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Everything about promotions is an easy way to start your journey. Esme Fireber. Everything about promotions. Develop a personal financial plan

All rights reserved. No part of this book may be reproduced in any form whatsoever without the written permission of the copyright holders.
Legal support of the publishing house is provided by the law firm "Vegas-Lex"

© Esmé Faerber, 2006
© Pobortseva O.M., translation into Russian, 2013
© Edition in Russian, design.
LLC "Mann, Ivanov and Ferber", 2013
© Cover photo, shutterstock.com

Foreword from the partner of the publication

World financial system basically contains many different instruments: stocks, futures, bonds, forwards, options, currencies, etc. - all this is like a living organism. From the Latin language, the word "action" is translated as "deed" or "set in motion." It is stocks that make this cauldron boil first, being the most sensitive indicators of macro- and microeconomic processes in the world. This is the base from which to build on, from which to start everyone who is going to devote at least a small part of themselves to the investment process.
Russian realities are such that Forex trading, investing in pyramids and investing in stocks are often in the same row - and this is taken for granted. And not only that, the promises of castles in the air filled with profits from dubious placement moneyare compared with real earnings on stock market... How often do we not notice a filthy soul behind beautiful faces? Or vice versa, behind a seemingly ordinary appearance is a Man (with a capital H). This is exactly what is happening now: they are greeted by their clothes, but no one looks into the head, and for some reason it is not fashionable to delve into the essence. Perhaps the complex and sometimes too pretentious presentation of general concepts related to the stock market, on the one hand, gives this a certain mystery and even romanticism, and on the other hand, it completely discourages the desire to delve into the process.
The wonderful book "All About Shares", written by a mother who loves her children, a good wife and, of course, an outstanding specialist in her field, is designed to help everyone who has wanted to ask about something for so long, but was a little shy. Here everyone will find answers to those questions that caused difficulty. Understand what shares are and what is the use of them; learn how to manage them and find out when it is better to buy and sell them; discover some interesting ways to analyze; perhaps, become a supporter of one of the approaches to investing and, finally, choose the style or method that suits you - all this can be found in the book by Esme Ferber.
Despite the fact that the publication is adapted for the American market, the examples most accurately and succinctly characterize the subject of the story. The essence of investing in stocks is the same, be it the United States, Brazil, Germany, China or Russia, so you should not dwell on the regional aspect. And of course, anyone who reads it in Russian will definitely have a different look at russian market shares, will see new opportunities for itself and will finally open this invisible veil between those who are “in the subject” and those who are not.
I recommend reading!

Kazakbaev Marat,
asset manager,
NETTRADER.ru

Acknowledgments

Many people from McGraw-Hill have contributed to this book, but I would especially like to highlight Dina Penikas.
Thomas Hohens provided me with information on his research on the cash flow (CFAR), for which I am very grateful to him.
I dedicate this book to my husband Eric and my children Jennifer and Michael for their continued support, patience and help.

Preface by the author

The third edition of the book "All About Stocks" includes materials that will help raise investors' awareness of their investments in stocks. Investing in stocks is not an easy task, as the process involves many questions, recriminations and risks. A retrospective approach helps to understand which stocks should be bought, but if there is a need to see the future, then many investors are afraid to make decisions that should give them an edge in the market. The purpose of this book is to characterize stocks, the risks and returns associated with them, describe the operation of the stock market, evaluate stocks, use the fundamental and technical analysis when choosing stocks to sell and buy, the differences between growth stocks, value stocks and impulse stocks, and expound the theory of the stock market.
Among the many changes made to this publication are new chapters on stock valuation, investing in foreign stocks, and exchange-traded funds. Each chapter contains new sections to help both beginners and advanced investors find the tools and knowledge they need to grow their returns without significantly increasing their risks by building a diversified portfolio. As an informed investor, you can more easily make better decisions related to investing in stocks.

Chapter 1
Why invest in stocks?

