Chapter 11 Investment Planning Chapter Outline Learning Goals I. The Objectives and Rewards of Investing A. How Do I Get Started? B. The Role of Investing in Personal Financial Planning 1. Coming Up With the Capital 2. An Investment Plan Provides Direction C. What Are Your Investment Objectives? 1. Retirement 2. Major Expenditures 3. Current Income 4. Shelter from Taxes D. Different Ways to Invest 1. Common Stock 2. Bonds 3. Preferreds and Convertibles 4. Mutual Funds, Exchange Traded Funds, and Exchange Traded Notes 5. Real Estate *Concept Check* II. Securities Markets A. Primary and Secondary Markets 1. Primary Markets 2. Secondary Markets B. Broker Markets and Dealer Markets 1. Broker Markets 2. Dealer Markets C. Foreign Securities Markets D. Regulating the Securities Markets E. Bull Market or Bear? *Concept Check* III. Making Transactions in the Securities Markets A. Stockbrokers 1. Selecting a Broker 2. Full-Service, Discount, and Online Brokers 3. Brokerage Fees 4. Investor Protection B. Executing Trades C. Types of Orders 1. Market Order 2. Limit Order 3. Stop-Loss Order D. Margin Trades and Short Sales *Concept Check* IV. Becoming an Informed Investor A. Annual Stockholders' Reports B. The Financial Press 1. Market Data a. Dow Jones Industrial Averages b. Standard & Poor's Indexes c. The NYSE, NASDAQ, and Other Market Indexes 2. Industry Data 3. Company Data 4. Stock Quotes C. Brokerage Reports D. Advisory Services *Concept Check* V. Online Investing A. Online Investor Services 1. Investor Education 2. Investment Tools a. Investment Planning b. Investment Research and Screening c. Portfolio Tracking 3. Online Trading *Concept Check* VI. Managing Your Investment Holdings A. Building a Portfolio of Securities 1. Investor Characteristics 2. Investor Objectives B. Asset Allocation and Portfolio Management C. Keeping Track of Your Investments *Concept Check* Summary Financial Planning Exercises Applying Personal Finance Research Your Investments! Critical Thinking Cases 11.1 The Useltons Struggle with Two Investment Goals 11.2 Col Bernard Takes Stock of His Securities Money Online! Major Topics Investing is a key element of personal financial planning because it allows the individual to meet many of his or her long-term financial goals by saving and using the funds in such a way that an additional return is earned. Once the level of savings in nearly riskless assets reaches an amount that is sufficient for emergency and other short-term purposes, funds can be put into various forms of investments. To be a successful investor, you must understand the institutions, mechanisms, and procedures involved in making securities transactions. Without this knowledge it would be impossible for you to take advantage of the opportunities offered in the financial markets, which, in turn, can be of real help in achieving your personal financial goals. The major topics covered in this chapter include: 1. Investing is a long-term activity, while speculating is a short-term activity. 2. Investment objectives include current income, saving for major expenditures, retirement funds, and tax shelters. 3. There are many ways to invest, including stocks, bonds, convertibles, preferred stock, mutual funds, real estate, commodities, financial futures, and options. 4. Security markets include the organized exchanges and the over-the-counter market. 5. The services of a brokerage provide access to the organized markets. 6. A computer network of dealers provides access to unlisted securities in the over-the-counter market. 7. Transactions in securities are for cash or credit. 8. There are a variety of sources for investment information, ranging from stockholder reports to brokerage and advisory service reports and the financial press. 9. Daily information about the markets and their performance is available by observing various indexes and averages. 10 The Internet provides individual investors access to discount brokers as well as to investment services, information, and tools in order to better select and monitor their own portfolios. 11. Developing a well-diversified portfolio, based on sound asset allocation principles, is the key to improved returns and/or lower risk. Key Concepts A key to this chapter is the use of investing as a tool to achieve one's long-term financial goals. But to understand the application of investing to financial goals, it is necessary to understand the nature of the investments and the securities markets. The following phrases represent the key concepts stressed in this chapter. 