (subject to phase-out rules starting at $166,000). </p>
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<p>If you withdraw money from an IRA before age 59 1/2, there will be a 10% penalty on the amount withdrawn, and federal and state income taxes will be due on the amount withdrawn on that year's income tax return. You can withdraw funds from an IRA without a penalty after you reach age 59 1/2. Withdrawals from a Traditional IRA are taxable and are treated as ordinary income. Withdrawals must begin no later than April 1 of the year after you turn 70 1/2. </p>
<p>Penalty-free withdrawals of up to $10,000 can be made from any IRA for first-time homebuyers who meet certain qualifications. Withdrawals also can be made for qualified higher education expenses incurred on behalf of the taxpayer, the taxpayer's spouse, or any of their children or grandchildren. These education withdrawal provisions include expenses related to undergraduate or graduate-level college courses. </p>
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<h3>Roth IRAs</h3>
<p>Although contributions to a Roth IRA are not tax-deductible, qualified withdrawals are tax-exempt if made more than 5 years after the Roth IRA was established and the taxpayer has reached age 59 1/2, becomes disabled, or dies. Roth IRAs accumulate like whole life insurance - they go in after-tax, accumulate tax-deferred, and come out tax-free. Another big plus: Unlike traditional IRAs, investors in a Roth IRA are not subject to the minimum distribution rules, and you can make contributions after age 70 1/2 as a worker or spouse of a worker. Early withdrawals from a Roth IRA are tax-free and penalty-free if they satisfy the five-year holding requirement or the money is used to cover qualified first-time homebuyer expenses of up to $10,000, or if the taxpayer becomes disabled before age 59 1/2, or dies. </p>
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<p>Individuals can contribute up to $5,000 in 2009 (to be adjusted for inflation in $500 increments) to a Roth IRA if they have an AGI of up to $105,000 (for married taxpayers filing a joint return, the AGI limit is $166,000). Eligibility for contributing to a Roth IRA begins to phase out for individuals with an AGI over $105,000 and ends once an individual's AGI exceeds $120,000. For joint filers, the phase-out figures are between $166,000 and $176,000. Investors can roll funds over from a traditional IRA to a Roth IRA, provided the taxpayer's AGI is $100,000 or less and he or she is not a married individual filing separately. Taxes must be paid on the amount of the conversion, in the year that the conversion is made. To determine if converting from a traditional IRA to a Roth IRA will result in a decrease in taxes, check one of the IRA calculator links on the Web site http://www.rothira.com. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" title="Earl outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$07_earl$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Earl</h3>
<p>Earl's interested in an IRA. Select the Play icon to hear more.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$07_earl$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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Exercise: Retirement Plans
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>List the types of retirement savings plans for which you are eligible and 3 to 5 characteristics of each plan (e.g., IRAs, 401(k) or 403(b) plans for employees, SEP or Keogh plans for self-employed workers, and annuities), using information from this course and IRS Publication 590 available at http://www.irs.gov/publications/p590/index.html. Contact your employer or a financial services professional for additional information about or assistance with opening a retirement savings account.</p>
</td>
</tr>
</table>
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3 - Tax-Advantaged College Savings Plans
<p>In addition to retirement, one of the most frequently reported investment goals is funding college or post-secondary education. Fortunately, there are several tax-advantaged investment products that make the savings process easier. Before deciding where to invest for college, calculate how much savings is required and how much should be set aside on a regular basis. A downloadable college planning worksheet can be found at the following Web site: http://njaes.rutgers.edu/pubs/publication.asp?pid=FS634. An interactive online College Cost Calculator can be found at http://www.collegesavings.org/index.aspx. The calculator provides an estimate of the savings required based on the following key variables: a child’s age, the type of college (e.g., in-state public college), the number of years that a child plans to attend school, and the specific expenses being covered (e.g., “tuition and fees only” or “tuition, fees, room, and board”). </p>
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<p>Once you know how much money you need to accumulate for college expenses, the next step is to figure out where to invest. Available options include state-operated 529 college savings plans (named for a section of the federal tax code), prepaid tuition plans, Coverdell Education Savings Accounts (ESAs), and custodial accounts (often called Uniform Transfers to Minors (UTMA) or Uniform Gifts to Minors (UGMA) by financial institutions). Each type of plan has specific advantages and disadvantages so it may be wise to fund more than one investment account. Detailed information about, and side by side comparisons of, available college savings plans can be found in the Financial Industry Regulatory Authority (FINRA) publication Smart Saving for College—Better Buy Degrees at http://apps.finra.org/investor_Information/Smart/529/000100.asp. The next page has some general recommendations about investing for college provided by investment experts. </p>
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<img valign="top" align="left" hspace="10" vspace="15" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$college_students.png" alt="College students" />
<h3>Recommendations</h3>
<p>Consider funding a 529 college savings plan and start saving early. Every state offers at least one type of 529 plan and specific details about each state’s plan features can be found at the College Savings Plans Network Web site, <a href="http://www.collegesavings.org" target="_blank">www.collegesavings.org</a>. 529 plans offer a number of advantages to investors, the most important of which is that withdrawals from 529 accounts for qualified educational expenses are tax-free. Meanwhile, earnings on plan contributions grow tax-deferred, allowing investors to maximize the power of compound interest. In addition, while 529 plans are funded with after-tax dollars (meaning there is no up-front federal income tax deduction for the amount of the investment, similar to how Roth IRAs operate for retirement savings), over 30 states provide some type of state income tax write-off. </p>
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<p>To narrow down available plan options, look for 529 plans with appealing features such as state income tax benefits, low investment expenses, high contribution caps, affordable minimum contributions, and “age-based tracks” where the asset allocation becomes more conservative as an account beneficiary gets older. The alternative to this is “fixed tracks” where the 529 plan portfolio composition stays the same over time.</p>
<p>Also consider funding a Coverdell Education Savings Account (ESA) up to the maximum annual limit of $2,000 per beneficiary per year. Like 529 plans, earnings grow tax-deferred and are tax-free if used for qualified education expenses. However, unlike 529 plans, which are limited to investments within state-run programs, Coverdell ESAs allow a wide variety of investment choices. In addition, tax-free withdrawals are allowed for elementary and secondary school expenses as well as post-secondary education (529 plans only cover college). </p>
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<p>Another key difference is that balances in a Coverdell must be spent by the time the beneficiary reaches age 30 or gifted to another family member under 30. There are also maximum income limits to qualify to make an ESA contribution. 529 plans do not have either of these last two restrictions. </p>
<p>A Coverdell ESA can also be used for educational expenses that occur prior to college. This is especially useful for expenses associated with primary and secondary education should children attend private schools or need supplies for public schools. This flexibility is not available with 529 plans. </p>
<p>Weigh the pros and cons of prepaid tuition plans, which are offered in about a third of states, as well as by individual colleges and universities. An advantage is that investors can lock in current tuition and fees when the plan is opened as a hedge against future inflation. A disadvantage is that most state plans have some type of residency requirement for the parent or child and other plans are tied to a specific academic institution.</p>
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<p>Consider several potential disadvantages of UTMA/UGMA (custodial) accounts. First, the money is technically the child’s at age of majority (18 or 21, depending on state law) and could be used for expenses other than college. Second, since funds belong to the child, they could reduce available financial aid. Third, changes in tax laws have extended the “kiddie tax” on college students’ investment earnings to age 24.</p>
<p>Don’t be overwhelmed by the amount of savings required for college. Any amount of savings is better than none, even if it doesn’t cover the full cost. Break your college savings goal down into small “bite-sized” pieces and remember that even small regular deposits will grow to sizable sums over time. Consider the following example from the FINRA publication described earlier. If someone saves $200 a month for a newborn and averages an 8% return, there will be over $96,000 for college when the child turns 18.</p>
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Exercise: College Savings Plans
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Review the College Savings Plans Network Web site at http://www.collegesavings.org/index.aspx and compare the features of three state 529 plans (for your home state and two other states). Then use the FINRA College Savings Calculator to determine the amount of savings required to meet your college savings goals. The Web site URL is: <a href="http://apps.finra.org/investor_Information/Calculators/1/collegecalc.aspx" target="_blank">http://apps.finra.org/investor_Information/Calculators/1/collegecalc.aspx</a>.</p>
</td>
</tr>
</table>
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4 - Annuities
<p>An annuity is a contract between the investor and a life insurance company. All annuities have two things in common: </p>
<ol>
<li>There is no tax deduction for the money used to purchase the annuity (with the exception of tax-sheltered annuities in 403(b) plans).</li>
<li>Inside the annuity, the money compounds tax-deferred. Beyond this, each annuity has its own cost structure, characteristics, and rate of return. Taxes are paid on the earnings when money is withdrawn at retirement, either in a lump sum or as a series of periodic payments.</li>
</ol>
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<p>Annuities are sold by bankers, stockbrokers, financial planners, insurance agents, or through mutual funds, but regardless of who makes the sale, an insurance company always backs the annuity. If the annuity holder (investor) dies during the so-called accumulation phase, that is, before receiving any payments from the annuity, the beneficiary is guaranteed to receive the amount of the original investment. </p>
<p>Investors purchase an annuity by paying a lump sum of money (required minimum purchases generally range from $1,000 to $25,000, depending on the issuer) or by making deposits over time. An annuity may be either an immediate annuity or a deferred annuity. </p>
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<img valign="top" align="left" hspace="10" vspace="10" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$financial_advisor.png" alt="Financial advisor" />
<h3>Immediate Annuities</h3>
<p>An immediate annuity pays a lifetime income starting now. In return for a lump sum of money, the purchase of an annuity guarantees a fixed stream of income. Go with a quality company (one that has paid consistently above average returns) that pays the most. To spread your risk, you may want to buy annuities from two or more companies or buy annuities in subsequent years. </p>
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<h3>Deferred Annuities</h3>
<p>Deferred annuities may be purchased in one of two ways. Single premium annuities are purchased with a lump sum and flexible payment annuities may be purchased by installment payments over a period of years. Deferred annuities accumulate money for the future and come in two types. A fixed annuity pays a specified interest rate for a period of time. A variable annuity puts your money in stock, bond, or money market mutual funds, and returns are dependent on the financial market volatility and performance. An equity indexed annuity offers a guaranteed minimum return plus a variable rate based on the return of a specific stock market index, generally the Standard & Poor's 500. </p>
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<h3>Payout Options</h3>
<p>The payout from annuities may be taken in several ways. Taxes are owed when the money comes out, and there is a 10% penalty on earnings withdrawn before age 59 1/2. You can take monthly payments for the rest of your life, or you can make periodic withdrawals. If you make regular withdrawals, part of each withdrawal is treated as taxable income, and the rest is a nontaxable return of your own capital. If you make occasional withdrawals, the entire withdrawal is treated as taxable income. Taxes are levied until you have taken all of the earnings on the original capital invested. Other payment options include taking the money in a lump sum or rolling your savings into another annuity tax-free. </p>
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When you buy an annuity, you are making a long-term commitment (15-20 years). Moving the money to another annuity may be difficult, and quitting is expensive. You usually have to pay a surrender fee to the insurance company for selling an annuity too soon (e.g., withdrawing money from an annuity after the third year). A common fee is 7% the first year which is reduced to 0% by the seventh year. Because annuities are purchased with after tax-dollars, it is usually recommended that pre-tax investment plans [e.g., IRAs, 401(k)s] be funded to the maximum first.
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Exercise: Annuities
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>Increase your investment knowledge by reviewing two U.S. Securities and Exchange Commission’s online publications about annuities:
<ul><li>Annuities at http://www.sec.gov/answers/annuity.htm </li>
<li>Variable Annuities: What You Should Know at http://www.sec.gov/investor/pubs/varannty.htm</li>
<p>Record 3 to 5 points that you previously did not know about annuities and two personal applications.</p>
</td>
</tr>
</table>
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Exercise: Equity-Indexed Annuities
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" />
</td>
<td>
<p>Increase your investment knowledge by reviewing the U.S. Securities and Exchange Commission’s online publication on equity-indexed annuities at http://www.sec.gov/investor/pubs/equityidxannuity.htm. Record 3 to 5 points that you previously did not know about equity-indexed annuities and two personal applications.</p>
</td>
</tr>
</table>
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<h3>Summary</h3>
<p>This unit has discussed the advantages of tax-deferred plans to invest for retirement. These include employer-provided plans, small business employer/employee plans, plans for the self-employed, Individual Retirement Accounts, and annuities. Tax advantages are that earnings are not taxed until funds are withdrawn, and contributions are often made with pre-tax dollars that are not subject to income tax. As contributions to some IRAs and annuities may not be with pre-tax dollars, putting the maximum in tax-deferred employer plans (if you and/or a spouse have off-farm income) first will bring greater returns at retirement. </p>
<p>Keep in mind that there are penalties for early withdrawal on many of the plans, so those dollars that are needed before age 59 1/2 are better invested in other accounts. Also, once you have determined which plan works for you, you still have to decide on what investments you will put in the plan. Other units in this course will help you make those decisions. The sooner you start, the more time your money will have to grow! </p>
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<p>Congratulations! You've reached the end of the unit. Select continue to start Unit 8 or use the lesson menu on the left to skip to any part of Units 1-11. </p>
<p><br /></p><hr style="width: 100%; height: 2px;" />
<h3>About the Author</h3>
<p><b>Constance Y. Kratzer</b>, Ph.D., is an extension specialist Emerita in family resource management, Home Economics Extension Department, New Mexico State University. She received her Ph.D. from Michigan State University in 1991. She provided statewide program leadership in the areas of financial management and management of time and energy. Her research interests were areas of perception of economic well being, planning for retirement by the self-employed, and workplace financial education. She received an Emerging Leaders Award from Michigan State University in 1996.</p>
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UNIT 8: SMALL DOLLAR INVESTING
<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$coin_jarcorrected.png" alt="Jar full of coins" />
<h3>Investing Small Dollar Amounts</h3>
<p>Earlier units in this course have discussed specific types of investment products (e.g., mutual funds) and various investment prerequisites. Unfortunately, and erroneously, many people think that they need a substantial sum of money to start investing. This is simply not the case. The objective of this unit is to demonstrate that investing is possible, even on a "shoestring" budget. Investing can be done with as little as $25 (e.g., a U.S. savings bond), and a variety of investments (e.g., Treasury securities ($100 minimum purchase), unit investment trusts, and many mutual funds) are available for an initial outlay of $1,000 or less. </p>
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Learning Objectives
<p>This unit will help you: </p>
<ul>
<li>Identify inexpensive investment options</li>
<li>Calculate advantages of investing tax deferred</li>
<li>Compare online brokers and determine the best online broker for your personal investment needs</li>
</ul></p>
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<p>Once you’ve taken care of "the basics" (e.g., reduced household debt, purchased adequate insurance, and set aside an emergency reserve of at least 3 months’ expenses), you are ready to explore affordable investment options. This way, your money will earn a higher rate of return over time than a certificate of deposit or passbook savings account to help you achieve important financial goals. This unit will discuss investments that can be purchased for a thousand dollars or less and are suitable for beginning investors whose largest asset is their future earning ability. </p>
<p>Even saving $20 a week for retirement is much better than doing nothing. While this may not sound like a lot of money, over time it really adds up. At a 5% annual real rate of return, an investor would have $36,100 more than they would otherwise have in 20 years ($65,500 with a 10% return), according to the Employee Benefit Research Institute. In 30 years, the figures for 5% and 10% returns are $72,600 and $188,200, respectively, and, in 40 years, the figures are even more dramatic: $131,900 with a 5% return and $506,300 when $20 per week is invested to earn 10%. The take home message: small-dollar investments matter! </p>