Main themes

Why invest in stocks
Developing your financial plan
What investing in stocks will give you

Investment cut
In November 2001, Enron filed for bankruptcy. Investors who purchased shares of this widely famous company at $ 60 per share at the beginning of the year, we watched their investments depreciate.
For three years, from March 2000 to 2003, the stock market was in a deep crisis. The NASDAQ Index dropped 71%. The stock market has not experienced such a decline since the Great Depression of 1929.
Boeing's share price was $ 33.50 per share in November 2001, and on May 3, 2006, it climbed to $ 85 per share. For 4.5 years, the growth was 155%.

So, you've seen how easy it is to lose money by investing in stocks. Yet more than half of the citizens of the United States own shares, either directly or indirectly through their retirement portfolios. Understanding what stocks are and how the stock markets work can help you avoid costly mistakes when investing in stocks and build a portfolio of high-yielding investments, as is the case with Boeing stocks.

Why invest in stocks

The investment cut begs the question: why invest in stocks if it can lead to the loss of some of your investments? The answer can be seen in Fig. 1-1 illustrating why stocks are so attractive to invest in.
For more than 19 years, from 1986 to 2004, stock returns in both large and small companies exceeded the yield on bonds and Treasury bills, well ahead of inflation. Yet, over five years, 19 stocks performed worse than bonds and Treasury bills. However, the long-term investor should not be discouraged by several unprofitable years, since the growth of wealth in the long term is more important.

Figure 1-1
Annual returns on stocks, bonds and treasury bills, 1986-2004

In fig. Figures 1–2 show how significantly the actual yield on stocks surpassed the yield on bonds and Treasury bills in 1926-2000. $ 1 invested in each of the above instruments showed different returns adjusted for inflation. Investments of $ 1 in shares of small companies brought in over $ 500, while similar investments in shares of large companies brought in over the same period $ 150. Actual yields on Treasury bills, Treasury bonds and corporate bonds were 1.50, 3.79 and 5 , $ 50 respectively. These rates of return show how attractive investing in stocks is over the long term.

Figure 1-2
Actual return on investment of $ 1, 1926–2000

So, we can draw the following conclusions:
to reduce the risks of losses, invest in shares should be for the long term;
to obtain high returns in the long term, investors should not attach great importance to the volatility of annual returns, which should be considered as an insignificant obstacle on the way to higher returns;
with long-term investment, losses in the stock market become quite noticeable;
when investing for a long period, shares of small companies bring higher returns than large companies;
in the short term, investing in bonds and short-term Treasury bonds may be more efficient than investing in stocks;
bonds bring higher yields than treasury bills (money market securities);
investing in common shares provides preferential taxation at the federal level, which investors in bond and money markets do not have. Dividends on ordinary shares are taxed federal tax at preferential rates (below the marginal tax rate), while bond income and valuable papers the money market is taxed at marginal rates.
Table 1-1 lists some of the reasons why you should consider long-term investing in stocks rather than bonds, treasury bills, certificates of deposit, or money market mutual funds in order to obtain better returns.
Investors who invest for a long period (more than five years) and are willing to bear the risk of losses in a falling market should invest in stocks. Investors with shorter time horizons, who need a steady stream of return on their investments and who are risk averse, should invest in bonds. Your financial goals and personality traits determine the types of securities you invest in.

Table 1-1
Top reasons to save more and invest wisely

People are living longer, so they need more moneyto support yourself after retirement.
Prices for medical care, education and insurance services are constantly growing.
Real estate prices, including residential buildings, are steadily increasing.
It is necessary to stay ahead of inflation and improve living standards.
People want to make a fortune in order to leave a legacy.
The more you save and invest now, the higher your solvency will be due to the accrual of income at a complex interest rate.
By investing wisely, you are increasing your wealth.

Develop a personal financial plan

The investment process begins with drawing up a financial plan, which indicates financial goals and a plan to achieve them. If you don’t know what you want, you don’t know how to achieve it.