1. Investing versus speculating 2. Investment objectives 3. Primary and secondary markets 4. Organized securities exchanges and the over-the-counter market 5. Foreign securities markets 6. Regulation of the market 7. Bull and bear markets 8. Securities transactions through full service, discount, and Internet brokers 9. Orders to buy or sell 10. Margin trading and short selling 11. Sources of investment information 12. Online investment services, information and tools 13. The concept of diversification 14. Portfolio construction 15. Asset allocation and portfolio management Answers to Concept Check Questions 11-1. Investing is the vehicle through which we achieve many of our financial goals. In our personal financial plan we set financial goals such as buying a house or paying for our children's education. One way to accumulate funds to achieve these long-term goals is by investing. 11-2. A capital accumulation plan is the first step toward an investing plan. It is used to build a pool of funds for various needs, including savings for short-term needs and emergencies. Once this fund is sufficient for these purposes, the balance can be used to implement an investment plan, which is a strategy to invest funds to meet certain goals. 11-3 Investment objectives are important because they are so closely tied to overall personal financial planning and the achievement of financial goals. Clearly defining investment goals helps to develop appropriate strategies to reach them. 11-4. Both money and capital markets can be further divided into primary or secondary markets. The primary market is where a security is first issued to the investing public, and the issuing company receives the proceeds. For example, when a company comes out with a new issue of common stock, it does so in the primary market. In contrast, investors trade outstanding issues in the secondary market. The NYSE, AMEX, NASDAQ, and all the other exchanges are part of the network of secondary markets, and this is where the vast majority of securities transactions take place. The New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) are both national in scope, but the similarities end there. The NYSE dominates the AMEX in size, trading volume, etc., and the quality of the companies is much higher on the NYSE (the listing requirements on the NYSE are far more stringent than those on the AMEX). Over 3,000 firms with over 3,300 different stocks (including several hundred foreign issues) and about 1,600 corporate bonds are listed on the NYSE. The AMEX has only about 800 listed stocks and just a few listed bonds. The organized exchanges account for about half of the total dollar volume of all common shares traded in the U.S. stock market. 11-5. The broker market consists of national and regional “securities exchanges” while the dealer market is make up of both NASDAQ market and the OTC market. 11-6. There are several regional exchanges that deal primarily in securities with local and regional appeal. They typically list between 100 and 500 securities. Most are modeled after the NYSE, but their membership and listing requirements are considerably more lenient. They will often list securities that are also listed on the NYSE or AMEX in order to enhance their trading activity. The Midwest, Pacific, Philadelphia, Boston, and Cincinnati exchanges are the biggest and best known of the regional exchanges. 11-7. Rather than being a physical marketplace, such as the NYSE, the NASDAQ market is composed of hundreds of brokers and dealers linked together via a communications network which allows the buyers and sellers of securities to initiate trades. There are no real listing requirements in the NASDAQ market; all types of unlisted securities can be sold or traded in this market. 11-8. There are about 7,000 actively traded issues in the NASDAQ (National Association of Securities Dealers Automated Quotation System) with about 2,700 of these being part of the National Market System (NMS). The NMS is for the largest, most actively traded securities, which generally have a national following. Trades for these securities are executed efficiently, and these stocks are about as liquid as those traded on the NYSE. However, the vast majority of the firms traded in the OTC market are not part of NASDAQ. These are very small firms which are “thinly traded”—not much of a market exists for them, and they are rather illiquid. These stocks are listed on the “pink sheets,” which are published daily and are available from brokers. The electronic quotes available at any given time on these companies may not be current, as prices are only updated electronically at the request of the traders or when there is significant trading. 11-9. Bull markets are favorable markets normally associated with investor optimism, economic recovery, and governmental stimulus. Bear markets are unfavorable markets normally associated with investor pessimism, economic slowdowns, and government control. The markets are either bullish or bearish, depending upon whether stock prices are generally rising (a bull market) or falling (a bear market). The answer to whether the current market is bullish or bearish depends on the recent course of stock prices and investor sentiment as the instructor conducts the course. An interesting discussion of the current market could include comments on such things as the age of the bull or bear market, signs that it will continue or change, who the current market participants seem to be, and any other information that could help describe the current and future course of the market. 