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1 - Investing Tax-Deferred
<p>If saving for retirement is one of your financial goals, a good place to start investing is a tax-deferred employer retirement plan [e.g., 401(k)s and 403(b)s]. (See Unit 7, Tax-Deferred Investments, for more information.) Many employers require only a minimum deposit amount (e.g., $10) per paycheck or a low percentage (e.g., 1% or 2%) of pay to enroll. </p>
<p>Three advantages of employer savings plans are:
<ul>
<li>A federal tax write-off for the amount contributed (e.g., if you contribute $1,000, you do not pay tax on this income) </li>
<li>Tax-deferred growth of principal and investment earnings </li>
<li>Automatic payroll deduction </li>
</ul>
</p>
<p>In addition, almost 80% of 401(k) plans and about 30% of 403(b)s provide employer matching. For every dollar a worker contributes, an employer might contribute a quarter, fifty cents, or even a dollar. This is "free money" that should not be passed up, if at all possible.</p>
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<p>If you’re already investing in an employer plan, consider increasing the amount contributed by 1% (or more) of pay. The most painless time to do this is when you receive a promotion or raise because you’re already accustomed to living on less and won’t miss the extra contribution. The extra savings (e.g., 2% of pay), combined with a pay raise, should be more or less "a wash." As chef Emeril Lagasse of the Food Network would say, "Kick it up a notch!" Over time, the extra amount of savings that will accumulate is impressive, especially for younger workers and workers at higher salary levels. According to Boston-based Advantage Publications, a company that produces financial education materials including a slide rule-type chart called the 401(k) Booster Calculator, investing just 1% more of your pay can translate into tens of thousands of extra dollars by retirement age. </p>
<p>As an example, 1% of a $30,000 salary is $300 ($5.77 weekly). According to Advantage Publications, if a 35-year-old worker earning a $30,000 salary increases his/her contribution to an employer plan by 1%, he/she would have an additional $55,680 at age 65. This example assumes an 8% average annual investment return and 4% average annual pay increases. If the extra 1% increase also triggers an additional 1% match by their employer, this figure can be doubled to $111,360. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" title="Lee Ellen at table with laptop and paper" alt="Lee Ellen at table with laptop and paper" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$08_lee_ellen$@SLASH@$0.mp3"></a><br /><br /></div>
</td>
<td>
<h3>Lee Ellen</h3>
<p>Lee Ellen just reviewed her 401(k). Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$08_lee_ellen$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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<p>The beauty of investing in employer plans is that you are using pre-tax dollars. For every dollar you invest, Uncle Sam subsidizes this investment by that amount multiplied by your tax bracket. For example, if you contribute $1,000 to an employer plan and are in the 15% marginal tax bracket, your after-tax cost is only $850 [$1,000 - ($1,000 x 0.15)]. In the 25% marginal tax bracket, the out-of-pocket cost is even less: $750 [$1,000 - ($1,000 x 0.25)]. Most employers adjust workers’ withholding to reflect this tax savings, thereby freeing up more money in each paycheck to invest. In addition, taxes are deferred on investment earnings, which provides increased growth of principal over time. </p>
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<p>If you don’t have an employer plan, or have "maxed out" contributions to an employer plan and are looking for another tax-deferred investment, consider an individual retirement account (IRA). The good news for IRA investors with small dollar amounts is that you don’t have to invest the maximum allowable contribution ($5,000 in 2009 and, thereafter, to be adjusted for inflation in $500 increments. Additional catch-up contributions are available for persons age 50 and older) all at once. You simply need to meet the minimum amounts (e.g., $250 or $500) required for the investments you select (e.g., a zero-coupon bond or mutual fund). </p>
<p>One way to accumulate IRA money, for example, $2,000, by year-end is to open a "Holiday Club" at a local bank. Simply deposit $40 weekly in a club plan throughout the year and you'll have $2,000 ($40 x 50 weeks) for an IRA deposit when the last coupon is clipped. In 2009, you can put $5,000 a year in an IRA or $100 a week ($100 x 50 weeks). As discussed in Unit 7, there are two types of IRAs: a traditional (deductible or non-deductible) IRA and a Roth IRA. To choose the IRA that will provide the highest amount of after-tax income, consult one or more "IRA calculators" on the Web site www.rothira.com or check with a financial advisor. </p>
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Exercise: Investing Tax Deferred
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Determine the federal marginal tax bracket for your taxable income and tax filing status from http://njaes.rutgers.edu/money/taxinfo/ and calculate the after-tax cost of investing $1,000, $2,500, $5,000, $7,500, and $10,000 (Hint: multiply the invested amount by your marginal tax bracket). </p>
</td>
</tr>
</table>
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2 - Buying Stocks
<img valign="top" align="left" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$monitor_investingcorrected.png" alt="Person investing online" />
<p>Not too long ago, to build a diversified portfolio of stocks, you may have needed $30,000 to $50,000 or more. That was the cost to purchase a round lot of 100 shares of each of 10 or 12 different stocks at an average cost of $30 to $50 per share. </p>
<p>Today, thanks to the popularity of investment clubs and the increase in both online trading and stocks that can be purchased directly from sponsoring companies, you can make a purchase for far fewer dollars. Making small stock purchases no longer has to be costly or embarrassing (e.g., asking a broker to trade a few shares), as it used to be. Direct stock investing today is easy and affordable. </p>
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<p>As described in detail in Unit 9, Investing Resources, investment clubs generally assess members from $25 to $100 monthly, which is pooled to make club stock purchases. The amount of "dues" is decided by individual clubs based on the preferences of their members. Some investment club members also choose to invest additional dollars above the required amount. </p>
<p>As for online trading (also discussed in Unit 9), some electronic brokerage firms require $1,000 or less to open an account, although a minimum of between $2,500 and $15,000 is typical. Stocks that can be purchased directly from participating companies often require initial investments of $1,000 or less, with subsequent investments (called OCPs or optional cash payments) of as little as $25. </p>
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<p>Adequate diversification in a portfolio of individual stocks can, therefore, be achieved without spending a fortune. According to the National Association of Investors Corporation (NAIC), stocks can be grouped into 12 industry sectors. Consider the following example of an investment club stock portfolio that incorporates these sectors. The initial purchase of a diversified stock portfolio costs less than $3,000.
</p>
<table border="1" width="100%" cellspacing="1">
<tr>
<td width="583">5 shares @ $35 of a building/forestry stock</td>
<td width="116">$ 175</td>
</tr>
<tr>
<td width="583">5 shares @ $27 of a financial services company stock</td>
<td width="116">$ 135</td>
</tr>
<tr>
<td width="583">5 shares @ $43 of a "consumer growth" (e.g., soft drink) stock</td>
<td width="116">$ 215</td>
</tr>
<tr>
<td width="583">5 shares @ $51 of a "consumer staple" (e.g., food) stock</td>
<td width="116">$ 255</td>
</tr>
<tr>
<td width="583">5 shares @ $39 of a "consumer cyclical" (e.g., car) stock</td>
<td width="116">$ 195</td>
</tr>
<tr>
<td width="583">5 shares @ $62 of a technology (e.g., computer) stock</td>
<td width="116">$ 310</td>
</tr>
<tr>
<td width="583">5 shares @ $48 of a capital goods (e.g., machinery)
stock</td>
<td width="116">$ 240</td>
</tr>
<tr>
<td width="583">5 shares @ $18 of an energy (e.g., oil) stock</td>
<td width="116">$ 90</td>
</tr>
<tr>
<td width="583">5 shares @ $56 of a materials (e.g., paper company)
stock</td>
<td width="116">$ 280</td>
</tr>
<tr>
<td width="583">5 shares @ $73 of a transportation (e.g., air freight)
stock</td>
<td width="116">$ 365</td>
</tr>
<tr>
<td width="583">5 shares @ $21 of a utility (e.g., electric company)
stock</td>
<td width="116">$ 105</td>
</tr>
<tr>
<td width="583">5 shares @ $67 of a conglomerate company stock</td>
<td width="116">$ 335</td>
</tr>
</table>
<p>In this example, the total cost of these shares is $2,700. Add on the fees that most companies with stock purchase plans charge (e.g., enrollment fees and fees to reinvest dividends or buy and sell shares) and the cost is undoubtedly higher, maybe $3,000.
</p>
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<p>Finding quality companies with affordable minimum investment amounts can be a challenge for individual investors, as well as investment clubs. It may also take several years to develop a diversified portfolio like the one described on previous page if minimum amounts of $500 or more are required. Fortunately, the number of companies that allow investors to purchase shares directly has increased in recent years. Well over 1,000 companies offer shareholder investment plans where dividends are invested in additional shares. Of these, dividend reinvestment plans (DRIPs) allow investors to make direct stock purchases only after they acquire an initial share elsewhere. Some companies offer direct-purchase plans (DPPs or "no-load stocks") where even the first share of stock can be purchased from the sponsoring company. </p>
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<p>In addition to their affordability, another advantage of DRIPs and DPPs is a discount on the price of shares, which can help stretch limited investment dollars. Approximately one in 10 companies that sell shares directly to investors offer a 3% to 5% discount on initial purchases and/or OCPs. Of course, the quality of a company, and not a discount on its stock, should be your primary consideration. If you’re picking a quality company, however, it’s nice to be able to purchase stock on sale. An increasing number of DRIPs and DPPs also allow investors to set up IRAs, although an annual fee of $25 or $50 is generally charged. </p>
<p>DRIPs and DPPs appeal to investors who are willing to do their own research rather than consult a broker. There are several helpful references available for investors who wish to learn more about purchasing stock directly from issuing companies. Among them are the books <i>No-Load Stocks</i> and <i>Buying Stocks Without a Broker</i> by Charles B. Carlson and the Web sites http://www.dripinvestor.com and http://www.dripcentral.com. </p>
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Exercise: Buying Stock
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Visit the Web sites of five online brokers (some examples of available online brokerage firms include Accutrade, Charles Schwab, E*Trade, Fidelity, Firsttrade, Muriel Siebert, Scottrade, ShareBuilder, TD Ameritrade, and Zecco Trading), compare their minimum account balance requirements and cost to trade shares, and determine the best online broker for your personal investment needs. Another source for information about some online brokers can be found at http://www.fool.com/investing/brokers/index.aspx. </p>
</td>
</tr>
</table>
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3 - Buying Fixed Income Investments
<img valign="top" align="left" hspace="10" vspace="12" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$bondcorrected.png" alt="Newspaper with bond yields" />
<p>Fixed-income investments are securities that provide regular interest or dividend payments and, in many cases, a return of principal at maturity. Their primary objective is income with limited, if any, growth potential. As noted in Unit 5, Fixed-Income Investing, the rate of return on a fixed-income investment can be fixed throughout its holding period (e.g., bonds) or can fluctuate with the general movement of interest rates (e.g., Series EE U.S. savings bonds and money market mutual funds). </p>
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<p>Most fixed-income investments require a minimum purchase of $1,000 or less. <b>U.S. Treasury securities</b> (See Unit 5) have a minimum purchase of only $100. Treasury bills are issued with maturities of 12 months or less and Treasury notes with maturities of 2, 3, 5, and 10 years. All Treasury securities are backed by the "full faith and credit" of the U.S. government and can be sold prior to maturity in secondary markets. Periodic government Treasury auctions determine the interest rate earned by investors. Generally, the longer the maturity date, the higher the rate of interest a Treasury security (and all bonds) pay, because an investor’s money is "tied up" (subject to interest rate fluctuations and unavailable to invest elsewhere) for a longer period of time. </p>
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<p>Interest earned on Treasury securities is exempt from state and local income taxes. Another characteristic is that, like all bonds, Treasuries are subject to interest rate risk (when interest rates rise, bond prices decrease and vice versa). </p>
<p>Treasury securities can be purchased from a bank or brokerage firm for a fee or directly from the Federal Reserve System’s "Treasury Direct" program at no charge. For additional information, contact the Bureau of the Public Debt at 202-874-4000 for the location of the nearest Federal Reserve Bank or the Web site http://www.treasurydirect.gov/indiv/products/products.htm. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" title="Earl outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$08_earl$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Earl</h3>
<p>Earl's excited about US Treasury Securities. Select the Play icon to hear more.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$08_earl$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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</table>
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<p><b>Corporate bonds</b> are IOUs issued by for-profit companies and can also be purchased in denominations of $1,000. (In the secondary market, corporate bonds can cost more or less than $1,000). Like Treasury securities, investors deposit a sum of $1,000 or more and receive a fixed amount of interest at regular intervals, generally every 6 months. For example, an investor holding a corporate bond paying 7% interest would receive $70 in two semi-annual payments of $35. Barring any problems with company finances, bond payments continue until bonds are called or principal is returned at maturity (e.g., 30 years). Conservative investors should select "investment grade" bonds issued by corporations rated BBB or higher by a major rating service such as Moody’s or Standard and Poor’s. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$anna.png" alt="Anna outdoors" title="Anna outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$08_anna$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Anna</h3>
<p>Anna's been learning about corporate bonds. Select the Play icon to hear more.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$08_anna$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
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<td>
<p>Another type of fixed-income investment that can be purchased with a small dollar amount is a <b>zero-coupon bond</b> (a.k.a., zeros). These are bonds issued by certain levels of government (local, state, and federal) or corporations at a deep discount to face value. Unlike other bonds that pay semi-annual interest, zero-coupon bonds don’t pay out anything until maturity, at which time an investor receives the face value, generally $1,000. The table below illustrates the amount of money required initially to purchase a zero-coupon bond that will mature to $1,000 at different yields and maturities:
</p><p><b>Table 1. Amounts Required to Purchase a Zero Coupon Bond With $1,000 Face Value</b>
</p>
<table border="1" width="100%" bgcolor="#FFFFFF">
<tr><td width="129" align="center" bgcolor="#C0C0C0" height="19"><strong>Years to Maturity</strong></td>
<td width="611" colspan="7" align="center" bgcolor="#C0C0C0" height="19"><strong>Yield to Maturity</strong></td>
</tr>
<tr>
<td width="129" align="center" bgcolor="#C0C0C0" height="25"> </td>
<td width="88" align="center" bgcolor="#C0C0C0" height="25"><strong>6% </strong></td>
<td width="88" align="center" bgcolor="#C0C0C0" height="25"><strong>7%</strong></td>
<td width="88" align="center" bgcolor="#C0C0C0" height="25"><strong>8%</strong></td>
<td width="88" align="center" bgcolor="#C0C0C0" height="25"><strong>9%</strong></td>
<td width="88" align="center" bgcolor="#C0C0C0" height="25"><strong>10%</strong></td>
<td width="88" align="center" bgcolor="#C0C0C0" height="25"><strong>11%</strong></td>
<td width="89" align="center" bgcolor="#C0C0C0" height="25"><strong>12%</strong></td>
</tr>
<tr>
<td bgcolor="#C0C0C0" align="center" height="25" width="129"><strong>25</strong></td>
<td align="center" height="25" width="88">226</td>
<td align="center" height="25" width="88">179</td>
<td align="center" height="25" width="88">141</td>
<td align="center" height="25" width="88">111</td>
<td align="center" height="25" width="88">87</td>
<td align="center" height="25" width="88">69</td>
<td align="center" height="25" width="89">54</td>
</tr>
<tr>
<td bgcolor="#C0C0C0" align="center" height="25" width="129"><strong>15</strong></td>
<td align="center" height="25" width="88">412</td>
<td align="center" height="25" width="88">356</td>
<td align="center" height="25" width="88">308</td>
<td align="center" height="25" width="88">267</td>
<td align="center" height="25" width="88">231</td>
<td align="center" height="25" width="88">201</td>
<td align="center" height="25" width="89">174</td>
</tr>
<tr>
<td bgcolor="#C0C0C0" align="center" height="25" width="129"><strong>5</strong></td>
<td align="center" height="25" width="88">744</td>
<td align="center" height="25" width="88">709</td>
<td align="center" height="25" width="88">676</td>
<td align="center" height="25" width="88">644</td>
<td align="center" height="25" width="88">614</td>
<td align="center" height="25" width="88">585</td>
<td align="center" height="25" width="89">558</td>
</tr>
</table>
<p>Note that, the longer the time horizon to maturity and the higher the investment yield, the less an investor needs to deposit up front to guarantee a return of $1,000 at a future date. Brokers often require a transaction with a $5,000 face value, however, so the amounts in the chart would need to be multiplied by five to determine the amount needed to invest initially. For example, a purchase of five 25-year zero-coupon bonds earning 8% would require an up-front deposit of $705 ($141 x 5), which would increase in value to $5,000 in 25 years. A disadvantage of zeros is that the "phantom income" (interest that increases the amount originally invested to full face value) is taxable each year even though this interest is not received until maturity. For this reason, zeros are often recommended for tax-deferred accounts (e.g., IRAs and Keoghs or SEPs for the self-employed).