1. Formulate your financial goals

The first step in drawing up any investment plan is to determine what you want to achieve by investing and when you will need your money. Perhaps you have many goals, for example: to save money for retirement in 20 years, to pay for the education of children in 10 years, to make the first installment for a summer residence in two years. Financial goals are financial milestones that you want to achieve by investing. Take some time to formulate your financial goals and determine how you expect each one to return in the future.
Possible financial goals:
to collect savings "for a rainy day" within one year;
buy a car in five years;
in 10 years to pay for the education of children;
to form pension capital within 25 years.
Investing in retirement benefits differs from investing in shorter-term goals at the cost of time horizon and risk.

Time horizon

Defining a time horizon is important because it gives you a better idea of \u200b\u200bhow much money will need to be invested to achieve each goal. The amount of funds to finance each goal directly depends on your financial condition or the amount of equity capital. Table 1-2 shows how to calculate it. Equity Is the difference between how much you have and how much you owe.
Analyzing your monthly budget will also help you determine how much to invest and what level of risk you are willing to take.

Table 1-2
What is your capital?

Risk

Assess your goals against the risks that can be summarized as follows:
safety of invested capital;
income stream;
capital gains.
Preservation of the invested capital. Money market instruments such as bank accounts, savings accounts, certificates of deposit, money market mutual funds, treasury bills and commercial bills ensure the safety of invested capital and low returns. Short-term goals such as creating a reserve fund and saving for small acquisitions during the year fall into this investment category. The profitability of such instruments often does not cover inflation and taxes.
Stream of income. Investments that provide a steady stream of income with higher returns than money market instruments have include bonds and preferred stocks. Shifting interest in favor of bonds and preferred shares in order to obtain a higher return may lead to a loss of invested capital. If the value of bonds and preferred shares falls below their purchase price, then investors will suffer losses if their investments are sold. High-risk and high-yield bonds (junk or junk bonds) offer potentially higher income streams than bonds investment grade, however, they are also not protected from the risk of default on payment par value bonds to their holders. Investors wishing to finance their goals with time horizons of one to five years use bonds with a maturity corresponding to the chosen horizon. This allows you to get a higher profitability than on money market instruments.
Capital gains. Investing for capital gains can provide an increase in the value of the investment, or capital gain... Stocks have the potential for capital gains if their prices rise above the buying level. The risk is that the share price could fall below its purchase price, resulting in loss of capital... For this reason, it takes a longer time horizon (more than five years) to be able to ride out the fall in the stock market. Some stocks pay dividends to provide shareholders with a stream of returns. In general, income on dividend stocks is lower than on bonds. However, not all stocks are dividend, and investors are investing in them with capital gains in mind. Investments in stocks are suitable for financing long-term investment goals (with a time horizon of more than five years), for example, the formation pension savings.
Thus, there is always a balance between risk and reward. Low-risk investments (money market securities) guarantee the safety of invested capital, but have a low return. Fixed income securities (bonds and preferred shares) are subject to higher returns, but carry the risk of losing invested capital in the event of a default on bonds or the need to sell preferred shares at a price lower than their purchase price. Common stocks provide the most high level aggregate return (capital gains and dividends) over a long period of time, however, have an increased risk of losing invested capital in the short time horizon. Your personal circumstances (age, marital status, number of dependents, equity and income) determine the level of risk that is acceptable for you as a guideline when choosing investment instruments.

2. Distribute your assets

Asset allocation Is investing in various categories of investment instruments such as money market funds, bonds, stocks, real estate, gold, options and futures. Your personal asset allocation plan depends on a number of factors: the time horizon you choose, your risk acceptance, and your financial situation.
So, the younger you are, the more you should invest in capital gains (common stocks and real estate). The closer you are to retirement age, the more you should invest in money market bonds and securities, which provide income, and less in stocks, which provide portfolio growth. In fig. 1-3 give two examples of asset allocation plans. The first of them is aimed at a married couple about 30 years old, who invest mainly in the formation of pension savings for a period of more than 30 years. The second plan is designed for a married couple about 45 years old. The plan calls for a slightly lower share of equity investments for a 20-year period of time remaining until retirement.
Asset allocation plans must be revaluated periodically if your financial position changes. Table 1-3 provide guidelines for developing your personal asset allocation plan.