11-10. The function of a discount broker is to make trades, purchases, and/or sales for his or her customers at a low cost. Because discount brokers usually provide little brokerage advice, their overhead is minimal, and this cost saving is passed along to the customer via reduced transactions costs. With the increase in the number of discount brokerage firms, there is greater variation in both fees charged and services offered. Some firms base commissions on the dollar value of the transaction, some on the number of shares, and some use both (refer to Exhibit 11.3). Those with higher commissions generally offer more services such as sweep accounts and research; some charge for research reports. 11-11. Online brokers allow investors to execute trades electronically online. Investors first establish an account with an online broker and then start trading by accessing the online broker’s Web site. Online services are appealing to people who are comfortable with using computers and are willing to research their selections themselves. An individual investor who usually trades in round lots and who does not need research and advisory help will usually find the services of the discount or online brokers most helpful. In contrast, if you normally deal in small/odd lots, the discounters are not for you—indeed, they sometimes discourage such business by charging sizable minimum fees. However, technology and services offered are changing rapidly, so it pays to check around for the latest offerings. 11-12. The SIPC (Securities Investor Protection Corp.) is a private, non-profit organization authorized by the U.S. Congress (in 1970) to protect customer accounts against the financial failure of a brokerage firm. SIPC insurance covers each account for up to $500,000, of which up to $100,000 may be in cash balances held by the firm. This insurance does not guarantee that the dollar value of the securities will be recovered. It only ensures that the securities themselves will be returned. The SIPC is not intended to insure against investment losses or bad advice from a broker. If you do lose money as a result of bad advice, the first thing to do is to discuss the situation with the managing officer at the branch where you do your business. If that does not work, write the firm's compliance officer and contact the securities office in your home state. If that still does not help, the claim might have to go into arbitration. 11-13. Arbitration and mediation are two methods of dispute resolution. With arbitration, the two parties—in this case, you and your broker—present the two sides of the argument before an arbitration panel, who then decides how the case will be resolved. If it is binding arbitration—and it well could be—you have no choice but to abide by the decision. As an alternative to arbitration, an investor may try to resolve the matter through mediation. The idea is to have the two parties try to negotiate with one another in order to settle their dispute and voluntarily arrive at a settlement. 11-14. The three basic types of orders are the market order, the limit order, and the stop-loss order. A market order is placed to buy or sell stock at the best price available at the time it is placed. A market order usually takes only seconds to fill once it hits the trading floor. A limit order is an order to buy at a specified price or lower, or to sell at a specified price or higher. The order is executed as soon as the specified market price or better exists and all other such orders having precedence have been satisfied. A limit order can remain in effect until a certain date or until canceled. With a limit order, the investor is looking for an attractive opportunity to trade. A stop-loss order is an order to sell a stock when the market price reaches or drops below a specified level. When the stop price is reached, the stop order then becomes a market order. With a stop-loss order, the investor is attempting to put a floor under his or her possible losses. However, the investor is not guaranteed that their stop-loss will be executed at the specified price. If the market starts to tumble and a stop-loss order kicks in, the next available price may be lower than the specified price. 11-15. Investors who use margin trading to purchase securities can magnify their returns on investments if stock prices rise because they have fewer of their own dollars at risk. However, margin trading also magnifies losses because in the event of a loss, investors are out not only their own dollars lost, but also the interest owed the broker. 