</p>
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<p><b>Series EE and Series I U.S. Savings Bonds</b> (See Unit 5) are also well suited to those with small dollar amounts. Series I bonds are an inflation-adjusted savings bond introduced by the Treasury Department in September 1998. Like inflation-adjusted marketable Treasury securities that were introduced in 1997, the principal amount of Series I bonds is adjusted semi-annually for inflation. I bonds are available at most commercial banks and many other financial institutions. </p>
<p>Like Treasury securities, savings bonds are a debt instrument of the U.S. government and income earned is completely exempt from state and local taxes. They can be purchased in denominations ranging from $50 to $5,000 (I bonds issued in paper form) or $10,000 (EE bonds purchased at half their face value for $5,000). Series EE bonds cost one-half their face value (e.g., $25 for a $50 bond) and I bonds are sold at par (e.g., $50 for a $50 bond). Many employers also offer savings bond purchase programs via payroll savings, where bonds can be purchased with as little as $5 or $10 per paycheck. Effective January 1, 2008, individuals or entities may purchase up to $5,000 worth of each series in paper form (a total of $10,000 in paper bonds) in one calendar year. In addition, individuals can buy up to the same amount of each series in Treasury Direct online accounts or a total of $20,000 (issue price) in single ownership form per calendar year. </p>
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<img valign="top" align="left" hspace="10" vspace="15" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$savings_bonds.png" alt="Series EE bonds" />
<p>Effective May 1, 2005, Series EE bonds pay a fixed rate of interest for the life of the bond based on interest rates in effect at the time of purchase. Bonds must be held one year before being eligible for redemption and those cashed in before 5 years are subject to a 3-month penalty. For example, if an investor redeems a bond after 18 months, they will earn 15 months of interest. </p>
<p>Savings bond rates are announced each May and November for the following 6 months. Thus, the 6-month earning period for rates announced on May 1 is from May through October and, for rates announced on November 1, from November through April. Series EE bonds and I bonds earn interest for 30 years that is exempt from state and local income taxes. Special tax benefits are also available for Series EE bonds and I bonds cashed in for education expenses by qualified taxpayers. </p>
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Exercise: Buying Fixed Income Investments
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Visit the Treasury Direct Web site and open a Treasury Direct account by clicking on the “Treasury Direct” link in the “Open an Account” section on the right side of the Web site http://www.treasurydirect.gov/tdhome.htm and following the instructions. </p>
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Exercise: Buying Fixed Income Investments
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
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<p>Search for available U.S. government securities mutual funds that include Treasury securities in their portfolio using an Internet search engine such as Google®. </p>
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4 - Unit Investment Trusts
<h3>Diversification For $1,000</h3>
<p><b>Unit Investment Trusts</b> (UITs) are a low-cost diversified investment product that can include either fixed-income securities (e.g., municipal bonds, Ginnie Maes) or stock. UITs are sold to investors by brokerage firms in small denominations called units. The cost of a unit is generally $1,000. The securities that comprise a UIT are professionally selected and of a similar type (e.g., investment grade municipal bonds with 30-year maturities). Unlike mutual funds, however, UITs are not professionally managed. Instead, the securities in the portfolio are simply held to maturity to generate interest or dividends, which are periodically distributed proportionately to investors. If a UIT includes bonds that are called (redeemed by the issuer prior to maturity), investors get back part of their principal early. When the last security in a UIT portfolio is redeemed, the trust ceases to exist. </p>
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<p>UITs offer diversification at a low cost. For just $1,000, an investor can become part-owner of a portfolio of, perhaps, 30 municipal bonds that would sell individually for $5,000 and would require a total of $150,000 to purchase. UITs can also be used to purchase units of Ginnie Maes, which are portfolios of VA (Veterans Administration) and FHA (Federal Housing Authority) mortgage securities packaged by the Government National Mortgage Association (GNMA). </p>
<p>Ginnie Maes typically sell in minimum denominations of $25,000 so investing in them directly through a UIT makes them affordable for small investors. Investors in Ginnie Maes and Ginnie Mae UITs receive both interest and a return of principal as homeowners repay their mortgages. Distributions are generally paid monthly and the interest portion is taxable. </p>
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<p>While originally developed as a vehicle to sell fixed-income securities, UITs have also been used to sell stocks. Common UIT stock investments are trusts that buy equal shares of the 10 highest yielding stocks that make up the widely quoted Dow Jones Industrial Average (DJIA) stock index (a.k.a., "The Dow Ten" or "Dogs of the Dow"). The "Dogs of the Dow" is considered a "value investing" strategy because it invests in out-of-favor stocks that offer better bargains among the 30 large company stocks that comprise the DJIA. </p>
<p>Like bond and Ginnie Mae trusts, "Dow Ten" UITs are packaged and sold through brokerage firms, generally in units of $1,000 each. Instead of having to spend upwards of $50,000 to buy 100 shares of the Dow 10 stocks, ownership can be achieved at a fraction of this cost. Of course, there is "no free lunch," and UITs of all types (stocks and fixed-income securities) also have their downside. The first drawback is brokerage commissions, which are generally 3% to 5% of the initial purchase. To amortize this expense over time, it generally makes sense to "buy and hold" a UIT until it is dissolved. UITs containing bonds that can be called also are subject to unpredictable distributions and reinvestment risk (the risk of having to reinvest principal at a lower interest rate). </p>
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Exercise: Unit Investment Trusts and Exchange Traded Funds
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Using print or online tools, compare the performance and expense ratio of a mutual fund and an ETF that track the same market index (e.g., Standard & Poor’s 500 index, small company stocks). Record 3 to 5 key points about the each investment. </p>
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5 - Mutual Funds
<img valign="top" align="right" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$mutual_fundscorrected.png" alt="Newspaper" />
<h3>Mutual Funds: A Shoestring Investor’s Friend</h3>
<p>Mutual funds are a professionally managed portfolio of securities such as stocks, bonds, and real estate investment trusts that are sold to investors in units called shares (See Unit 6, Mutual Fund Investing, which deals exclusively with mutual funds.). The market price of fund shares fluctuates daily in response to market conditions and the performance of securities within a fund. Unlike UITs, mutual fund portfolios are always in a state of flux as securities are bought and sold. Unless they are closed to new investors, mutual funds are constantly receiving "new money" from investors and also must meet shareholder redemptions upon request. </p>
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<p>The amount of money required to purchase shares in a mutual fund varies considerably. Some funds require an initial investment of $250 or $500 (or less), while others require $10,000, or even $25,000, to open an account. Like banks, mutual funds are free to set their own purchase and redemption policies. Unfortunately, many mutual funds with low initial minimums also have high expense ratios (the percentage of fund assets deducted annually for management and operational expenses). Therefore, in addition to the initial investment amount, fund expenses, objectives, and historical performance need to be considered when making a selection. </p>
<p>What happens if you find a great fund but it requires more money than you have available? Don’t despair! In three instances, mutual funds typically reduce their entrance requirements to a more "shoestring" level. The first exception is for retirement accounts such as simplified employee pensions (SEPs) and IRAs. Some fund families lower the required deposit amount in order to build a long-term relationship with investors. </p>
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<p>A second instance where initial fund purchase requirements are lowered are Uniform Gifts/Transfers to Minors Act (a.k.a., UGMA/UTMA or "custodial" accounts). These are accounts established for a minor child, generally for college savings. Once a child reaches the age of majority in their state (age 18 or 21), this money is theirs to do with as they please. Again, mutual funds that charge several thousand dollars to open a regular account may accept less for minors’ accounts. </p>
<p>The third way to purchase shares in an otherwise "out-of-reach" mutual fund is to open an automatic investment plan (a.k.a., "sharebuilder" or "asset builder" account). Typically, this is done through direct deposit. On the application form, an investor authorizes a mutual fund to deduct a certain amount (often a minimum of $25 or $50) periodically from his/her bank account or paycheck, which is used to purchase fund shares. In addition to the convenience of not having to remember to write a check, this strategy also avoids the temptation of spending the money first (out of sight, out of mind). </p>
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<p>Mutual funds, recognizing that they are encouraging a long-term relationship, generally provide a price break or waive their minimum account requirements completely for automatic investment programs. For example, one well-known fund family requires $2,500 to open an account and $250 for subsequent deposits. Investors who enroll in its "Automatic Account Builder"<sup>SM</sup> investment plan still need $2,500 for a regular account, and $500 for retirement accounts, but only $100 for subsequent deposits, which can be made monthly or quarterly. </p>
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<h3>All-In-One Mutual Funds</h3>
<p>What if you have money for only one fund and want to include several asset classes (e.g., stocks, bonds, cash)? Not a problem. This, too, can be done on a shoestring budget. The trick is to select a fund that invests in several asset classes and also has an affordable minimum. Three types of "hybrid" funds that combine asset classes are balanced, asset allocation, and life-cycle funds.
</p>
<ul><li> <b>Balanced funds</b> offer a mix of stocks and bonds, typically 60% to 70% of the portfolio in blue-chip (high quality companies that pay dividends) stocks and 30% to 40% in investment grade corporate bonds or federal government securities.
</li></ul>
<p>On the following pages are descriptions of several different types of "all-in one" mutual funds.</p>
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<ul><li> <b>Lifecycle funds</b> typically include cash, in addition to stocks and bonds, and may include both U.S. and foreign securities. The percentage of funds in each asset class is determined by the fund manager who attempts to earn the highest return possible by switching portfolio weightings in each type of asset according to market conditions. Lifecycle funds generally include three or four "portfolios" with varying percentages of funds in each asset class. These portfolios are designed to fit investors at various ages or risk tolerance levels. An example is the Vanguard Group’s LifeStrategy® Funds. Investors have a choice of four asset mixes: income (lowest percentage of stock in the fund portfolio), conservative growth, moderate growth, and growth (highest percentage of stock in the fund portfolio. Another example is T. Rowe Price's Personal Strategy funds which offer a choice of three different portfolios: growth, balanced, and income.</li></ul>
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<ul><li> <b>Target Date (Target Retirement) funds</b> are the third type of "hybrid" mutual fund. Like lifecycle funds, they contain a mixture of stocks, bonds, and cash. However, they differ from lifecycle funds because they usually have a future date in their title (such as 2030 or 2040) and they gradually become more conservative over time. As investors get older, the fund manager puts a lower percentage of stock in the fund portfolio without any action required on the part of investors. An example of a target date mutual fund is the Fidelity Freedom Funds (e.g., Fidelity Freedom 2040 Fund). Target date mutual funds are increasingly being used as the "default option" when workers are automatically enrolled in employer 401(k) plans.
</li></ul>
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<p>Some mutual fund families also offer "funds of funds" that invest in a combination of funds within their family. Two examples are Vanguard STAR ($1,000 minimum) and T. Rowe Price Spectrum ($2,500 minimum; $1,000 for IRAs; no minimum for automatic investment accounts). </p>
<p>Another way to obtain broad diversification with limited funds is to purchase an index fund. Index funds track the performance of a market benchmark such as the Standard & Poor’s 500 stock index. With limited funds for just one "core" fund, an investor might select a "total stock market" index fund that tracks over 7,000 large, medium, and small U.S. companies. Some index funds can be purchased for $1,000 or less. With extra money, an investor can expand into additional index fund types (e.g., bonds, international securities) or into actively managed funds within these market sectors. </p>
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<p>Let’s take a look at how a "shoestring" mutual fund portfolio might look. Let’s say that you have $2,000 to invest and your asset allocation mix is 10% cash, 30% bonds, and 60% stock. Within the 60% stock portion, you want to invest half in large company stocks and half in small company stocks. Your asset allocation might be as follows: $200 in a money market mutual fund, $600 in a bond mutual fund, and $600, respectively, in large and small company stock funds. With just $1,000 to invest, you’d place $100 in the money market fund, $300 in the bond fund, and $300 in each of the two stock funds. Of course, the trick will be finding specific funds that accept small deposits, but, as noted previously, this is often possible with automatic investing programs (i.e., DRIPs and DPPs). </p>
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<p>Once a mutual fund account is established, resolve to add to it frequently using a strategy called dollar-cost averaging (See Unit 2 for details). With this strategy, shares are purchased at regular intervals (e.g., monthly) with a fixed dollar amount (e.g., $100). Dollar-cost averaging takes the emotion out of investing because share purchases are made on a regular basis regardless of what is happening in the financial markets. In addition, most investors don’t have large sums to invest, but rather, small sums periodically as they earn it. </p>
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Exercise: Mutual Funds
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Type the words “Low-Minimum Mutual Funds” into an Internet search engine such as Google® and download and read at least five current articles about specific mutual funds that can be purchased for $1,000 or less. Record 3 to 5 points that you previously did not know about low-minimum funds and two personal applications. </p>
</td>
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<h3>Summary</h3>
<p>You don’t need a last name like "Gates" or "Trump" to become an investor. What you do need are investments that make it easy to get started with small dollar amounts. This unit has reviewed a variety of options ranging from tax-deferred employer retirement plans and IRAs to conservative U.S. Treasury and Series EE savings bonds to growth-oriented stocks and stock index funds. There’s no time like the present to become an investor. Use the <a href="$@FILEPHP@$$@SLASH@$html_pages$@SLASH@$shoestring_investment_comparison_worksheet.html" target="_blank"> Shoestring Investment Comparison Worksheet</a> to compare potential investments. </p>
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<p>Congratulations! You've reached the end of the unit. Select continue to start Unit 9 or use the lesson menu on the left to skip to any part of Units 1-11. </p>
<p><br /></p><hr style="width: 100%; height: 2px;" />
<h3>About the Author</h3>
<p><b>Barbara O’Neill</b>, Ph.D., holds the rank of full professor at Cook College, Rutgers University. She was a family and consumer sciences educator in Sussex County, New Jersey from 1978 to 2004 and is currently an Extension specialist in Financial Resource Management. She is a Certified Financial Planner (CFP), an Accredited Financial Counselor (AFC), and a Certified Housing Counselor (CHC). Dr. O'Neill has written over 1,500 consumer newspaper articles and over 100 articles and abstracts for professional journals and conference proceedings. She is also the author of five books, three financial case-study books published by Rutgers University, and Saving On A Shoestring and Investing On A Shoestring, trade books published by Dearborn Financial Publishing.</p>
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UNIT 9: GETTING HELP: INVESTING RESOURCES
<img valign="top" align="right" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$news.png" alt="Investing newspaper" />
<p>This unit highlights three popular ways that individual investors can learn more about investing and get reliable investment information. The first is by joining an investment club. The second is by using links in this unit to get information about investing from other online sources. The third is by reading various publications recommended within this unit.</p>
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Learning Objectives
<p>This unit will help you:</p>
<ul><li>Understand how investment clubs operate and their advantages and disadvantages.
<li>Learn about available sources of investment information.
<li>Learn about non-profit organizations that promote investor education.
<li>Learn about online investing
</ul>
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1 - Investment Clubs
<p>Why start or join an investment club? There are basically three reasons to join an investment club—education, fun, and potential financial gain. The club hopes to do well and make profits; however, financial gains are not guaranteed. Clubs provide a social atmosphere that makes learning about investing fun. Investment clubs differ from other clubs, however, in that individuals are not merely members of the club but are "partners." Typically, there are 10 to 20 partners in a club. </p>
<p>Partnership agreement forms are filed and guidelines are established for the club. Guidelines include how much and how often partners must pay fees to the club and how to withdraw funds paid in and profits made. Guidelines are also set for the order of business at each meeting. A typical club meeting will have an update from the treasurer, an educational program, a presentation by partners presenting stocks or investments to buy, and updates from partners who are "watching" the club’s current investments. </p>
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<h3>Advantages of an Investment Club</h3>
<p><ul><li>You can learn from others who have been investing longer.
</li><li>You are pooling money and making joint decisions.
</li><li>This joint effort may be very comforting if you’re hesitant about making investment decisions on your own.