Figure 1-3
(a) Asset allocation plan for a 30-year-old married couple
(b) Asset allocation plan for a 45-year-old married couple

Table 1-3
How to write your personal asset allocation plan

Specialists in financial planning use the following empirical method for determining the percentage of investments in stocks:
Distribution Percentage in Stock \u003d 100 - your age.
For example, if you are 65, you can invest 35% in stocks and distribute the rest among other investment vehicles (bonds and money market securities). This is the starting point for your plan, where your asset mix will be determined by your financial position and your risk taking.

3. Choose an investment strategy

The choice of investment strategy should be based on your goals and asset allocation plan. Also, this choice will depend on your perception of how effectively the stock and bond markets respond to significant information that affects the value of securities. If you believe in the efficiency of securities markets, that is, in the fact that all current and constantly updated information is quickly and efficiently reflected in the prices of stocks and bonds, you should choose a passive investment strategy. So, if the shares are undervalued, they will be actively bought, as a result of which their price will reach a fair level. Thus, there will be very few undervalued or overvalued stocks in an efficient market. The term “efficient market” means that only a small number of investors will be able to significantly outperform the risk-adjusted market (that is, obtain a return significantly superior to the market return by investing in securities with a similar level of risk). Investors who believe in the efficiency of the markets expect to receive the average market return, knowing that they cannot surpass it. These investors pursue a passive investment strategy, building and maintaining a diversified portfolio of stocks that mimics the structure of stock indices.
If investors believe that the markets are underperforming (prices are slow to respond to information), then there will be many undervalued and overvalued stocks for them. These investors use financial and technical analysis to find such undervalued stocks and earn above the market average. Investors following an active investment strategy buy stocks when they are undervalued and sell them when they are perceived to be overvalued. Asset allocation plans change with market conditions, and the share of funds invested in stocks rises when the market is considered undervalued and shrinks when the market becomes overvalued.

4. Select investment instruments

After you have formulated your goals, prepared an asset allocation plan and chosen an investment strategy, it is time to choose investment instruments. When deciding which stocks to buy, you should be guided by your investment strategy. Passive investors choose diversified instruments in each category investment assets. Diversified stock portfolio includes shares of companies in various sectors of the economy (technology, energy, healthcare, consumer goods, industrial production, finance, automotive, raw materials, factory production and utilities), the profitability of which is not directly dependent.
A proactive investor uses fundamental and technical analysis to buy stocks when they are undervalued and then sell them when they become overvalued and replace them with other undervalued assets.
Regardless of whether you are an active or passive investor, you need to reduce your risk of loss by diversifying your portfolio. In other words, you don't have to put all your eggs in one basket.

5. Assess your portfolio

You should periodically evaluate your portfolio as changes in your circumstances may necessitate a review of your asset allocation plan. In addition, changing economic and market conditions can affect your asset allocation plan. Also, changes in the company's business will have a direct impact on the value of its shares, which are included in your investment portfolio.

What investing in stocks can give you

If you have a long-term investment horizon and sleep well at night during stock market downturns, then you should consider investing in stocks because:
stocks generate income in the form of dividends and capital appreciation. Historically, long-term returns on stocks (seven years or more) have exceeded the returns on bonds and money market securities. Investing in stocks delivers growth investment portfolio in addition to income in the form of dividends;
stocks are a means of preserving capital. Buying and holding rising stocks in your portfolio is optimal for tax respect a way to increase their value, because if the holding period before the sale of shares was more than one year, then capital gains are subject to federal tax at a rate not exceeding 15%. Income from stocks held for less than a year is taxed at your marginal tax rate, which can exceed 35%. Check with your accountant to see if Congress has changed the tax code in terms of tax on capital gains;
dividend income on qualified shares subject to tax incentivestaxed at a lower rate than interest income from bonds and money market securities.
The following chapters describe the characteristics of the different types of stocks and describe the process for choosing the one that suits your circumstances. Not all stocks are high-yielding, and even reliable stocks sometimes fall in value. Understanding the factors that influence the value of a stock will help you shape your stock portfolio so that you can achieve your financial goals.