Exam 2 FIn 3030 ch 8 to ch 15

Healthcare health savings account (HSA)

-provides tax advantaged way for employees to pay out of pocket expenses for health bills not covered by insurance. you can continue to accumulate funds in the account and if you rarely get sick/injured the funds continue to grow for decades. -must be coupled with a "High deductible health plan". which is a policy that requires a very large out of pocket payment (deductible) to be paid before any coverage is provided by the health insurance policy. -why? Well, imagine having the option to pay $350/month for a Blue Cross comprehensive policy with $300 annual deductible, or paying $200/month ($150 savings) for a high deductible health plan (HDHP) with a $3,000 deductible, and being able to save that $150 per month in a health savings account. If you are generally healthy and don't have any injuries, this account can build up substantially over time. If you ever have an illness or injury requiring the use of the $3,000 deductible, you'll have the funds, and potentially much more left over from previous contributions you made to your account (instead of paying the $150 to the insurer. You are at risk for about two years, until that account builds up to $3,000 in this particular fact pattern. -who funds it: typically employer -who owns it: employee -high deductible: yes -taxation: Contributions, Earnings, and reimbursements (distributions from the account for healthcare) are tax-free -portability to another employer: YES -balance carry over to next year: Yes, if all unused saved funds carry over and grow.

Deductible, coinsurance, copayment

1)Deductible - amount of your medical costs that you must pay before your plan begins to pay (like automobile coverage deductible) EX: Deductible Example: $1,000 Deductible Medical Service Charge = $750 Plan Pays - $0 You Pay - $750 3)Copayment ("copay") - a flat fee you pay each time you go to the doctor, or purchase pharmacy benefits (e.g. $35 copay for primary care visit; $50 for specialist visit). EX: Copayment Example: $5 Copay for Generic Drugs $25 Copay for Brand Drugs $25 Copay for Primary Care Visit $75 Copay for Specialist Visit 2)Coinsurance - after your deductible is met, the plan will pay a percentage of medical expenses - 60%, 70%, 80% or 90%. You will pay the remaining Percentage (40%, 30%, 20%, 10%) EX: Coinsurance Example: 70/30 Coinsurance Plan Medical Bill = $100 Insurance pays 70% or $70 You pay 30% or $30

Calculate P/E ratio

1. Find the Earnings (Profits) of the Company 2. Divide the Earnings (Profits) by the number of common shares outstanding (issued to investors) to get the Earnings Per Share. EPS = Net Income / # shares common stock outstanding* 3. Divide the market price of the stock by that EPS number (next page) EPS Example: Company Profit = $40,000 # Shares of Stock held by investors = 20,000 EPS = $40,000 profits/20,000 common shares outstanding EPS = $2 "Two dollars of earnings for each share of stock"

why its important to classify investments according to type of asset (stock, bond, real estate), by size (large, small, micro), by location (US, International, etc)?

1.Because each asset class (large US stock vs small company stock) will provide different rates of returns (gains or losses) year to year, and 2.By combining these asset classes in specific ways, we can engineer portfolios that "capture" the returns of these asset classes while avoiding unnecessary risks, and..... 3.We need to know if each of the investments (asset classes) held in our portfolio are matching, outperforming ("beating the market"), or falling short ("underperforming) the market "benchmark" indexes!

Active vs passive investing

Active investing: •Active investing is a strategy investors use when trying to beat a market or appropriate benchmark. Active investors rely on speculation about short-term future market movements. They are less concerned about historical data. •Active investors engage in picking stocks, fund managers, or investment styles in an attempt to outperform market benchmarks. Passive investors seek to match market benchmark returns. •Studies indicate that active investors regularly underperform the benchmarks they set out to beat. Passive investor: Passive investor = an investor who does not actively trade, and who seeks to match "market" returns as defined by specific market benchmarks (e.g. S&P 500, Russell 1000) List of behaviors that define an active investor: •Owning actively managed mutual funds •Picking individual stocks •Picking times to be in and out of the market •Picking a fund manager based on recent performance •Picking the next hot investment style •Disregarding taxes, fees, and commissions

Four major levels of coverage

Bronze: 60% coverage, lowest premium, high deductible, no cost-sharing subsidies Silver (MOST POPULAR): 70% coverage, 2nd lowest premium, separate medical & Rx deductibles, cost-sharing subsidies Gold: 80% coverage, higher premium, No deductibles, No cost-sharing subsidies Platinum: 90% coverage, highest premium, no deductible, no cost-sharing subsidies.

which payment count towards your total out of pocket limit for the plan year?