</li></ul>
</p>
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<p>Clubs require "dues" in the form of a set payment. These payments, typically $25 to $100 a month, are used by the club to buy stocks, bonds, and other investments. Regular payments such as monthly dues may make it easier for you to set aside money for investments. Like paying a bill each month, you’ll write a check to the club for investing. The clubs function as a learning environment with partners taking turns giving educational programs and presenting stocks or other investments to study and to consider for purchase. </p>
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<h3>Disadvantages of an Investment Club</h3>
<p>There are also some disadvantages to investment clubs. Financial decisions must be made year-round. For that reason, investment clubs differ from many clubs in that they must meet throughout the year. The stock market closes for only a few national holidays and certainly doesn’t take an extended summer vacation. </p>
<p>These clubs require a commitment by partners to attend meetings, hold offices such as president, secretary, and treasurer, and present educational programs. Just like any group of individuals, you may not always agree. Many clubs decide what to buy and sell with a simple vote, with the majority ruling. If you join a club, be prepared to accept decisions made by the majority of the partners even if you disagree with the investment decision. </p>
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<p>Each investment club will establish procedures for operations such as how often to meet and where, how much dues to charge, how new partners join, the minimum time to stay in the club, and how to pay out partners who must leave the club. Clubs must also establish criteria for investments and decide how to diversify the portfolio. The club will decide if a portion of their club’s investments will be speculative or somewhat risky in nature, conservative, or growth or income oriented. Clubs may also set a policy as to what portion of the investments will be in stocks, mutual funds, or bonds, as well as set criteria for buying and for selling. Most clubs, however, know that regardless of general market conditions, funds will be fully invested, and not held in cash. </p>
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<p>Investment clubs may also establish policies about what kind of industries or companies they will not include in their portfolio. For example, the club may decide not to invest in stocks of tobacco or liquor manufacturers. The club may set a policy to invest in companies that are environmentally friendly. Criteria may even include how the company treats employees or the number of women and minorities in key leadership positions. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" title="Earl outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$09_earl$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Earl</h3>
<p>Earl just learned about investment clubs. Select the Play icon to hear more.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$09_earl$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" title="Lee Ellen at table with laptop and paper" alt="Lee Ellen at table with laptop and paper" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$09_lee_ellen$@SLASH@$0.mp3"></a><br /><br /></div>
</td>
<td>
<h3>Lee Ellen</h3>
<p>Lee Ellen's already familiar with her local investment club. Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$09_lee_ellen$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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<h3> Sources of Information For and About Investment Club Investing</h3>
<p>Investment clubs themselves use a variety of sources to obtain information about stocks, mutual funds, and bonds. Clubs or individual members in the club may choose to subscribe to the Value Line Investment Survey, business periodicals, and magazines. The Value Line Investment Survey provides analysis of the information contained in the annual reports of a company. The analysis includes a look at the company’s financial history, current financial health (debt), and future prospects. </p>
<p>Public libraries often subscribe to Value Line Investment Survey and other resources. They also may provide access to the Internet. Investment clubs will sometimes work with a broker who provides educational information, holds funds in the investment account, and buys and sells investments as decided by the club membership. </p>
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<p>Companies file regular reports with the U.S. Securities and Exchange Commission (SEC), obtainable on the Internet. Companies publish annual reports in a slick, magazine-length format to give to shareholders, the media, and interested investors. Financial charts in the form of a balance sheet inform investors of assets — things of value owned by the company — and liabilities — claims against the firm, such as debt and taxes. The income statements contained in an annual report can help investors understand the profitability of the company over time. </p>
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<p>Investment clubs may choose to have a stock selection committee. This committee, representing a few partners, will do the initial research on potential investments, follow the established club criteria or policies, and present the stock for consideration to the group. They may choose to use the Stock Selection Guide© which contains evaluation methods developed and provided by BetterInvesting (formerly known as NAIC or the National Association of Investors Corporation). In every issue of BetterInvesting magazine, a company is profiled using the Stock Selection Guide©. If you want to join an existing club in your area or if you want to start an investment club, BetterInvesting is a good place to start. </p>
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Exercise: Investment Clubs
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Read the “Start a Club” section of the BetterInvesting Web site at http://www.betterinvesting.org/Public/StartLearning/Clubs/default.htm. Record 3 to 5 points that you previously didn’t know about investment clubs and two personal applications.</p>
<p>Locate an investment club in your area and ask to attend one of their meetings as a visitor. Many clubs will allow this with advance permission because it might inspire someone to join their club or start one of their own. </p>
</td>
</tr>
</table>
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<h3>Additional Resources for Investment Clubs</h3>
<p><b>American Association of Individual Investors (AAII)</b><br />
625 N. Michigan Ave.<br />
Chicago, IL 60611<br />
Phone: 312-280-0170<br />
Toll-free: 1-800-428-2244<br />
www.aaii.com </p>
<p><b>BetterInvesting</b><br />
(Formerly the National Association of Investors Corporation)<br />
P.O. Box 220<br />
Royal Oak, Michigan 48068<br />
Phone: 248-583-6242<br />
Toll Free: 1-877-275-6242<br />
www.betterinvesting.org <br />
</p>
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<p><b>Stock Selection Guide Tutorial (Internet)</b><br />
Investment Club Central<br />
www.iclubcentral.com/ssg/ <br /></p>
<p><b>The Wall Street Journal</b><br />
200 Liberty Street<br />
New York, NY<br />
Phone: 212-416-2000<br />
www.wsj.com <br /></p>
<p><b>U.S. Securities and Exchange Commission (SEC)</b><br />
Toll-free: 1-800-SEC-0330<br />
www.sec.gov <br /></p>
<p><b>Value Line Investment Survey</b><br />
220 East 42nd St.<br />
New York, NY 10017<br />
Phone: 212-907-1500<br />
Toll-free: 1-800-833-0046<br />
www.valueline.com </p>
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Exercise: Investment Resources
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Visit the American Association of Individual Investors (AAII) (see www.aaii.com) and BetterInvesting (see www.betterinvesting.org) Web sites to learn more about investing through publications, Web-based tools, and face-to-face meetings sponsored by these non-profit organizations.</p>
<p>Read the OnGuard Online Investing Wisely Online module at http://onguardonline.gov/games/invest-quest.aspx and play the Web site’s Invest Quest game to test your investment knowledge. </p>
</td>
</tr>
</table>
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2 - Investing on the Internet
<img valign="top" align="left" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$investing_online.png" alt="Computer monitor" />
<p>The computer databases and information for investment decisions are no longer reserved for big institutional investors. The Internet has dramatically changed investing by opening Wall Street to every individual investor with a computer and Internet access. </p>
<p>Several things make the Internet appealing to investors. Once you have a computer and connection to the Internet, the cost of getting information is low. In fact, many of the financial newspapers, magazines, and financial network sites are free. Depending on how elaborate and detailed the information you want, you can get lots of free information and some information for minimum monthly fees. </p>
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<h3>Advantages of Investing Resources Online</h3>
<p>Going to the Internet for investing information is appealing because you are in control. The Internet is very hands-on. If you want to be actively involved, just point and click. Internet investing is also very private and can be done at home anytime. </p>
<p>You can do many different kinds of financial transactions on the Internet. You can buy and sell stocks, bonds, and mutual funds as well as find the best rates on insurance, mortgages, credit cards, and airline tickets. The list of items you can buy and sell on the Internet is growing all the time. You can move money from one bank account to another, you can check on the value of your portfolio, and you can get an instant report on a hot new company. By eliminating the salesman, the broker, or the financial adviser, you’ve also accepted all the risks of the investment decision. </p>
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<p>What kind of investing help is available on the Internet? First, printed information in the form of magazines and periodicals is present in cyberspace, including major publications such as:
</p>
<ul><li><i>Investor’s Business Daily</i>
</li><li>McGraw-Hill’s <i>Business Week</i>
</li><li><i>Wall Street Journal</i>
</li><li><i>Smart Money</i> Magazine
</li><li>Time Warner’s <i>Money</i> magazine
</li><li><i>Fortune</i> magazine
</li></ul>
<p>Newswire services and television broadcasters are also delivering investing information online.
</p>
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<p>The Internet is not necessarily a passive medium. You can receive personalized updates about investments and have business and industry news sent to you automatically—weekly, daily, or several times a day depending on your interests and needs (e.g., through RSS feeds or automated e-mail messages). </p>
<p>Through the Internet, you can find out what other investors are doing. Too busy to join a club but want to ask questions or "listen" to conversations of other investors? You can do that through organized e-mail sessions called "chat rooms" and discussion forums. Chats on investing and other financial topics are available through the eXtension personal finance community (see www.extension.org/personal_finance). </p>
<p>The Internet can aid the individual investor or investment club in the decision-making process. You can study stocks and mutual funds, read annual reports, and obtain stock quotes—available free through many sites. You can also set up a portfolio of investments you own or are "watching." </p>
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<h3>Disadvantages of Investing Resources Online</h3>
<p>There are also disadvantages of online investing resources. The ease of the Internet can be a burden. Unless you resist the addictive nature of trading activity, you can find yourself trading simply because you can, rather than because you should. Investment discipline is an issue. To avoid the pitfall of the easy trade, a sound financial strategy is more important than ever. </p>
<p>News via the Internet reaches everyone very swiftly. But that urge to act on the financial news, or "hot tips," gets many investors in trouble. Research shows that among buyers of more volatile stocks, those who ignored the news earned more than twice as much as news junkies. </p>
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<p>Research in the Quarterly Journal of Economics published in 1997 compared investors who watched stock funds monthly and those who checked once a year. The monthly watchers concentrated on interim volatility and moved money into lower-earning bond funds, whereas the yearly group stuck with the stock fund and ended up with twice as much money. </p>
<p>The more you check your investments, the more they’ll seem to bounce up and down. Remember, investing is a long-term proposition. You don’t have to watch the market and your investments every day. And don’t rush to buy a stock "in the news" on the Internet. </p>
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<p>"Churning" is a term for turnover of your portfolio. Individuals should beware of investment professionals who are constantly selling and buying investments within a portfolio—churning to make money on commissions. But when you are in charge of your own portfolio, you can also be susceptible to selling and buying too frequently. By forgetting your long term strategy, you, too, will be guilty of wasting money on commissions—even if online commissions are low. Some individual investors have reported increasing their trades from six a month to 60 a month. Don’t let this happen to you. </p>
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<h3>Investing Online: Choosing an Internet Brokerage Firm</h3>
<p>A number of brokerage firms have online trading services. Some are new companies established for Internet trading only, while others are the newest offering in service from some long-standing brokerage firms. The major issues in choosing an online broker are cost, access, service, and support. Whichever you choose to use, there are several criteria you might consider before you actually "trade" online. </p>
<p><b>Features to look for are:</b>
</p>
<ul><li>Low commissions
</li><li>Available technical support
</li><li>Low monthly fees
</li><li>Variety of products and research links
</li><li>Free and unlimited real-time quotes
</li><li>24-hour access to place trades
</li></ul>
</p>
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<p>Online brokerage firms may advertise a low-cost online trade, but be sure to investigate all the costs. Some firms charge a flat fee plus some pennies, for example two cents, per share traded. Another firm may charge a low fee for a market order but more for an odd lot order (a round lot is an even multiple of 100 shares, anything else is an "odd" lot). Some firms charge an "activity fee" which is assessed on an annual basis. This fee is charged to account holders who are less active than others. Be sure to see how you fit that definition or ask to get the fee waived. </p>
<p>Some brokerage firms offer special offers for investment clubs that establish an account with them and trade the club’s investments through the online broker. Shop around and compare at least three competing firms. Be sure to read the fine print before you or your club chooses one online broker over another. </p>
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<p>What about online security, an issue most commonly mentioned by people new to online investing? The first issue is protection. What will you do if your online broker goes out of business? Most brokers have Securities Investor Protection Corporation (SIPC) account insurance of $500,000 as a base amount. Many firms add secondary coverage raising the protection to millions of dollars. </p>
<p>The second issue is online security of the financial transactions. The computer software referred to as a browser is the system that allows you to navigate the Internet. Online security is accomplished by encryption, or coding, that occurs between the browser and the Internet site. Encryption makes it nearly impossible for someone to enter unauthorized trades or observe your account details on the Internet. Some online brokers offer dual password access, meaning that the partners in the investment club, for example, can view the online account and investments and use the brokerage resources. A second password is required for actually executing a buy or sell order. </p>
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<img valign="top" align="left" hspace="10" vspace="0" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$online_investing.png" alt="Computer monitor" />
<h3>How to Get Started Investing on the Internet</h3>
<p>To get started investing online, go to the online investor Web sites and take a "test drive" or a demonstration which you’ll find on most of the Web sites. After you’ve selected the online broker of your choice, you’ll need to complete an account application. You can do this by completing the online application form or by printing the form, filling it in, signing and mailing it with a check. The minimum to open an account is usually between $1,000 and $15,000. </p>
<p>An online application may speed up the process of opening your account but will require you to fund the account with your credit card, not a debit card. You will be notified by e-mail when your account is established and you may begin placing buy and sell orders online. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" title="Lee Ellen at table with laptop and paper" alt="Lee Ellen at table with laptop and paper" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$09_lee_ellen_2$@SLASH@$0.mp3"></a><br /><br /></div>
</td>
<td>
<h3>Lee Ellen</h3>
<p>Lee Ellen is interested in an online brokerage account. Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$09_lee_ellen_2$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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Exercise: Investing on the Internet
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Learn more about online brokerage accounts by visiting the North America Securities Administrators Association (NASAA) Web site www.investingonline.org and/or reading the U.S. Security and Exchange Commission’s fact sheet, <i>Online Brokerage Accounts: What You Can Do to Safeguard Your Money and Your Personal Information</i>, at www.sec.gov/investor/pubs/onlinebrokerage.htm. Record 3 to 5 points that you didn’t previously know about online investing and two personal applications.</p>
</td>
</tr>
</table>
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<h3>Summary</h3>
<p>Whether online trading appeals to you may depend upon how you choose to use your time. You may decide you don’t have the time or that you don’t have the expertise to do your own investing. That’s why some people still go to brokers and financial planners; they’d rather let someone else worry about how the stock market is doing, give them advice, and hold their hand. The choice is up to you. </p>
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<p>Congratulations! You've reached the end of the unit. Select continue to start Unit 10 or use the lesson menu on the left to skip to any part of Units 1-11. </p>
<p><a href="$@FILEPHP@$$@SLASH@$html_pages$@SLASH@$unit_9_resources2.html" target="_blank">Select this link for additional resources to assist you with investment decisions</a>. </p>
<p><br /></p><hr style="width: 100%; height: 2px;" />
<h3>About the Author</h3>
<p><b>Linda Kirk Fox</b>, Ph.D., is Dean and Director of Cooperative Extension at Washington State University. Prior to this, she was Director of the School of Family and Consumer Sciences and Financial Resource Management Specialist at the University of Idaho. Dr. Fox has developed educational programs and materials including the award winning "Enhancing the Financial Literacy for Older Youth" videoconference and the Idaho Financial Literacy Coalition. Her University of Idaho Cooperative Extension publications include Making Financial Decisions When Divorce Occurs and Estate Planning: An Idaho Guide. </p>
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UNIT 10: SELECTING FINANCIAL PROFESSIONALS
<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img alt="Team of financial advisors" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$financial_experts2.png" />
</td>
<td>
<p>Being an investor takes some know-how. You can do it yourself using the investing resources discussed in Unit 9, Investing Resources. Or you can reach out to people in the financial services industry to find the advice you need. This unit will help you decide if you need professional help and, if so, where to find it and how to make good choices. A single professional probably cannot provide all the help you’ll need. This unit will help you build a team of financial professionals. </p>
</td>
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</table>
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Learning Objectives
<p>This unit will help you: </p>
<ul>
<li>Develop a financial plan to guide your investment choices</li>
<li>Match your financial goals with the professional adviser best suited to help you achieve them</li>
<li>Select the right financial professional using the six-step process under Choosing Financial Professionals </li>
</ul></p>
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<p>Getting financial help is a little like building a house. Most often, it takes a whole team of people to get the job done—a plumber, electrician, carpenter, carpet layer, roofer, and more. To get your financial house in order also takes a team of professionals—banker, tax preparer, attorney, insurance agent, employee benefit counselor at your place of work, stock broker, and financial planner. </p>
<p>You need to know when to use which professional, if at all, and for what purpose. As a beginning investor, the human resources consultant at your place of work may help you make investment decisions regarding your retirement plan. Stock brokers and financial planners are most likely to provide investment advice and recommend products. Insurance agents provide access to investment products through cash value life policies. Some banks also sell investments. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$anna.png" alt="Anna outdoors" title="Anna outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$10_anna$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
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<h3>Anna</h3>
<p>Anna's considering getting professional assistance. Select the Play icon to hear more.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$10_anna$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
</td>
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</table>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td>
<p>The bottom line is the financial services industry is complex and becoming more so everyday. But don’t let this hold you back. Plenty of information is available to help you make your decisions (see Unit 9), as are many wise and trustworthy advisors who can help you through the complexities. </p>
</td>
<td> <img alt="Financial advisor helping clients" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$financial_advisor.png" />
</td>
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</table>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" title="Earl outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$10_earl$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Earl</h3>
<p>Earl wonders whether he should look for a financial professional. Select the Play icon to hear more.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$10_earl$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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Exercise: Selecting Financial Professionals
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Check out the background of potential financial advisors using two online tools. First, ask for an advisor’s personal registration number and visit the Securities and Exchange Commission (SEC) <i>Investment Advisor Public Disclosure Web site</i> at www.adviserinfo.sec.gov/IAPD/Content/IapdMain/iapd_SiteMap.aspx. </p>
<p>Then contact your state security regulator for information regarding the same individual(s) at www.nasaa.org/QuickLinks/ContactYourRegulator.cfm and compare the information that you received from these two sources. </p>
</td>
</tr>
</table>
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1 - Investing on Your Own
<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$computer_women.png" alt="Woman using computer" />
<p>There is absolutely nothing wrong with going it alone as a beginning investor. Being self-educated reduces your dependence on others for advice. Further, it creates a situation where you can grow in knowledge and confidence as your investments grow in value. To help you educate yourself, we will discuss where to obtain information and how to sort through the extensive material available. </p>
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<h3>Sources of Information</h3>
<p>Beyond signing up for this online course, and seeing it through completion, there are many sources of information for the beginning investor that range from free to quite costly. Here are some places to start:
</p>
<ul><li>Your local public library investment reference section
</li><li>The World Wide Web—see Unit 9 (Getting Help: Investor Resources)
</li><li>Your local bookstore
</li><li>Newspapers, magazines, and other periodicals
</li><li>Pamphlets, workshops, and other educational materials provided by the Cooperative Extension System (CES), a public-funded, non-formal educational system. County Extension offices are conveniently located in courthouses, post offices, or other government buildings. To find a state or county Extension office, visit the Web site of the federal partner, the USDA Cooperative State Research, Education, and Extension Service, at <a href="http://www.csrees.usda.gov/Extension/index.html" target="_blank">www.csrees.usda.gov/Extension/index.html</a> and click on your state
</li></ul>
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<h3>Sorting Through Information Overload</h3>
<p>The toughest thing about personal financial management information, especially investments, is dealing with the mass of information that’s available. How do you sort the good from the bad? How do you find good resources that can guide you in making decisions? How can you avoid the "hard sell" and truly find good consumer information and not a so-called "education resource" that is really marketing a product or service? </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" title="Lee Ellen at table with laptop and paper" alt="Lee Ellen at table with laptop and paper" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$10_lee_ellen$@SLASH@$0.mp3"></a><br /><br /></div>
</td>
<td>
<h3>Lee Ellen</h3>
<p>Lee Ellen's having a little information overload. Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$10_lee_ellen$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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<p>Contacting your Cooperative Extension office or the U.S. Securities and Exchange Commission (SEC) can put you in touch with unbiased, basic investor information. Signing up for this home study course, and seeing it through completion, is probably the best decision you can make to start you on the road to being an educated investor. </p>
<p>Use caution when using business-sponsored materials. Be sure the resource is solely educational, not designed to blatantly or subliminally sell a product or service. A true educational resource does not contain the business sponsor’s brand name, trademark, related trade names, or corporate identification in the text or illustrations. </p>
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<p><p>In addition, information you can trust needs to be:
</p>
<ul><li><b>Complete</b>. Materials may mislead by omission. If you’re not familiar with a subject, it is difficult to tell what has been omitted. It is important, therefore, to refer to several sources, making sure that you consult at least one reference from a source that you know is unbiased, such as the Cooperative Extension System or the SEC.