11-16. A short sale is a transaction that involves selling borrowed securities in the expectation that they can be repurchased at some future date at a lower price. The short seller profits when the price of the security falls, making money by selling the securities at a higher price and then buying them back later at a lower price. The idea behind a short sale is just like any other transaction: buy low and sell high; the only difference is the short seller does it in reverse. The securities sold are borrowed on behalf of the short seller by his or her broker. The brokerage firm requires the short seller to abide by certain rules and regulations when making a short sale. 11-17. The four basic types of investment information that investors should try to follow are: 1. Economic developments and current events—to help you evaluate the underlying investment environment. 2. Alternative investment vehicles—so that you can stay abreast of market developments. 3. Current interest rates and price quotations—both to monitor your investments and to stay alert for developing investment opportunities. 4. Personal investment strategies—so that you can hone your skills and watch for new techniques as they develop. 11-18. Market averages and indexes describe the general behavior of the securities markets over time. These averages move up and down in accordance with price movements of the securities comprising the average or index. The averages or indexes most closely followed by the investing public are the Dow Jones Industrial Average, the Standard & Poor's 500 Index, the New York Stock Exchange Composite Index, and the American Stock Exchange Index. In addition to these, there are several other indexes—including the NASDAQ composite, the NASDAQ 100, Wilshire 5000, and MidCap 400—whose behavior is widely reported in the financial media. 11-19. The Dow Jones Industrial Average is the oldest and probably most widely followed measure of overall stock market performance and is composed of 30 blue-chip industrial companies. The S&P 500 Index is composed of 500 large companies. Because this index is based on more stocks and represents a wider variety of companies than the DJIA, it is also a very popular measure of overall stock market performance. The S&P MidCap 400 is composed of 400 medium-sized companies with market caps from about $ 1 billion to $4.4 billion, and is used to assess medium company stock performance. The NASDAQ Composite is often used to assess the price behavior of high tech stocks—because so many high tech stocks trade on the NASDAQ—and is calculated using virtually all the stocks traded on the NASDAQ system. The Russell 2000 Index tracks the behavior of 2,000 small-sized companies and is used as a broad measure of the small-cap segment of the market. The Wilshire 5000 Index is actually composed of 6,000–7,000 stocks and reflects the total market value of 98-99% of all publicly traded stocks in this country. It is used not only as a measure of the total market behavior but also of total market size on any given day. 11-20. The Internet has opened the world of investing to small, individual investors. Not only can individuals execute trades quickly and inexpensively through discount Internet brokers, but they can also easily and quickly access a wealth of information and screening tools once available only to professionals. 11-21. Individuals can obtain real-time quotes, monitor and chart their portfolios and trade many different types of securities in addition to stocks. 11-22. Online investment tools include financial calculators and worksheets, screening and charting tools, portfolio trackers, and personal calendars that notify you of forthcoming announcements and send you alerts concerning your stocks. These tools can be used to aid in developing financial plans and setting investment goals, finding securities to meet your objectives, analyzing potential investments, and organizing your portfolio. 11-23. Day traders are the opposite of the traditional buy-and-hold investor with the long-term approach. Day trading involves buying and selling stocks quickly throughout the day. Day traders attempt to make quick profits by buying in and then selling while the stock is still on an upward trend. Some day traders also do short sells in anticipation of price decreases. True day traders do not own any stocks overnight for fear that prices might change radically in the wrong direction overnight. 11-24. Placing "all your eggs in one basket" may prove to be extremely rewarding, but it also introduces the risk that you could suffer a significant loss or even lose your total investment. By investing in a portfolio rather than a single security, you can spread risk over a number of securities rather than a single issue. The overall return will also vary, because at any given time some securities will have a higher yield than will others. A portfolio provides diversification, protection, more security, and probably a more favorable risk-return tradeoff for the investor. 