Count toward deductible: -deductibles- Yes -copayment- some do -coinsurance- n/a, you don't pay coinsurance until your deductible has been met. Count toward total out of pocket? -deductible- Yes -copayment- yes, under HRC must now be counted toward your total out of pocket maximum -coinsurance- Yes

example

EX: •Bergitta works for a company which sponsors a 401(k) plan. •The company provides a matching contribution of 100% of the first 3% of the employee's salary that the employee contributes to the 401(k), and 50% of the next 2% of pay that the employee contributed to the plan •If Joanna earns $100,000 and contributes 5% of her salary, how much will the employer match be in dollars for the year? • •How much will Bergitta contribute to the 401(k) plan this year? •How much will the Employer contribute to the plan this year? Answer: •Salary = $100,000 •Employee Contribution = 5% = $5,000 •Employer Contribution: •100% of first 3% of pay = $3,000 •50% of next 2% of pay = .5 x 2% x 100k = $1,000 •Total employer contribution = $4,000 •Total employee contribution = $5,000 •Total of all contributions to plan $9,000

comparing pre vs post tax take home pay

Employees tax savings with a POP: Gross wage- W/O: $45,000 with: $45,000 pre-tax premium deductions- W/O: 0 with: 5,500 taxable wage- W/O: 45,000 with: 39,500 tax (28%)- W/O: 12,600 with: 11,060 net pay- W/O: 32,400 with: 28,400 post tax premium deductions- W/O: 5,500 with: 0 take home pay- W/O: 26,900 with: 28,440 savings- W/O: 0 with: 1,540 ***

is value investing riskier than growth investing?

First, it should not be an either/or decision. Only time will tell whether a HIGH P/E Stock (growth) will actually turn out to be a high growth (high return) stock, or whether a LOW P/E Stock (value) will turn out to be a good value! So, having a blend of growth and value stocks may be the best approach. Second, there is an ongoing debate in the industry among some academics who believe value stocks have more embedded risk (and the low stock price reflects that risk), and others who believe value stocks have less overall risk, believing they are a good bargain (a diamond in the rough), and it's the behavior of uninformed investors causing the price to be so low.

automobile insurance

Four major parts of automobile -Part A - Liability Coverage pays for amounts you owe to others for damage to their property, or injuries. -Part B - Medical Payments, the amounts paid when you (the insured) are injured, or when passengers in your car are injured. -Part C - Uninsured and Underinsured Motorist, which comes into play when the other driver who is at fault doesn't have enough coverage to pay for damages and injuries to you and your property. -Part D - Physical Damage Coverage - coverage for damage to your automobile.....Two types: Collision and Comprehensive Coverage.

valuation of common stock

Fundamental analysis — think "analysis of company financials" Fundamental analysis focuses on such determinants as strength of a company's financial statements, prospects for future earnings and dividends, expected levels of interest rates, and the firm's risk. You are focusing more on what the company is really worth instead of attempting to guess market movements. Technical analysis — Many investors try try to predict future movements in stocks by looking at "patterns in market data"... Technical Analysis focuses on price movements, patterns, market movements and a host of other charting and mathematical calculations and techniques to spot opportunities. This approach to investing is much debated, and there is no scientifically proven method investors can use to profit from these influences. I recommend consumers view sales pitches about computerized methods of beating the market using technical analysis (radio infomercials, etc) with a lot of skepticism!.

what is an exchange?

Health insurance exchange is similar to a store or shop (marketplace) where you can purchase health insurance merchandise. today's health insurance exchanges typically include the following: •A choice of two or more health insurance options •Advice and recommendation on what health insurance options best fit your needs •Automated billing for the chosen health insurance plan premium(s) •On-going support for the chosen health insurance plan(s) -can be public or private -public exchange: administered by either federal or state gov. and are used to provide coverage to individuals who are not covered by another plan. -private exchange: administered by private companies (hewitt) for employers that wish to use an exchange approach to provide benefits to their employees. -Health insurance can also be purchased off the exchange

low vs high deductible health plan?

High deductible plan may be better: •You're healthy and rarely get sick or injured. •You can afford to pay your deductible upfront or within 30 days of receiving a bill for that amount if an unexpected medical expense comes up. •You have the means to make significant contributions to an HSA each month. •You are healthy and are interested in using an HSA as a way to save or invest money. Low Deductible plan may be better: •You are pregnant, planning to become pregnant, or have small children. •You have a chronic condition or need to see a doctor frequently. •You're considering surgery. •You take several prescription medications, or even just one expensive drug. •You or your children play sports, especially those with high risk of injury.

Housing options

Houses (single dwelling): -Offers space and privacy -Most potential for capital appreciation -You are responsible for maintenance, repair, and renovations Cooperatives and Condominiums: -Homeowner's Association fee will cover expenses relates to common areas -Less upkeep than ownership requires -Potentially less price appreciation than single dwelling ownership Apartments and other rental housing -Low maintenance -Good for temporary residence (job changes)

Renting vs. Buying

Renting: -mobility: can relocate w/o real estate selling costs -no down payment -lower monthly cash flow -avoids the risk of falling housings prices -may have swimming pools, tennis courts, and health clubs -no home repairs and maintenance, groundskeeping, property taxes -immune to losses due to housing price depreciation Buying: -allows you to build up equity over time -possibility of property appreciation -allows for a good deal of personal freedom to remodel, landscape, and redecorate to suit your taste -tax advantages, like deduction of interest and property taxes -no chance of rent rising over time -your home is a potential source of cash in the form of home equity loans