</li><li><b>Objective and unbiased</b>. Differing points of view are given.
</li><li><b>Accurate</b>. Information can be verified easily. Statements mirror established fact.
</li><li><b>Understandable</b>. Technical terms are used sparingly and are fully defined.
</li></ul>
</p>
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Exercise: Investing on Your Own
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Learn more about investing by reading five articles on the “Additional FINRA Investor Resources” Web page of http://www.finra.org/Investors/index.htm. </p>
<p> Also read the article at http://moneycentral.msn.com/content/investing/startinvesting/p38389.asp about do-it-yourself investing. Record 3 to 5 points that you didn’t previously know about investing and two personal applications. </p>
</td>
</tr>
</table>
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2 - Getting Help
<p>You may not have the confidence, time, or motivation to wade through stacks of information to make investment decisions. Creating your team of financial professionals and establishing a trusting relationship with each of them can reap significant benefits. This section will get you started, and help you make wise investment choices. </p>
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<h3>Why, When, and How Often?</h3>
<p>Financial advisors can save you time. All of us would like to put our hard-earned money to work making more money. But searching through the maze of investment options may take too much of your time. Financial advisors can get specialized information for you quickly. Maybe you’ve developed a financial plan yourself and want an opinion from someone with more experience than you, or you need to improve your current financial situation and don’t know where to start. Financial advisors also are helpful if you have an immediate need or unexpected life event such as a severe illness, birth, death in your family, or an inheritance. </p>
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<p>Seeking financial advice is like seeing a physician for your health. Just as most people need an annual physical exam, at least an annual review of your financial situation, including your investment portfolio, is a good idea. When the markets are showing extreme volatility, or you have a significant change in life circumstances (e.g., birth of a child, divorce, severe illness or disability, or death of a spouse), more frequent assessment of your investments is recommended. Just as you call on a physician when you have a particular need, you may also need a financial advisor to help with such issues as tax preparation, buying insurance to protect against catastrophic loss of property, or drawing up a will or trust. </p>
<p>When and how often you seek financial advice really depends on the complexity of your financial situation. The bottom line is that having someone to call at the right time, for the right purpose, who is familiar with your situation, and can lead you to an informed decision, is invaluable. </p>
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Exercise: Getting Help
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Interview three local financial professionals by phone or in person and complete the <a href="$@FILEPHP@$$@SLASH@$Worksheets$@SLASH@$U10Ex3_Comparison_Financial_Professionals.doc" target="_blank">Comparison of Financial Professionals</a> worksheet.</p>
</td>
</tr>
</table>
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3 - Financial Professional Team
<h3>Members of a Financial Professional Team</h3>
<p>Depending on your personal financial situation, and how much knowledge you have, your financial professional team can be as large as 10 people. Here are the possibilities. </p>
<p><b>Bankers</b> (or their counterparts at credit unions) can help you choose appropriate accounts for your cash and emergency funds. </p>
<p><b>Real estate agents</b> can help you make housing purchase decisions and help you make contact with mortgage lenders. (Note: You can often negotiate a lower sale price by employing a buyer’s broker who works for you, not the seller. If the buyer’s broker or the broker’s firm also lists properties, there may be a conflict of interest, so ask them to tell you if a property is one of their listings.) </p>
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<p><b>Lawyers</b> can help you with certain legal implications of your investments, such as real estate or partnerships. They may also provide financial advice because some are certified financial planners. Choose a lawyer that has the expertise you need (e.g., real estate, family law, estate planning). </p>
<p><b>Certified Public Accountants</b> (CPAs) and <b>Accountants</b> (and some highly qualified tax preparers) can answer questions about the income tax consequences of your investments and help you submit your tax return to the Internal Revenue Service. Like lawyers, they may also offer comprehensive financial advice. Many CPAs have a personal finance specialization, designated by the letters PFS. Another recommended tax preparation professional is an enrolled agent. </p>
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<p><b>Employee benefit counselors</b> at your place of work can help you with decisions related to retirement accounts, if any, available through your employer. </p>
<p><b>Life insurance agents</b> can sell you insurance products (e.g., annuities, whole life insurance, universal life), which have an investment component. Most life insurance agents are trained by the company whose products they sell and may not be knowledgeable about all investment options available to you. Some also may have additional training through the insurance industry and have earned the CLU (Chartered Life Underwriter) designation. </p>
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<img valign="top" align="right" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$financial_advisors2.png" alt="Financial advisors" />
<p><b>Estate planners</b> can help with a strategy for management of your assets at the time of your death. Many estate planners hold the AEP (Accredited Estate Planner) designation, but they are not qualified to prepare legal documents, such as wills, trusts, and powers of attorney. Only a lawyer is qualified for that. </p>
<p><b>Investment advisors</b> (a.k.a., financial consultants) can give you advice on securities (e.g., stocks, bonds) and must be registered with the Securities and Exchange Commission or a state securities agency. The registry designation is RIA (Registered Investment Advisor). Investment advisors cannot sell securities products without a securities license, but being registered does not guarantee competence. </p>
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<p><b>Stock brokers</b> may sell you a wide variety of investment products. Large national or regional firms may have special programs for the beginning investor. Brokers may either be full service or discount. Full service brokers can provide good financial advice. Discount brokers, who get their name because sales commissions are discounted, sometimes as much as 70%, are useful if you know what you want to purchase. They generally do not offer advice. </p>
<p>Stock brokers are licensed by the state(s) in which they buy and sell securities, and they must be registered with a company that is a member of Financial Industry Regulatory Authority (FINRA) and pass FINRA-administered securities exams. FINRA maintains the Central Registration Depository (CRD), where you can check to see if your broker is registered to sell securities. </p>
<p>For further information about stock brokers, see http://www.brokercheck.com. </p>
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<p><b>Financial planners</b> consider your total financial situation to develop a comprehensive plan. This involves taking a "snapshot" of where you are now via a net worth statement, identifying where you want to be financially (e.g, buying a house, financing a child’s college education, living comfortably in retirement), and developing recommendations to help close the gap between what you have now and what you need to meet your life’s goals. </p>
<p>Financial planners look at meeting short-, intermediate-, and long-term financial goals, and managing risk with insurance, investments, tax planning, retirement planning, and estate planning. Making decisions about one area, such as saving for retirement, has implications for other areas, such as tax planning and investment choices. Working with someone who can give you the complete picture, and can call on specialized experts (e.g., lawyers, accountants) when needed, has its advantages for some people. </p>
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<p>Though credentialing for financial planners is not required by federal or state law, it is recommended you seek someone who has met certain standards set by well-recognized organizations. The best known credential is CFP (Certified Financial Planner), which is administered by the Certified Financial Planner Board of Standards in Denver (http://www.cfp-board.org). A Chartered Financial Consultant (ChFC) has successfully completed courses from the American College in Bryn Mawr, Pennsylvania. For financial planners who sell or manage assets, being registered with the SEC or the state where they practice is required. </p>
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Exercise: Your Financial Professional Team
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Complete the worksheet <i>A Record of Important Family Papers</i> at http://njaes.rutgers.edu/money/pdfs/importantpapers.pdf to list important financial data together in one place and have readily available to share with financial advisors as needed. </p>
<p>For more detailed record-keeping, complete the <a href="$@FILEPHP@$$@SLASH@$worksheets_raw$@SLASH@$Activity_2_Emergency_Financial_First_Aid_Kit.pdf" target="_blank"><i>Financial Emergency Preparedness (FEP) Worksheets</i></a>. </p>
</td>
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</table>
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<h3>Costs</h3>
<p>It is important to be told clearly, and preferably in writing, what the service provided by a financial professional will cost. Generally, payment can be in one of three forms, or a combination. </p>
<p>1. <b>Salary</b>. The financial professional gets a paycheck from the company. The company gets the money from fees or commissions charged to you.
<p>2. <b>Fees</b>. There may be an hourly rate, a flat rate, a percentage of assets managed by the company, or a percentage of your income. "Fee-only" financial advisors work solely for their clients and are compensated only by a previously agreed upon fee. They do not accept commissions or receive any other compensation for recommending specific products. Many "fee-only" planners are members of the National Association of Personal Financial Advisors. For a list of NAPFA members near you, call 1-888-333-6659 (1-888-FEE-ONLY).
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<p>3. <b>Commissions</b>. These are paid to the financial professional when recommended financial products (e.g., mutual fund) are purchased. Commissions are generally based upon a percentage of the amount you invest in a product.
<p>4. <b>Combination of fees and commissions</b>. A financial planner may charge a set fee to develop an investment plan for you, and receive commissions from any products purchased to implement the plan.
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4 - Choosing Financial Professionals
<p>Choosing your team of financial professionals, and especially those who may advise you on investment decisions, takes some comparison shopping on your part. Say you have decided you could use the help of an investment advisor, a stock broker, or a financial planner. </p>
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<p>Here’s a six-step process that can help find the financial professional that is best for you. </p>
<p><b>STEP 1. Get some names.</b>
You can check the yellow pages of your phone book, but a better idea is to work from referrals. Ask your friends, work colleagues, and family members for their recommendations. You also can contact professional organizations for names of professionals practicing in your area. To do this, call toll-free, or check their Web sites.
<ul><li>Financial Planning Association (FPA), 1-800-282-PLAN (7526) or 1-888-806-PLAN (7526) or <a href="http://www.fpanet.org" target="_blank">http://www.fpanet.org</a>
</li><li>National Association of Personal Financial Advisors, 1-888-FEE-ONLY (1-888-333-6659) or <a href="http://www.napfa.org" target="_blank">http://www.napfa.org</a>
</li><li>American Institute of Certified Public Accountants, Personal Financial Planning Division, 1-800-862-4272 or <a href="http://www.aicpa.org/" target="_blank">http://www.aicpa.org/</a>
</li></ul>
</p>
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<p> <b>STEP 2. Make some calls.</b>
Ask to have information sent to you in writing, including the names of a couple of satisfied clients. You can get a good feel for how a financial professional will work with you by the way that person treats you on the phone and through the mail. Pay special attention to the financial professionals’ credentials. </p>
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<p><b>STEP 3. Check out references.</b>
Call to see if the person is licensed. For example, all stock brokers must register with Financial Industry Regulatory Authority (FINRA) and are listed in the Central Registration Depository (CRD). Call FINRA or your state securities regulator to see if the broker is registered, and ask if there are any disciplinary actions on file. Here are some numbers to call to check for disciplinary action taken against a financial professional:
<ul><li>Certified Financial Planner Board of Standards, Inc., 1-888-487-1497
</li><li>Financial Industry Regulatory Authority, 1-800-289-9999
</li><li>U.S. Securities and Exchange Commission, 1-800-732-0330
</li></ul>
</p>
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<p><b>STEP 4. Set up a face-to-face meeting and ask some questions.</b>
<ol><li>How long have you been a financial planner? What other related experience do you have?
</li><li>What are your professional credentials and affiliations?
</li><li>What is your investment philosophy? (You will feel most comfortable with a financial professional whose recommendations are driven by YOUR tolerance for risk and other preferences, not his or hers.)
</li><li>How will we work together (e.g., by phone, electronically, in person) and how frequently?
</li><li>What services do you offer?
</li><li>What can I expect from you?
</li><li>What will it cost and how are you paid?
</li><li>Who will work with me (e.g., the person you are interviewing or a business associate)?
</li><li>May I see a sample financial plan?
</li><li>Are you registered with state or federal regulators?
</li></ol>
</p>
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<p> <b>STEP 5. Ask yourself, "Do I feel comfortable with this person?"</b>
Working with a financial professional making investment decisions requires a relationship of mutual trust and respect. You must feel the financial professional has your best interests in mind and will be responsive to your needs. You must feel completely confident that this person will treat your situation with strictest confidence and act in a professional manner at all times. You must feel that this professional relationship, putting the effects of market volatility aside, will leave you better off than before. </p>
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<p> <b>STEP 6. Make the decision.</b>
Ask for a written agreement that details the services to be provided. Demand the best. Keep up your end of the relationship by providing prompt and accurate information about your current financial situation, your short-, intermediate-, and long-term financial goals, and your tolerance for investment risk. Advisors are required, by law, to make recommendations that are suitable for you; so they need to know a lot about you and your objectives. </p>
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Exercise: Choosing Financial Professionals
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Find the names of three to five local financial professionals by checking the Web sites www.napfa.org, www.cfp.net, www.financialpro.org, and www.fpanet.org. Contact at least two of them and ask them the questions found in Step 4 of the six-step process to locate a financial advisor. Also check out their disciplinary history with the SEC and/or your state securities regulator.</p>
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<h3>Summary</h3>
<p>Selecting your team of financial professionals, and especially someone to advise you on investments, is only the first step. Building this relationship and getting the most payback for your investment dollar requires constant monitoring on your part. Be involved. Ask questions. Review your portfolio periodically, at least yearly, to be sure your investment strategy will help you reach your financial goals. </p>
<p>Review monthly statements carefully and understand what they say. Monitor economic conditions (e.g., interest rates) to see things on the horizon that may affect your investments. Then consult with your financial professional for advice. If you have a problem or complaint about your financial professional, act quickly to resolve the situation.</p>
<p>Building your financial professional team is only a start. Being an active part of that team will increase your chances of making wise investment choices. Often, financial professionals stay with you for a lifetime and can be as great an asset as a solid net worth. Choose wisely. </p>
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<p>Congratulations! You've reached the end of the unit. Select continue to start Unit 11 or use the lesson menu on the left to skip to any part of Units 1-11.</p>
<p><br /></p><hr style="width: 100%; height: 2px;" />
<h3>About the Author</h3>
<p><b>Jane Schuchardt</b>, Ph.D., is National Program Leader, USDA Cooperative State Research, Education, and Extension Service, Washington, DC, the federal partner in the Cooperative Extension System. During 1999, she was Senior Fellow with the National Endowment for Financial Education, Denver. She is a past president of the American Council on Consumer Interests (ACCI).</p>
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UNIT 11: INVESTMENT FRAUD
<img valign="top" align="left" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$investment_portfoliocorrected.png" alt="Investment portfolio" />
<p>Information is an investor's best tool when it comes to investing wisely and avoiding fraud. And the best way to gather information is to <a target="_blank" href="http://www.sec.gov/investor/pubs/askquestions.htm">ask questions</a>- about both the investment and the person or firm selling it. It doesn't matter if you are a beginner or have been investing for many years, it's never too early or too late to start asking questions.</p>
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Learning Objectives
<p>This unit will help you:</p>
<ul><li>Recognize and avoid different types of investment fraud</li>
<li>Learn what questions to ask about investment products before investing</li>
<li>Learn where to get information about investments and who to call for help</li>
<li>Understand what to do if you run into trouble (e.g., become a victim of fraud)</li>
</ul>
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<p>Too many investors who've suffered losses at the hands of swindlers could have avoided trouble if they had only asked basic questions from the start. One simple phone call to your state securities regulator or the U.S. Securities and Exchange Commission (SEC) can often make the difference between investing in a legitimate business or squandering your money on a scam. </p>
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1 - Where the Frauds Are
<h3>Navigating the Investing Frontier</h3>
<p>Many fraudsters rely on the telephone to carry out their investment scams. Using a technique known as <b>cold calling</b> (so-called because a caller telephones a person with whom they have not had previous contact), these fraudsters will hound you to buy stocks in small, unknown companies that are highly risky or, sometimes, part of a scam. In recent years, the Internet has also become increasingly attractive to fraudsters because it allows an individual or company to communicate with a large audience without spending a lot of time, effort, or money. </p>
<p>You should be skeptical of any offers you learn about from a cold caller or through the Internet. Here's what you need to know about cold calling and Internet fraud. </p>
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<h3>Cold Calling</h3>
<p>For many businesses, including securities firms, cold calling serves as a legitimate way to reach potential customers. Honest brokers use cold calling to find clients for the long term. They ask questions to understand your financial situation and investment goals <i>before</i> recommending that you buy anything. </p>
<p>Dishonest brokers use cold calling to find "quick hits." Some set up "boiler rooms" where high-pressure salespeople use banks of telephones to call as many potential investors as possible. Aggressive cold callers speak from persuasive scripts that include retorts for your every objection. As long as you stay on the phone, they'll keep trying to sell. And they won't let you get a word in edgewise. </p>
<p>Whether the calls are annoying, abusive, or downright crooked, you can stop cold callers. The law protects you by requiring cold callers to follow several rules. </p>
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<p><b>When people from the securities industry call to sell something, they must:</b></p>
<ul><li> <b>Call Only Between 8:00 a.m. and 9:00 p.m.</b> These time restrictions do not apply if you are already a customer of the firm or you've given them permission to call you at other times. Cold callers may call you at work at any time.