11-25. Asset allocation involves a decision on how to divide your portfolio among different types of securities in order to diversity your holdings and thereby lessen your overall exposure to risk. You determine what asset mix best meets your financial goals, and once the mix is set, you select the specific securities for each asset category. For example, a portfolio's asset mix could be 20% in short-term securities (money market), 20% in bonds, and 60% in stocks. 11-26. Once you establish your portfolio according to the asset allocation scheme, these percentages guide you in investing new money and also in rebalancing your portfolio if the value of an asset class changes significantly. 11-27. Keeping track of your investment holdings is essential to a well-managed securities portfolio. Just as you need investment objectives to provide direction to your portfolio, keeping track of your holdings helps you monitor it. An informed investor knows what his or her investment holdings are, how they have performed over time, and whether or not they have lived up to expectations. If they have not performed as expected, you may want to sell them so that you can put your money into securities that better suit your investment objectives. In addition, by tracking your portfolio you keep good records for tax purposes. Financial Planning Exercises 1. The solutions to this problem appear on Worksheet 11.1 on the following page. The keystrokes for using the financial calculator appear below (set on 1 payment per year and End Mode). a. b. c. 50,000 +/- FV 50,000 +/- FV 50,000 +/- FV 8 N 8 N 10,000 PV 10 I/YR 10 I/YR 8 N PV $23,325.37 PMT $4,372.20 10 I/YR PMT $2,497.76 d. An investment plan is a statement, preferably written, that sets out how capital will be invested to reach the financial goal. Once Linda decides on a course of capital accumulation, she must choose an investment plan outlining how she will invest to earn the ten percent she requires. Once she decides on the best investment vehicles, she must stick to the plan in order to ensure success. Problem 1(b)—Worksheet 11.1 (No initial investment) Problem 1(c)—Worksheet 11.1 ($10,000 initial investment) 2. a. Price of stock at time of quote was $44.56 at 1:34pm EDT on August 1, 2012. b. The price earnings ratio was 20.44; this is the current market price per share divided by the per share earnings for the most recent 12-month period (from the company’s income statement). Therefore, the stock shows a nice solid multiple. In other words, this means that investors are willing to pay more than $20 for every $1 of earnings per share that the company generated last year. c. The last price at which the stock traded on the previous trading date was the closing price of $44.17. d. The stock’s dividend yield was 3.80%. e. The highest price at which the stock traded during the past 52-week period was $45.17 and the lowest price for the same period was $29.47. f. The market capitalization for the firm is $135.74 billion. Market capitalization is the total market value of all shares of the company’s stock that is traded. 3. This exercise serves to illustrate that a company's stock price per share by itself does not indicate how much a company is worth. Two companies with the same total valuation can have stock prices that are very different, depending on the number of shares each company has outstanding. Some companies like to split their shares when their stock price climbs to a certain level in order to make their shares more affordable to a larger number of investors. Others, like Berkshire Hathaway, do not. The following table presents and example of how students should set up their data for comparison purposes. Total value and price per share will vary depending on the date of the quotes. Therefore, it is suggested that the instructor choose the date for standardization of grading and conclusions explained by students. BRKA JPM HD AAPL WMT VZ Price/Share No. Shares 50 150 100 100 150 50 Total Value 4. When Leonard Krauss places his market order to buy 100 shares of Google with his broker, the order is immediately transmitted to the main office of the brokerage firm and then to the exchange floor, where it is immediately executed. Confirmation that the order has been executed is transmitted back along the same route; from the floor of the exchange back to the broker placing the order and then to the customer. Due to the sophisticated telecommunications involved, the entire process may take only a matter of minutes. If Leonard instead places a limit order, the broker transmits the specified buy or sell price to an exchange specialist dealing in the given security. The specialist notes the limit order and limit price in his or her "book." The order is executed as soon as the specified market price is in effect and all other such orders with precedence have been satisfied. The order can be placed to remain in effect until a certain date or until canceled. Such an instruction is called a “good till canceled” order (GTC). 