</li><li> <b>Say Who's Calling and Why</b> Cold callers must promptly tell you their name, their firm's name, address, and telephone number, and that the purpose of the call is to sell you an investment.
</li><li> <b>Put You on Their "Do-Not-Call" List, If You Ask</b> Every securities firm must keep a "do-not-call" list. If you want to stop sales calls from a firm, tell the caller to put your name and telephone number on the firm's "do-not-call" list. If you continue to receive calls from that firm, get the caller’s name and telephone number, note the date and time of the call, and complain to the firm's compliance officer, the SEC, and your state securities regulator. At the end of this unit, you'll find information on how to make a complaint.
</li><li> <b>Treat You With Respect</b> Cold callers can't threaten or intimidate you or use obscene or profane language. They also can't call you repeatedly to annoy, abuse, or harass you.
</li><li> <b>Get Your Written Approval Before Taking Money Directly from Your Bank Accounts</b> Before investing, you should always get answers to the questions below and written information about an investment. If you do decide to buy from a cold caller, do not give your checking or savings account numbers to the broker over the phone. Brokers must get your written permission-such as your signature on a check or an authorization form-before they can take money from your checking or savings account.
</li><li> <b>Tell You the Truth</b> People selling securities must tell you the truth. Brokers who lie to you about any important aspect of an investment opportunity violate federal and state securities laws.
</li></ul>
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<img valign="top" align="left" hspace="10" vspace="2" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$good_dealcorrected.png" alt="Man on the telephone" />
<p>To learn more about how to deal with cold calls, how to stop them, and how to evaluate any investment opportunity that comes your way over the telephone, read the SEC's <i>Cold Calling: Know Your Rights</i>. You'll find this brochure on the SEC's Web site at www.sec.gov/investor/pubs/coldcall.htm or you can order it by calling the SEC's toll-free investor assistance line at 1-800-SEC-0330. </p>
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2 - Internet Fraud
<p>The Internet serves as an excellent tool for investors, allowing them to easily and inexpensively research investment opportunities. But the Internet is also an excellent tool for fraudsters. That's why you should always think twice before you invest your money in any opportunity you learn about through the Internet. </p>
<p>Anyone can reach tens of thousands of people by building an Internet Web site, posting a message on an online message board, entering a discussion in a live "chat" room, or sending mass e-mails. It's easy for fraudsters to make their messages look real and credible. But it's nearly impossible for investors to tell the difference between fact and fiction. </p>
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<h3>The most common methods for Internet investment scams are:</h3>
<p><b>Online Investment Newsletters</b> Hundreds of online investment newsletters have appeared on the Internet in recent years. Many offer investors seemingly unbiased information free of charge about featured companies or recommend "stock picks of the month." While legitimate online newsletters can help investors gather valuable information, some online newsletters are tools for fraud. Some companies pay cash or securities to people who write online newsletters in exchange for recommending their stocks. While touting specific stocks isn't illegal by itself, the federal securities laws require the newsletters to disclose who paid them, the amount, and the type of payment. But many fraudsters fail to do so. Instead, they'll lie about the payments they received, their independence, their so-called research, and their track records. These fraudsters usually stand to profit handsomely if they convince investors to buy or sell particular stocks. </p>
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<p><b>Online Message Boards</b> Online message boards are an increasingly popular forum for investors to share information. Message boards typically feature "threads" of messages on various investment opportunities. While some messages may be true, many are bogus-or even scams. Fraudsters often pump up a company or pretend to reveal "inside" information about upcoming announcements, new products, or lucrative contracts. Also, you never know for certain who you're dealing with-or whether they're credible-because many messageboards allow users to hide their identity behind multiple aliases. People claiming to be unbiased observers who've carefully researched the company may actually be company insiders, large shareholders, or paid promoters. A single person can easily create the illusion of widespread interest in a small, thinly traded stock by posting a series of messages under various aliases. </p>
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<img valign="top" align="right" hspace="10" vspace="5" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$older_man_computer.png" alt="Older man on computer" />
<p><b>E-mail Spams</b> "Spam" (junk e-mail) is so cheap and easy to create that fraudsters increasingly use it to find investors for bogus investment schemes or to spread false information about a company. Many more potential investors can be targeted with spam than with cold calling or mass mailing. Using a bulk e-mail program, spammers can send personalized messages to thousands and even millions of Internet users at a time. </p>
<p>For more information about how to protect yourself from Internet fraud, visit the Onguard Online Web site and review the materials on online investing, which are available at www.OnGuardOnline.gov/topics/online-investing.aspx. </p>
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Exercise: Where the Frauds Are
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Listen to the following online audio clips about investment fraud:
http://www.extension.iastate.edu/investwisely/apr08.htm (How to Stop Investment Fraud) and http://www.extension.iastate.edu/investwisely/mar08.htm (Investment Fraud Can Happen to Anyone and Investment Fraud—It’s Probably Too Good to be True). Record 3 to 5 points that you previously did not know about investment fraud and two personal applications. </p>
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3 - Common Investment Fraud Schemes
<p>The types of investment fraud seen online mirror the frauds perpetrated over the phone or through the mail. Here are the most common investment schemes and the "red flags" you should watch for: </p>
<p><b> The "Pump and Dump" Scam</b></p>
<p>It's common to see messages posted on the Internet that urge readers to buy a stock quickly or to sell before the price goes down. Cold callers often call using the same sort of pitch. Often the promoters will claim to have "inside" information about an impending development or an "infallible" combination of economic and stock market data to pick stocks. In reality, they may be insiders or paid promoters who stand to gain by selling their shares after the stock price is pumped up by gullible investors. Once these fraudsters sell their shares and stop hyping the stock, the price typically falls and investors lose their money. Fraudsters frequently use this ploy with small, thinly traded companies because it's easier to manipulate a stock when there's little or no information available about the company. </p>
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<h3>"Ponzi" and Pyramid Schemes</h3>
<p>These investment scams are essentially "robbing one person to pay another." Initial investors are paid off with money taken from new investors. As long as a steady flow of new investors keeps coming in, there will be money to pay off the old investors. This early return on investment is misleading, however, because when the new investors stop coming in, the scheme collapses, investors lose their money, and the fraudsters walk away rich. </p>
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<h3>Affinity Fraud</h3>
<p>"Affinity fraud" describes investment schemes that prey upon members of identifiable groups, including religious communities, the elderly, ethnic groups, and professionals such as lawyers, doctors, or teachers. Fraudsters often exploit the sense of trust and friendship in groups of people who have something in common. Fraudsters assume that the tight-knit structure of many groups makes it less likely that a scam will be detected by regulators and law enforcement officials and that victims may be more likely to forgive "one of their own." They'll enlist respected leaders within a community to spread the word about an investment deal. The key to avoid being a victim in an affinity scheme is to ask questions and check out everything-no matter how trustworthy the person is who brings the investment opportunity to your attention. </p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
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<td> <img vspace="10" hspace="0" border="0" align="middle" title="Lee Ellen at table with laptop and paper" alt="Lee Ellen at table with laptop and paper" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$lee_ellen.png" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$11_lee_ellen$@SLASH@$0.mp3"></a><br /><br /></div>
</td>
<td>
<h3>Lee Ellen</h3>
<p>Lee Ellen thinks she might have encountered affinity fraud. Select the Play icon to hear more.</p>
<p><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$11_lee_ellen$@SLASH@$transcript.html" target="_blank"> Read Audio Transcript</a> </p>
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</table>
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<h3>Oil and Gas Scams</h3>
<p>If you think you've found the right oil or gas investment to "strike it rich," consider this: it may be a scam. While some oil and gas investment opportunities are legitimate, many oil and gas ventures are frauds. Many of these schemes start in so-called "boiler rooms," where skilled telemarketers use high pressure sales tactics to convince you to hand over your hard-earned money. Oil and gas scams typically increase after highly publicized news item, like volatile gas prices, to lure potential investors and make their "opportunity" sound more legitimate. </p>
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<h3>Promissory Notes</h3>
<p>A promissory note is a form of debt-similar to a loan or an IOU-that a company may issue to raise money. Typically, an investor agrees to loan money to the company for a set period of time. In exchange, the company promises to pay the investor a fixed return on the investment. While promissory notes can be legitimate investments, those that are marketed broadly to individual investors often turn out to be scams. Investors should be careful to determine their legitimacy and should seek the advice of an objective third party when in doubt. </p>
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<h3>Prime Bank Fraud</h3>
<p>In a prime bank scheme, fraudsters often claim investors' funds will be used to purchase and trade "prime bank" financial instruments or other "high yield investment programs" on clandestine overseas markets in order to generate huge returns in which the investor will share. However, neither these instruments, nor the markets on which they allegedly trade, exist. To give the scheme an air of legitimacy, the promoters distribute documents that appear complex, sophisticated and official. The sellers frequently tell potential investors that they have special access to programs that otherwise would be reserved for top financiers on Wall Street, or in London, Geneva or other world financial centers. </p>
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<h3>Estate Planning Fraud</h3>
<p>Another common scam involves estate planning (planning for disposition of your assets after your death) and financial services. Scam artists involved in this type of fraud and deceit usually meet the consumer at a meeting site or during an in-home visit. They pose as business people offering a variety of services, including help with estate planning. There are a wide variety of tools available to help with planning, but a popular tool for scam artists to push is a “living trust.” </p>
<p>When developed properly, by professionals such as attorneys, a living trust can be an excellent tool for your estate planning needs. A living trust is created while you are alive, and allows you to control the distribution of your estate. You transfer ownership of your property and your assets into the trust. Then the trustee (the person or institution that controls the trust) will distribute the assets upon your death. </p>
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<p>Assets placed in the living trust are not subject to probate, and this can save time and money when settling your estate. It is important to remember that a living trust might not be the best planning tool for every estate. Poorly executed living trusts can cost you money and may not carry out your intentions. </p>
<p>Some scams try to sell services to create a living trust and use this as a tool to access your personal information. Once they have your financial information, they may try to sell you additional products or services, including insurance annuities. These may look like lucrative investments, but you should evaluate your situation and decide what is best for your family. Often a different type of estate planning or investment will be a better investment vehicle, depending on your circumstances. It is very important that you know who you are dealing with, that you get referrals, and that you thoroughly investigate the business reputation of those attempting to sell you financial investment and/or estate planning services. </p>
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<h3>Farm and Ranch Fraud</h3>
<p>Fraudulent and deceitful practices aren’t limited to mail and Internet schemes or selling you faulty estate planning services. With the cost of inputs rising, it is harder to make ends meet on the farm or ranch. Some fraudulent schemes involve lying to investors about the number of cattle on feedlots and conspiring to set the prices of cattle at auctions. There are federal laws that prohibit these types of activities, including the Packers and Stockyards Act. It is important to know with whom you do business and make sure they have sound business practices.</p>
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<h3>Leasing Fraud</h3>
<p>Other offers to be wary of include lucrative leases for oil and gas, offers to purchase mineral or water rights, and offers to purchase carbon credits. Owning property involves more than just owning real estate. One comparison that is frequently used is the bundle of sticks theory. This is the theory that your property rights are like a bundle of sticks – that is, your property ownership is comprised of many separate rights: water rights, mineral rights, air rights, access rights and so on. You can give away or sell some of your rights while retaining the actual ownership of the property, or stated another way, you can give away or sell some of your sticks, but you still have a bundle. </p>
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<p>When signing a lease or any other document regarding one of your property rights, it is important to know and understand exactly what rights you are leasing. Often in oil and gas leases, there is language that allows the drilling company to access your ground water and to drill wherever they like. These are important considerations when signing a lease. It is imperative that when dealing with important rights associated with your real property (land) that you have a qualified legal advisor thoroughly review documents before you sign them, regardless of the royalty or lease bonus payments you are being offered. </p>
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<h3>High Return or "Risk Free" Investments</h3>
<p>Some unscrupulous investment advisers make unsuitable recommendations to purchase investment products that don't meet the investment objectives or means of an investor. Unsuitable recommendations might occur when a broker sells speculative investments such as options, futures or penny stocks to a 95-year-old widow living on a fixed income with a low risk tolerance. Investors should be careful to review the risk profile of each investment recommendation and should seek the advice of an objective third party when in doubt. </p>
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<p>In summary, the Internet provides tremendous opportunities for sharing information and connecting with people from around the world. It also provides the perfect opportunity for scammers to take advantage of unsuspecting individuals. Some of the most prevalent schemes and fraud operations, either general consumer fraud or investor fraud, are taking place online. </p>
<p>Online “scams” sometimes ask for funds to be wired directly to requester since there is little recourse for the victim once the money has been sent. Often these scams involve checks that appear to be valid, but are fake. It could take days for the depositing bank to discover the checks are fraudulent. By this time, any money that has been wired associated with the transaction may be spent and most likely not be recoverable. </p>
<p>Internet and mail fraud provide a way for scam artists to strike without you ever knowing who they are or seeing them face-to-face. You should also be very wary of business people that come to you making offers that seem too good to be true. </p>
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Exercise: Types of Investment Fraud
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Type the name of one or more types of investment fraud described in this supplemental unit of IFF (e.g., “pump and dump” scheme, pyramid scheme, affinity fraud, etc.) into an Internet search engine such as Google®. Find and read one or more articles about real life investment scams. </p>
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4 - How to Avoid Investment Fraud
<p>To invest wisely and avoid investment scams, research each investment opportunity thoroughly and ask questions. <a target="_blank" href="http://www.sec.gov/investor/pubs/roadmap.htm">Get the facts before you invest</a>, and only invest money you can afford to lose. You can avoid investment scams by asking-and getting answers to-these three simple questions: </p>
<p>1. <b>Is the investment registered?</b> </p>
<p>Many investment scams involve unregistered securities. So you should always find out whether the company has registered its securities with the SEC or your state securities regulators. You can do this by checking the SEC’s <a target="_blank" href="http://www.sec.gov/edgar/searchedgar/webusers.htm">EDGAR database</a>. </p>
<p>Some smaller companies don't have to register their securities offerings with the SEC, so always check with your state securities regulator. You'll find the number for your state securities regulator in the government section of your phone book. You can also call the North American Securities Administrators Association (NASAA) at 202-737-0900 or visit NASAA's Web site at www.nasaa.org. One simple phone call can make the difference between investing in a legitimate business or squandering your money on a scam. </p>
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<p>2. <b>Is the person licensed and law-abiding?</b> </p>
<p>Find out whether the person or firm selling the investment is properly licensed in your state and whether they've had run-ins with regulators or received serious complaints from investors. This information is available from the Central Registration Depository (CRD), a computerized database that contains information about most brokers, some investment advisers, their representatives, and the firms they work for. The CRD also contains information about the broker's educational background and previous employment history. </p>
<p>You can get CRD information from your state securities regulator. Or call the Financial Industry Regulatory Authority (FINRA) public disclosure hotline at 1-800-289-9999 or visit FINRA BrokerCheck at www.finra.org/brokercheck. Your state securities regulator may provide more information from the CRD than FINRA, especially when it comes to investor complaints, so you may want to check with them first. </p>
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<p>3. <b>Does the investment sound too good to be true?</b> </p>
<p>If it does, it probably is. High-yield investments tend to involve extremely high risk. Never invest in an opportunity that promises "guaranteed" or "risk-free" returns. Watch out for claims of astronomical yields in a short period of time. Be skeptical of "offshore" or foreign investments. And beware of exotic or unusual sounding investments. Make sure you fully understand the investment before you part with your hard-earned money. Always ask for-and carefully read-the company's prospectus. You should also read the most recent reports the company has filed with its regulators and pay attention to the company's financial statements, particularly if they do not say they have been audited or certified by an accountant. </p>
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<p>The SEC has spelled out all the questions you’ll need to ask in its <a target="_blank" href="http://www.sec.gov/investor/pubs/askquestions.htm">Ask Questions</a> publication. When you ask these questions, write down the answers you received and what you decided to do. If something goes wrong, your notes can help to establish what was said. Let your broker or investment adviser know you’re taking notes. They’ll know you’re a serious investor and may tell you more-or give up trying to scam you. The SEC has developed a <a target="_blank" href="http://www.sec.gov/complaint/callform.htm">form for taking notes</a>. You can get this and other useful publications by visiting the Investor Information section of the SEC’s Web site at www.sec.gov/investor or by calling 1-800-SEC-0330. </p>
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<h3>Smart Questions to Ask</h3>
<p>So how do you protect yourself from scams? The first and most important thing to do is make sure you know exactly what you are agreeing to or purchasing. Ask for time to review the documents. If the sales person is pushy and stresses the importance of signing the documents immediately, it is likely to be a scam. Also, be sure you understand your options. Ask lots of questions. A legitimate businessperson will be happy to answer your questions and provide any help they can. The next two pages have a list of questions to ask and consider before signing documents or purchasing services: </p>
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<p><b>What array of services do you offer?</b>
<p>--Look for organizations that offer a variety of services that can be tailored to fit your needs. If there is only one product available and they insist it is best for your situation, you should consider looking elsewhere.</p>
<p><b>Are you licensed to offer your services in my state?</b>
<p>--Many states have licensing requirements for different types of professionals. Attorneys, for example, must be licensed in the state where they practice. Often credit counselors and financial planners will have licensing requirements as well. Do not hire an organization that has not fulfilled the requirements in your state.</p>
<p><b>Do you offer free information?</b>
<p>--The FTC advises that you should avoid organizations that charge for information about the nature of their services.
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<p><b>Have other consumers been satisfied with the service they have received?</b>
<p>--Before doing business with an organization, check them out with your state Attorney General, local consumer protection agency and Better Business Bureau. These organizations can tell you if other consumers have filed complaints about them. The absence of complaints is not a guarantee that the business is legitimate, as many scammers change their business name frequently, but complaints from other consumers can alert you to problems. Ask for referrals.
<p><b>What are your fees? Are there set-up and/or monthly fees?</b>
<p>--Get a detailed price quote in writing, and specifically ask if all fees are covered in the quote. If a business or organization won’t put its prices in writing, you should find a different business to work with.
<p>Finally, it is important to have qualified professionals review all contracts, particularly those involving investments, before you sign those documents.</p>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$anna.png" alt="Anna outdoors" title="Anna outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$11_anna$@SLASH@$0.mp3"></a><br /><br /></div><br />
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<h3>Anna</h3>
<p>Anna's confident in her choices. Select the Play icon to hear more.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$11_anna$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
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</table>
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Exercise: Avoid Investment Fraud
<table cellspacing="10" cellpadding="10" border="0">
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<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
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<p>Visit the Web Site http://www.mcwhortle.com/ to learn more about investment fraud and how to avoid it (NOTE: This is NOT a commercial Web site but, rather, a Web site designed by the U.S. Securities and Exchange Commission to educate consumers about investment fraud). </p>
<p>Visit the Web site http://www.growthventure.com to learn about investment fraud and how to avoid it. (NOTE: This is NOT a commercial Web site but, rather, a Web site designed by the U.S. Securities and Exchange Commission to educate consumers about investment fraud). </p>
<p>Use the Risk Meter at the FINRA Web site SaveandInvest.org to see whether you share some of the characteristics and traits of many investment fraud victims. The URL for this tool is http://apps.finra.org/meters/2/riskmeter.aspx. </p>
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5 - How to Get Information About Companies
<p>Many investment scams involve small microcap companies that don't file reports with the SEC. Professional stock analysts regularly research and write about larger public companies, and it's easy to find their stock prices in the newspaper. In contrast, information about microcap companies can be extremely difficult to find, making them more vulnerable to investment fraud schemes. It's easier for fraudsters to manipulate a stock when there's little or no information available about the company. </p>
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<p>If you're working with a broker or an investment advisor you trust, you can ask him or her to get you written information about the company and its business, finances, and management. You can also get information on your own from these sources: </p>
<p><b>From the company</b>. Ask the company if it is registered and files reports with the SEC. If the company is small and unknown to most people, you should also call your state securities regulator to get information about the company, its management, and the brokers or promoters who've encouraged you to invest in the company. </p>
<p><b>From the SEC</b>. A great many companies must file their reports with the SEC. Using the <a href="http://www.sec.gov/edgar/searchedgar/webusers.htm" target="_blank">EDGAR database</a>, you can find out whether a company files with the SEC and get any reports of interest to you. For companies that do not file on EDGAR, contact the SEC’s Office of Investor Education and Advocacy by calling 202 551-8090, sending a fax to 202-772-9295, or sending an e-mail to PublicInfo@sec.gov. </p>
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<p><b>From your state securities regulator</b>. Even though the company does not have to register its securities with the SEC, it may have to register them with your state. Your regulator will tell you whether the company has been legally cleared to sell securities in your state. Contact your state securities regulator to find out whether they have information about the company and the people behind it. Too many investors could easily have avoided heavy and painful financial losses if they had only called their state securities regulator before they bought stock. Look in the government section of your phone book or contact NASAA at 202-737-0900 or www.nasaa.org to get your state regulator's name and phone number. </p>
<p><b>From other government regulators</b>. Many companies, such as banks, do not have to file reports with the SEC. But banks must file updated financial information with their banking regulators, and that information is often available for free on government Web sites. Visit the Federal Reserve System's National Information Center of Banking Information site at www.ffiec.gov/nicpubweb/nicweb/nichome.aspx, the Office of the Comptroller of the Currency at /www.occ.treas.gov, or the Federal Deposit Insurance Corporation at www.fdic.gov. </p>
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<p><b>From reference books and commercial databases</b>. Visit your local public library or the nearest law or business school library. You'll find many reference materials containing information about companies. You can also access commercial databases for more information about the company's history, management, products or services, revenues, and credit ratings. Although the SEC cannot recommend or endorse any particular research firm, its personnel, or its products, you may consult a number of commercial resources, including Bloomberg, Dun & Bradstreet, Hoover's Profiles, Lexis-Nexis, and Standard & Poor's Corporate Profiles. Ask your librarian about additional resources. </p>
<p><b>The Secretary of State where the company is incorporated</b>. Contact the secretary of state where the company is incorporated to find out whether the company is a corporation in good standing. You may also be able to obtain copies of the company's incorporation papers and any annual reports it files with the state. You'll find the name and address of your state's secretary of state in the government section of your phone book. </p>
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<p><b>Caution</b> If you've been asked to invest in a company but you can't find any record that the company has registered its securities with the SEC or your state or any reason to believe that it's exempt from registration, call or write your state's securities regulator or the SEC immediately with all the details. You may have come face to face with a scam. </p>
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Exercise: Get Information About Companies
<table cellspacing="10" cellpadding="10" border="0">
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<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
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<td>
<p>Use one or more sources of information discussed in this section, such as the EDGAR database (http://www.sec.gov/edgar.shtml), state securities regulators, and commercial data bases, to find information about a company to invest in. </p>
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6 - What to Do if You Run Into Trouble
<p>Act promptly! By law, you have only a limited time to take legal action. If your problem is with a broker, follow these steps to solve your problem: </p>
<ul>
<li>Talk to your broker and explain the problem. What happened? Who said what, and when? Were communications clear? What did the broker tell you? Did you take notes about what your broker said at the time? If so, what do your notes say? </li>
<li>If your broker can't resolve your problem, then talk to the broker's branch manager. </li>
<li>If the problem is still not resolved, put your complaint in writing and send it to the compliance department at the firm's main office. Explain your problem clearly, and tell the firm how you want it resolved. Ask the compliance office to respond to you in writing within 30 days. </li>
<li>If you're still not satisfied, then send a letter to your state securities regulator or to the Office of Investor Education and Advocacy at the SEC along with copies of any letters you've sent already to the firm. </li>
</ul>
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<p>You can get the name, telephone number, and address of your state securities regulator by calling NASAA at 202-737-0900 or by visiting NASAA’s Web site at http://www.nasaa.org. </p>
<p>The address for the SEC’s Office of Investor Education and Assistance is:</p>
<p>Office of Investor Education and Advocacy<br /> U.S. Securities and Exchange Commission<br /> 100 F Street, NE<br /> Washington, DC 20549-0213<br /> Phone: 202-551-6500; Toll-free: 1-800-SEC-0330<br /> Facsimile: 202-772-9295<br /> E-mail: help@sec.gov </p>
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1
1229386363
1252532689
Exercise: What to Do if You Run Into Trouble
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Find the contact information for your state securities regulator at http://www.nasaa.org/QuickLinks/ContactYourRegulator.cfm. </p>
</td>
</tr>
</table>
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<table cellspacing="10" cellpadding="10" border="0"> <tbody>
<tr>
<td> <img vspace="10" hspace="0" border="0" align="middle" src="$@FILEPHP@$$@SLASH@$flash$@SLASH@$earl.png" alt="Earl outdoors" title="Earl outdoors" />
<div align="middle"><a href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$11_earl$@SLASH@$0.mp3"></a><br /><br /></div><br />
</td>
<td>
<h3>Earl</h3>
<p>Earl's reflecting on his experience with fraud. Select the Play icon to hear more.</p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$flash$@SLASH@$11_earl$@SLASH@$transcript.html"> Read Audio Transcript</a> </p>
</td>
</tr> </tbody>
</table>
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Exercise: Additional Content About Investment Legal and Fraud Issues for Farmers
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Rent and watch a DVD of the movie Boiler Room which describes a group of fraudsters who swindle naïve investors out of their life savings. Record 3 to 5 points that you previously did not know about investment fraud and two personal applications. </p>
</td>
</tr>
</table>
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1252532753
Exercise: Additional Content About Investment Legal and Fraud Issues for Farmers
<table cellspacing="10" cellpadding="10" border="0">
<tr>
<td> <img vspace="0" hspace="0" border="0" title="exercise" alt="exercise" src="$@FILEPHP@$$@SLASH@$image$@SLASH@$exercise.png" /><br />
</td>
<td>
<p>Watch two investment fraud stories from The Lure of Money at www.aarp.org/money/wise_consumer/investment_fraud/the_lure_of_money.html. Record 3 to 5 points that you previously did not know about investment fraud and two personal applications. </p>
</td>
</tr>
</table>
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<p>Congratulations! You've reached the end of the course. Select continue to go to the main course page. </p>
<p><a target="_blank" href="$@FILEPHP@$$@SLASH@$html_pages$@SLASH@$unit_11_resources.html">Select this link for additional resources to help you avoid investment fraud</a>. </p>
<p><br /></p><hr style="width: 100%; height: 2px;" />
<h3>About the Author</h3>
<p>This unit was originally written as a cooperative effort of several staff members of the Office of Investor Education and Assistance at the U.S. Securities and Exchange Commission (SEC) and has been updated from time to time. In August 2007, the Office of Investor Education and Assistance changed its name to the Office of Investor Education and Advocacy (OIEA). For more information about OIEA, go to www.sec.gov/investor. If you have a complaint or question about your investments, call 1-800-732-0330 or send an e-mail to help@sec.gov.</p>
<p>Additional content was inserted by Janie Simms Hipp, J.D., LL.M, and Shannon Mirus, J.D., LL.M. (Agricultural Law). Hipp Director of the Risk Management Education Division of the Risk Management Agency. She holds a B.A. in Social Work (Oklahoma City University), a J.D. (Oklahoma City University School of Law) and an LL.M. (University of Arkansas, Fayetteville) and has worked for over 20 years in the area of agricultural law and agricultural legal education. Mirus is a Staff Attorney with the National Agricultural Law Center, the nation's leading source for national and international agricultural and food law research and information. She has a B.S. in Agricultural Business from the University of Arkansas, and has completed course work in the Agricultural Law LL.M. program. She works on a variety of issues at the Center including landowner liability, agritourism, women's issues in agriculture, and risk management, and is licensed to practice law in Arkansas.</p>
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8
questionnaire
It's All About You
Questions to measure participants' activity in farm finances.
0
anonymous
all
0
0
0
0
1251914963
15
15
Pre_Course_Questionnaire
39
private
Y
0
Pre-Course Questionnaire
<b>That's right: it's all about you. The more we know about you from the start, where you live, what sort of farm operation you have, and what your current practices are, the more effective we can make the course for future participants.</b>
<p>Please take the time to answer these 28 survey questions.
default.css
2009-09-02 14:09:20
47
15
IFF_Behavioral_Question_1
4
$@NULL@$
5
0
1
How often do you and/or your spouse keep records of personal financial data? (i.e. assets, debts, etc.)
N
N
Y
121
47
Never
$@NULL@$
122
47
Rarely
$@NULL@$
123
47
Sometimes
$@NULL@$
124
47
Often
$@NULL@$
125
47
Always
$@NULL@$
48
15
IFF_Behavioral_Question_2
4
$@NULL@$
0
0
2
How often do you and/or your spouse adjust your investment portfolio (i.e. farm and personal finances)?
N
N
Y
126
48
Never
$@NULL@$
127
48
Rarely
$@NULL@$
128
48
Sometimes
$@NULL@$
129
48
Often
$@NULL@$
130
48
Always
$@NULL@$
49
15
IFF_Behavioral_Question_3
1
$@NULL@$
0
0
3
Do you currently have crop insurance?
N
N
Y
50
15
IFF_Behavioral_Question_4
5
$@NULL@$
0
0
4
Do you currently have personal/family insurance coverage? Check all that apply.
N
N
Y
131
50
Life Insurance
$@NULL@$
132
50
Health Insurance
$@NULL@$
133
50
Disability Insurance
$@NULL@$
134
50
Liability Insurance
$@NULL@$
135
50
Property Insurance
$@NULL@$
136
50
I do not have any insurance
$@NULL@$
51
15
IFF_Behavioral_Question_5
1
$@NULL@$
0
0
5
Do you have written financial goals with a target date and dollar cost (e.g. save $10,000 for a car in 5 years)?
N
N
Y
52
15
IFF_Behavioral_Question_6
4
$@NULL@$
0
0
6
How often do you and/or your spouse obtain a free credit report?
N
N
Y
137
52
Never
$@NULL@$
138
52
Rarely
$@NULL@$
139
52
Sometimes
$@NULL@$
140
52
Often
$@NULL@$
141
52
Always
$@NULL@$
53
15
IFF_Behavioral_Question_7
4
$@NULL@$
0
0
7
How often do you and/or your spouse make timely payments on debt?
N
N
Y
142
53
Never
$@NULL@$
143
53
Rarely
$@NULL@$
144
53
Sometimes
$@NULL@$
145
53
Often
$@NULL@$
146
53
Always
$@NULL@$
54
15
IFF_Behavioral_Question_8
4
$@NULL@$
0
0
8
How often do you and/or your spouse look for investment alternatives?