5. If Harmony Shadwell buys 300 shares of Google at $757.49 a share, the total transaction will cost $227,247. If she uses the maximum margin available from her broker, she will borrow 50% of the purchase price, or $113,623.50. Harmony must supply the other 50% of the purchase price, or $113,623.50 from her own funds. Also note, she will have to pay interest on the funds borrowed (for the illustration below, we used 4% interest). If Harmony bought the stock at $757.49 per share and sold it at $800, she would make a total profit on each share of $42.51 or of $12,753 in total. To illustrate the effect of margin on stock returns, consider the following: Thus, while the dollar amount of the Net Profit may be more without the margin (because there is no interest to pay), the percentage return on investment is higher with the margin trade (because less of the investor’s capital is involved). Keep in mind that these results can change depending upon the interest rate charged. 6. [Note: The percentage return will be the same whether one share is owned or $5,000 worth is owned. Therefore, to simplify calculations, returns will be determined for one share.] Alternative (b) offers the best return on the investment while alternatives (a and c) offer the lowest returns. 7. If Clay Sorensen sold 300 shares of stock short at $100 per share and the price of the stock dropped to $70 per share, he would make a profit of $30 per share ($100 − $70) or $9,000 ($30 × 300 shares), ignoring commission costs. That is, he is selling a stock at $100 a share which he is later going to buy at $70. His profit is the difference between what he paid for the stock ($70) and what he sold it for ($100), or $30 per share. 8. a. If Aaron sold the stock short at $40 per share and repurchased at $50 per share, he had a loss of $10 per share. Multiply his loss of $10 per share times 100 shares for a total loss of $1,000. b. If Aaron bought the stock at $40 per share and later sold it at $50 per share, he had a gain of $10 per share. Multiply his gain of $10 per share times 100 shares for a total gain of $1,000. c. If Aaron sold the stock short at $40 per share and later repurchased it at $25 per share, he had a gain of $15 per share. Multiply his gain of $15 per share times 100 shares for a total gain of $1,500. 9. a. Investors who sell a stock short must deposit with the broker an amount of money equivalent to the prevailing initial margin requirement, in this case 50%. If she shorted 500 shares of a stock currently selling at $75 per share, she had to have on deposit with the broker $75 × 500 × .50 = $18,750. b. If the investor shorted the shares at $75 and repurchased them at $55, she made a profit of $20 per share. Multiply 500 shares × $20 per share for a total gain of $10,000. c. The investor made a gain of $10,000 and had at risk $18,750 of her own money to give her a return on her invested capital of 53.3% ($10,000 ÷ $18,750 = .533 = 53.3%). 10. The NYSE has the most stringent listing requirements of all the organized exchanges. There is a certain amount of prestige in being listed on the NYSE, because these companies have to have a certain minimum size market capitalization as well as meet certain profitability levels. If listed companies fall below these requirements, they stand to be delisted. However, even large, established companies that could easily meet these requirements may choose to stay on the NASDAQ instead. While the NYSE signals traditional standards, NASDAQ signals growth, vitality and innovation. According to NASDAQ's Web site, more companies now list on NASDAQ than all other major U.S. stock markets. It is the fastest growing major U.S. stock market and trades more shares per day than any other U.S. equities market. Many companies wish to tap into the energy generated by this environment. 11. This question requires that students look at the current levels of the various indices and also their performance during the last six months. Thus the current status of the markets – bullish or bearish – will be determined by the data period chosen. The answer to the whether the current market is bullish or bearish depends on the recent course of stock prices and investor sentiment. Bull markets are favorable markets normally associated with investor optimism, economic recovery, and governmental stimulus. Bear markets are unfavorable markets normally associated with investor pessimism, economic slowdowns, and government control. The markets are either bullish or bearish, depending upon whether stock prices are generally rising (a bull market) or falling (a bear market). 12. Students should list information for Johnson & Johnson’s (JNJ) common stock as follows: 52-week high $61.16 52-week low $25.25 Dividend yield 3.1% Closing price $44.83 P/E ratio 28 The amounts will differ, depending upon the time period chosen, so it is suggested that instructors choose the date to obtain information, in order to standardize grading. 