N
N
Y
147
54
Never
$@NULL@$
148
54
Rarely
$@NULL@$
149
54
Sometimes
$@NULL@$
150
54
Often
$@NULL@$
151
54
Always
$@NULL@$
55
15
IFF_Behavioral_Question_9
4
$@NULL@$
0
0
9
How often do you and/or your spouse track monthly income and expenses?
N
N
Y
152
55
Never
$@NULL@$
153
55
Rarely
$@NULL@$
154
55
Sometimes
$@NULL@$
155
55
Often
$@NULL@$
156
55
Always
$@NULL@$
56
15
IFF_Behavioral_Question_10
4
$@NULL@$
0
0
10
How often do you and/or your spouse analyze monthly cash flow patterns?
N
N
Y
157
56
Never
$@NULL@$
158
56
Rarely
$@NULL@$
159
56
Sometimes
$@NULL@$
160
56
Often
$@NULL@$
161
56
Always
$@NULL@$
57
15
IFF_Behavioral_Question_11
4
$@NULL@$
0
0
11
How often do you and/or your spouse consciously make an effort to reduce household spending?
N
N
Y
162
57
Never
$@NULL@$
163
57
Rarely
$@NULL@$
164
57
Sometimes
$@NULL@$
165
57
Often
$@NULL@$
166
57
Always
$@NULL@$
58
15
IFF_Behavioral_Question_12
4
$@NULL@$
0
0
12
How often do you and/or your spouse plan for months with lower income?
N
N
Y
167
58
Never
$@NULL@$
168
58
Rarely
$@NULL@$
169
58
Sometimes
$@NULL@$
170
58
Often
$@NULL@$
171
58
Always
$@NULL@$
59
15
IFF_Behavioral_Question_13
4
$@NULL@$
0
0
13
How often do you and/or your spouse take investment risks?
N
N
Y
172
59
Never
$@NULL@$
173
59
Rarely
$@NULL@$
174
59
Sometimes
$@NULL@$
175
59
Often
$@NULL@$
176
59
Always
$@NULL@$
60
15
often_and_or_spouse_calculate
4
$@NULL@$
0
0
14
How often do you and/or your spouse calculate personal investment asset allocation weightings (e.g. 50% stock, 30% bonds, and 20% cash)?
N
N
Y
177
60
Never
$@NULL@$
178
60
Rarely
$@NULL@$
179
60
Sometimes
$@NULL@$
180
60
Often
$@NULL@$
181
60
Always
$@NULL@$
61
15
IFF_Behavioral_Question_15
4
$@NULL@$
0
0
15
How often do you and/or your spouse select investments consistent with your personal risk tolerance level?
N
N
Y
182
61
Never
$@NULL@$
183
61
Rarely
$@NULL@$
184
61
Sometimes
$@NULL@$
185
61
Often
$@NULL@$
186
61
Always
$@NULL@$
62
15
IFF_Behavioral_Question_16
4
$@NULL@$
0
0
16
How often do you and/or your spouse purchase non-farm investments?
N
N
Y
187
62
Never
$@NULL@$
188
62
Rarely
$@NULL@$
189
62
Sometimes
$@NULL@$
190
62
Often
$@NULL@$
191
62
Always
$@NULL@$
63
15
IFF_Behavioral_Question_17
4
$@NULL@$
0
0
17
How often do you and/or your spouse sell farmland and other farm assets?
N
N
Y
192
63
Never
$@NULL@$
193
63
Rarely
$@NULL@$
194
63
Sometimes
$@NULL@$
195
63
Often
$@NULL@$
196
63
Always
$@NULL@$
64
15
IFF_Behavioral_Question_18
4
$@NULL@$
0
0
18
How often do you and/or your spouse make fixed income investments?
N
N
Y
197
64
Never
$@NULL@$
198
64
Rarely
$@NULL@$
199
64
Sometimes
$@NULL@$
200
64
Often
$@NULL@$
201
64
Always
$@NULL@$
65
15
IFF_Behavioral_Question_19
4
$@NULL@$
0
0
19
How often do you and/or your spouse make equity investments?
N
N
Y
202
65
Never
$@NULL@$
203
65
Rarely
$@NULL@$
204
65
Sometimes
$@NULL@$
205
65
Often
$@NULL@$
206
65
Always
$@NULL@$
66
15
IFF_Behavioral_Question_20
4
$@NULL@$
0
0
20
How often do you and/or your spouse compare the performance of non-farm investments to farmland?
N
N
Y
207
66
Never
$@NULL@$
208
66
Rarely
$@NULL@$
209
66
Sometimes
$@NULL@$
210
66
Often
$@NULL@$
211
66
Always
$@NULL@$
67
15
IFF_Behavioral_Question_21
4
$@NULL@$
0
0
21
How often do you and/or your spouse invest in farm assets (e.g. farm land and equipment)?
N
N
Y
212
67
Never
$@NULL@$
213
67
Rarely
$@NULL@$
214
67
Sometimes
$@NULL@$
215
67
Often
$@NULL@$
216
67
Always
$@NULL@$
68
15
IFF_Behavioral_Question_22
1
$@NULL@$
0
0
22
Are you personally aware of examples of investment fraud and financial scams?
N
N
Y
69
15
IFF_Behavioral_Question_23
4
$@NULL@$
0
0
23
How often do you and/or your spouse consult with professional financial advisors?
N
N
Y
217
69
Never
$@NULL@$
218
69
Rarely
$@NULL@$
219
69
Sometimes
$@NULL@$
220
69
Often
$@NULL@$
221
69
Always
$@NULL@$
70
15
IFF_Behavioral_Question_24
4
$@NULL@$
0
0
24
How often do you and/or your spouse consult print or online sources of investment information?
N
N
Y
222
70
Never
$@NULL@$
223
70
Rarely
$@NULL@$
224
70
Sometimes
$@NULL@$
225
70
Often
$@NULL@$
226
70
Always
$@NULL@$
71
15
IFF_Behavioral_Question_25
4
$@NULL@$
0
0
25
How often do you and/or your spouse attend local investment seminars or conferences?
N
N
Y
227
71
Never
$@NULL@$
228
71
Rarely
$@NULL@$
229
71
Sometimes
$@NULL@$
230
71
Often
$@NULL@$
231
71
Always
$@NULL@$
72
15
IFF_Behavioral_Question_26
4
$@NULL@$
0
0
26
How often do you and/or your spouse invest in an IRA (traditional IRA or Roth IRA)?
N
N
Y
232
72
Never
$@NULL@$
233
72
Rarely
$@NULL@$
234
72
Sometimes
$@NULL@$
235
72
Often
$@NULL@$
236
72
Always
$@NULL@$
73
15
IFF_Behavioral_Question_27
4
$@NULL@$
0
0
27
How often do you and/or your spouse invest in a 401(k), 403(b), or other employment-based retirement savings plan?
N
N
Y
237
73
Never
$@NULL@$
238
73
Rarely
$@NULL@$
239
73
Sometimes
$@NULL@$
240
73
Often
$@NULL@$
241
73
Always
$@NULL@$
74
15
IFF_Behavioral_Question_28
4
$@NULL@$
0
0
28
How often do you and/or your spouse work on estate planning activities such as writing a will, family gifts, etc.?
N
N
Y
242
74
Never
$@NULL@$
243
74
Rarely
$@NULL@$
244
74
Sometimes
$@NULL@$
245
74
Often
$@NULL@$
246
74
Always
$@NULL@$
75
15
IFF_Demographic_Question
4
$@NULL@$
0
0
29
Gender
N
Y
Y
247
75
Male
$@NULL@$
248
75
Female
$@NULL@$
76
15
IFF_Demographic_Question
4
$@NULL@$
0
0
30
Gender
N
Y
Y
249
76
Male
$@NULL@$
250
76
Female
$@NULL@$
5
questionnaire
Risk Protection Preferences
0
anonymous
all
1
0
0
0
1251919448
10
10
Risk_Protection_Preferences
39
private
Y
0
Risk Protection Preferences
There are several ways to reduce risk and increase security when preparing to invest with farm and personal finances. <br />
Answer the following questions about your own preferences for risk protection; your answers will be anonymous. <br />
When you finish, click <b>Submit Questionnaire</b> and you will be able to compare your responses to those of other farm families.
default.css
2009-08-11 08:46:40
26
10
Risk_Protection_Preferences
4
$@NULL@$
0
0
1
Before you consider investing, how important is it to have an <b>emergency reserve fund</b>?
N
N
Y
65
26
Very Important
$@NULL@$
66
26
Somewhat Important
$@NULL@$
67
26
Neutral
$@NULL@$
68
26
Hardly Important
$@NULL@$
69
26
Not Important at all
$@NULL@$
27
10
Risk_Protection_Preferences
4
$@NULL@$
0
0
3
Before you consider investing, how important is it to have <b>adequate insurance to cover larger risks</b>?
N
N
Y
70
27
Very Important
$@NULL@$
71
27
Somewhat Important
$@NULL@$
72
27
Neutral
$@NULL@$
73
27
Hardly Important
$@NULL@$
74
27
Not Important at all
$@NULL@$
28
10
Risk_Protection_Preferences
4
$@NULL@$
0
0
11
Before you consider investing, how important is it to set <b>financial goals</b>?
N
N
Y
75
28
Very Important
$@NULL@$
76
28
Somewhat Important
$@NULL@$
77
28
Neutral
$@NULL@$
78
28
Hardly Important
$@NULL@$
79
28
Not Important at all
$@NULL@$
29
10
Risk_Protection_Preferences
1
$@NULL@$
0
0
2
Does your family have an <b>emergency reserve</b>?
N
N
Y
30
10
Risk_Protection_Preferences
1
$@NULL@$
0
0
4
Does your family have <b>adequate insurance coverage for larger risks</b>?
N
N
Y
31
10
Risk_Protection_Preferences
1
$@NULL@$
0
0
13
Does your family set <b>financial goals</b>?
N
N
Y
32
10
Risk_Protection_Preferences
4
$@NULL@$
0
0
9
Before you consider investing, how important is it for you to have <b>crop insurance</b>?
N
N
Y
251
32
Very Important
$@NULL@$
252
32
Somewhat Important
$@NULL@$
253
32
Neutral
$@NULL@$
254
32
Hardly Important
$@NULL@$
255
32
Not Important at all
$@NULL@$
33
10
Does_family_set_b_financial_go
1
$@NULL@$
0
0
10
Does your family have <b>crop insurance</b>?
N
N
Y
6
questionnaire
Getting Professional Advice
0
anonymous
all
1
0
0
0
1251989147
11
11
Getting_Professional_Advice
39
private
Y
0
Getting Professional Advice
Using professional advice has great benefits for a farm family financial manager. It is important to be extremely careful when choosing a financial advisor to avoid scams and fraud. Answer the following questions about getting professional advice. When you finish, click <b>Submit Questionnaire</b> and you will see the results from other farm family managers.
default.css
2009-08-11 11:04:02
34
11
Getting_Professional_Advice
1
$@NULL@$
0
0
1
Do you have a financial advisor?
N
N
Y
35
11
Getting_Professional_Advice
4
$@NULL@$
0
0
2
How likely are you to consider hiring a financial advisor?
N
N
Y
80
35
I am very interested
$@NULL@$
81
35
I will think about it
$@NULL@$
82
35
I do not need a financial advisor
$@NULL@$
83
35
I already have a financial advisor
$@NULL@$
36
11
Getting_Professional_Advice
4
$@NULL@$
0
0
3
Is your financial advisor affiliated with your (or your spouse's) off-farm employment?
N
N
Y
84
36
Yes
$@NULL@$
85
36
No
$@NULL@$
86
36
I do not have a financial advisor
$@NULL@$
37
11
Getting_Professional_Advice
1
$@NULL@$
0
0
4
Have you been scammed by a professional financial advisor?
N
N
Y
38
11
Getting_Professional_Advice
1
$@NULL@$
0
0
5
Do you personally know anyone that was affected by investment fraud or a scam involving a professional advisor?
N
N
Y
125
quiz
Test Your Knowledge: First Things First
This short quiz is only to test yourself on what you learned in the lesson. No grades will be recorded for the course.
0
0
0
1
0
0
1
2
71752685
0
1
1
951,952,953,954,0
4
4
0
1251917752
0
0
0
0
673
951
1
674
952
1
675
953
1
676
954
1
206
125
0
5
124
quiz
Test Your Knowledge: Investment Prerequisites
This short quiz is only to test yourself on what you learned in the lesson. No grades will be recorded for the course.
0
0
0
1
0
0
1
2
71760879
0
1
1
943,944,945,946,0
4
4
0
1251917770
0
0
0
0
668
943
1
669
944
1
670
945
1
671
946
1
207
124
0
5
126
quiz
Test Your Knowledge: Debt and Credit
This short quiz is only to test yourself on what you learned in the lesson. No grades will be recorded for the course.
0
0
0
1
0
0
1
2
71760879
0
1
1
957,958,959,0
3
3
0
1251917782
0
0
0
0
679
957
1
680
958
1
681
959
1
208
126
0
4
127
quiz
Test Your Knowledge: Finding Money to Invest
This short quiz is only to test yourself on what you learned in the lesson. No grades will be recorded for the course.
0
0
0
1
0
0
1
2
71760879
0
1
1
963,964,965,966,967,0
5
5
0
1251917800
0
0
0
0
685
963
1
686
964
1
687
965
1
688
966
1
689
967
1
209
127
0
6
128
quiz
Test Your Knowledge: Assets and Risks
This short quiz is only to test yourself on what you learned in the lesson. No grades will be recorded for the course.
0
0
0
1
0
0
1
2
71760879
0
1
1
972,973,974,975,976,0
5
5
0
1251917812
0
0
0
0
694
972
1
697
973
1
698
974
1
699
975
1
700
976
1
210
128
0
6
129
quiz
Test Your Knowledge: Investment Products/Agricultural Alternatives
This short quiz is only to test yourself on what you learned in the lesson. No grades will be recorded for the course.
0
0
0
1
0
0
1
2
71760879
0
1
1
983,984,985,986,987,0
5
5
0
1251917828
0
0
0
0
705
983
1
706
984
1
707
985
1
708
986
1
709
987
1
211
129
0
6
130
quiz
Test Your Knowledge: Financial Information Sources
This short quiz is only to test yourself on what you learned in the lesson. No grades will be recorded for the course.
0
0
0
1
0
0
1
2
71760879
0
1
1
992,993,994,0
3
3
0
1251917844
0
0
0
0
714
992
1
715
993
1
716
994
1
212
130
0
4
131
quiz
Test Your Knowledge: Retirement Investments and Farm Succession
This short quiz is only to test yourself on what you learned in the lesson. No grades will be recorded for the course.
0
0
1
1
0
0
1
2
71760879
0
0
1
999,1000,1001,0
3
3
0
1251917875
0
0
0
0
721
999
1
722
1000
1
723
1001
1
213
131
0
4
132
quiz
11 Supplemental Units Quiz
This quiz tests the information from all 11 supplemental units.
0
0
0
1
0
0
1
2
71760879
5
0
1
1006,826,827,828,829,0,830,831,832,833,834,0,855,856,857,858,859,0,835,836,837,838,839,0,860,861,862,863,864,0,865,866,867,868,869,0,840,841,842,843,844,0,870,871,872,873,874,0,875,876,877,878,879,0,845,846,847,848,849,0,850,851,852,853,854,0
55
10
0
1252015764
0
0
0
0
728
830
1
729
831
1
730
832
1
731
833
1
732
834
1
733
1006
1
734
826
1
735
827
1
736
828
1
737
829
1
738
855
1
739
856
1
740
857
1
741
858
1
742
859
1
743
835
1
744
836
1
745
837
1
746
838
1
747
839
1
748
860
1
749
861
1
750
862
1
751
863
1
752
864
1
753
865
1
754
866
1
755
867
1
756
868
1
757
869
1
758
840
1
759
841
1
760
842
1
761
843
1
762
844
1
763
870
1
764
871
1
765
872
1
766
873
1
767
874
1
768
875
1
769
876
1
770
877
1
771
878
1
772
879
1
773
845
1
774
846
1
775
847
1
776
848
1
777
849
1
778
850
1
779
851
1
780
852
1
781
853
1
782
854
1
217
132
0
11
150
resource
Video Demonstration: How to Take this Course Resource
file
captivate_intro_demo/IFF_intro_demo.htm
resizable=1,scrollbars=1,directories=1,location=1,menubar=1,toolbar=1,status=1,width=1020,height=650
1251306006