13. From the S&P report on Apple in Exhibit 11.6: 14. Refer to the completed Worksheet 11.2 on the following page. It is suggested that the instructor provide the students with a specific day on which to complete the worksheet so that the numbers can be easily compared. Students should also check for stock splits, or stocks will appear to have a loss when in fact they have a profit. AN INVENTORY OF INVESTMENT HOLDINGS Name(s): Sophia and Rick Heinz Date: Type of Description of Investment: Date Amount of Investment: Annual Income: Latest Market Value: Comments/ Investment Security Ticker No. Purchased Quote $ Amount Per Security Total Quote $ Amount Planned Actions Com. Stk. IBM IBM 100 Aug-05 $83.36 $ 8,336.00 $ $ $ $ Com. Stk. Verizon VZ 250 Jun-98 $91.75 $ 22,937.50 $ $ $ $ (Split in 1998, 2 for 1) 500 $ $ $ $ Com. Stk. Proctor & Gamble PG 150 2003 $ 88.08 $ 13,212.00 (Split -2 for 1) 300 2004 $ - $ - $ $ Com. Stk. Google GOOG 200 2010 $607.833 $121,566.60 Savings Bank savings account @ 1.05% annual interest 1 $ 8,000.00 $ 84 $ 84 $ 8,000.00 hold Totals: $174,052.10 $ $ NOTE: Students will fill in Annual Income, Latest market value, and comments based upon current finding. Solutions to Critical Thinking Cases 11.1 The Uselton’s Struggle With Two Investment Goals 1. According to the worksheet which follows, the Useltons would need $53,282.97 to fund the educational needs of their children. This assumes they will need $40,000 in six years (which will require an investment of $28,188.87 today) and another $40,000 two years later, in eight years (which will require an investment of $25,094.10). Given they have already accumulated $45,000 for their kids' education fund, they are about $8,282.97 short of the amount needed. Note 1: The “targeted financial goal” is the amount of money you want to accumulate by some target date in the future. 2. Using the financial calculator set on 1 P/YR and End Mode, these investments would be worth a total of $224,499.48 in 20 years, given an 6% investment rate. Mutual Fund: Retirement Account: 50,000 +/- PV 20,000 +/- PV 6 I/YR 6 I/YR 20 N 20 N FV $160,356.77 FV $64,142.71 3. The Useltons currently have $70,000 in their retirement nest egg. If they were to add $6,000 to their nest egg at the end of each of the next 20 years, they would have a total of $445,213. Using the financial calculator set on 1 P/YR and End Mode: 70,000 +/- PV 6,000 +/- PMT 6 I/YR 20 N FV $445,213 4. They are doing a great job in meeting both of their investment goals. Not only have they trying to meet the educational funding needs of their children, but they are well on their way to building up a retirement nest of almost half a million dollars. Keep up the good work! Company Current Value of Stock % of Total Portfolio eBay $ % Watson Pharmaceuticals $ % United Technologies Corp. $ % JPMorgan Chase $ % Pepsico $ % Money Mkt. fund $ 12,000.00 % Totals $ 100.0% 11.2 Col Bernard Takes Stock of His Securities 1. Refer to the completed Worksheet 11.2 shown on the following page. It is suggested that the instructor provide the students with a specific day on which to complete the worksheet so that the numbers can be easily compared; also, he or she might want to warn the students to check for any stock splits. A good site to research securities is finance.yahoo.com. When you pull up the stock's chart, the splits are marked and the dates written at the bottom. Also, you can pull up information about all the companies at once by typing in the tickers separated by a space. 2. The students will comment on whether or not Col's net worth has increased or decreased. They should also comment on whether or not his portfolio needs to be rebalanced. 3. Here, students can make a table like that presented below to show the percentage of his total portfolio represented by each company. Company Current Value of Stock % of Total Portfolio eBay $ % Watson Pharmaceuticals $ % United Technologies Corp. $ % JPMorgan Chase $ % Pepsico $ % Money Mkt. fund $ 12,000.00 % Totals $ 100.0% AN INVENTORY OF INVESTMENT HOLDINGS Name(s): Col Bernard Date: Type of Description of Investment: Date Amount of Investment: Annual Income: Latest Market Value: Comments/ Investment Security Ticker No. Purch Quote $ Amount Per Security Total Quote $ Amount Planned Actions Com. Stk. eBay EBAY 200 2002 $ 15.00 $ 3,000.00 (Split, 2 for 1 ea. time) 800 $ $ $ $ Com. Stk. Watson Pharmaceuticals WPI 250 2003 $ 32.25 $ 8,062.50 $ $ $ $ Com. Stk. United Technologies UTX 200 2000 $ 24.00 $ 4,800.00 (Split 2 for 1) 400 $ $ $ $ Com. Stk. JPMorgan Chase JPM 450 2009 $ 16.00 $ 7,200.00 $ $ $ $ Com. Stk. PepsiCo PEP 400 2009 $ 52.50 $ 21,000.00 $ $ $ $ MMkt. Money mkt. mutual fund – 1.0% 12,000 $ 1.00 $ 12,000.00 $120 $120 $ 1.00 $ 12,000.00 hold Totals: $ 56,062.50 $ $ Note: This spreadsheet does not account for the reinvesting of dividends and interest. We are not told whether these amounts are used for current income needs or reinvested. Solution Manual for PFIN Personal Finance Lawrence J. Gitman, Michael D. Joehnk, Randall S. Billingsley 9781285082578
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