Describe healthcare coverage with regard to size of company, and high deductible health plans (HDHPs)

Size of Company: -98% of employers with 200 or more employees offer health insurance -Fewer than 45% of firms with 3 to 9 employees offer health coverage -Larger employers offer more choices of plans on their menus Growth of High Deductible Health Plans ("HDHPs"): -In 2006, HDHPs with medical savings accounts accounted for 4% of the employer sponsored market; by 2012 they accounted for more than 20% -In 2016, the number grew to 29% (Kaiser) -According to recent study by PriceWaterhouseCoopers (PWC), it is expected that 40% of employers will offer HDHPs as the only choice for their employees.

financing the purchase- The mortgage

Sources of mortgages: -Commercial banks (Wells Fargo, First Citizens Bank, BB&T) -Credit unions -Mortgage bankers—they originate mortgage loans using their own funds or funds obtained from other lenders. If they originate loans using funds from other lenders, they are paid by the lender. Mortgage bankers may keep (hold) the mortgage in their own portfolio, or sell it to another lender. -Mortgage brokers—middlemen who work for the borrower. They comparison shop for a fee to secure mortgage loans for borrowers. They are paid an origination fee (similar to a lending company like a bank that would charge a loan origination fee). Questions to ask: -How do you get paid, in points or commission? -How much will you make on this loan from the lender? -Name some of your top lenders.

Traditional vs Roth IRA chart

Tax Benefits: Trad: Grows tax deferred; Contributions tax-deductible up front (with limitations) Roth: Grows tax free; Contributions made on an after-tax basis Withdrawals: Trad: When distributed, taxes are paid on contributions and earnings in the account. Roth: No taxes on earnings if rules are met; Contributions are not taxed upon withdrawal because they were taxed when you contributed to the account. Penalties: Trad: If withdrawn prior to 59.5, you'll pay taxes on the withdrawal as well as a 10% penalty unless an exception applies Roth: No penalty on withdrawals of contributions; possible 10% penalty on earnings portion, unless an exception applies contribution limit: Trad: $6,000/yr ($1,000 catch-up) Roth: $6,000/yr ($1,000 catch-up) when must distributions begin: Trad: At age 70.5 you must start taking distributions and they must meet IRS minimum distribution rules. Roth: No Minimum Distributions Required at age 70.5. You can leave the money in the account.

major types of life insurance

Term insurance—pure life insurance that pays beneficiary a specific amount of money if you die while covered (inexpensive) Cash-value insurance—has a life insurance death benefit combined with a savings component variations on cash value insurance include whole life, universal life, variable life

Permanent insurance and the features

Three types: •Whole Life (guaranteed to be there when you die •Universal Life (there is a risk of not being permanent) •Variable Life (there is a risk of not being permanent)-With permanent insurance, a death benefit will be paid when the insured dies, turns 100, or reaches the maximum stated age. -Cash-value component of the permanent policy —This is the "savings" component of the policy. You pay MORE than the term cost (mortality charge) and the excess is put in an account similar to a savings account, and is invested for you. -Nonforfeiture right - this contract provision gives you the right to terminate your policy and receive cash value, a reduced amount of permanent insurance, or possibly even extended term coverage. The insurance company basically looks at the amount you have in the savings part of your contract, and they ask if you want to withdraw those funds, lower your death benefit and have no more premium payments to make, or buy a bunch of term coverage (which is cheaper but is not permanent). -Premiums - You are usually given the option to pay the premium for your entire life, or until a certain age or for a specific number of years. Many prefer to have policy premiums end at age 65, which means they are sort of "front loading" the premium...paying more over a shorter number of years. features: •Permanent (Cash value) life insurance provides both a death benefit and an opportunity to accumulate cash value. •The oldest and most conservative (low risk but high cost) form of permanent insurance is the "Whole Life" insurance policy. •Premiums are fixed - you pay the same premium amount each period over the life of the policy. •The death benefit is also fixed. Other policies (universal life and variable life discussed on the following slides may allow you to adjust the death benefit up or down based on needs.) •The policy is consider to be permanent insurance, meaning..."pay the premiums the policy will never terminate." The policy can be maintained until you die, as long as the premium is paid.

more on group term life insurance

advantage of group term life insurance: •Covers employees who otherwise would not be able to afford individual life insurance policies. •Allows higher risk individuals to be given life insurance coverage. Disadvantages of group term life insurance: •The employee has little to no control over their individual coverage. •Coverage does not continue or follow the employee if you leave your job. •Healthier individuals pay the same premiums as those who are considered to be a higher risk within the group policy. •Most people need additional coverage to compensate for coverage not included in their company's group life insurance. Key points: •It's inexpensive in early years but premiums increase over time, and ultimately become cost prohibitive. •There is no cash value growing inside the policy. You can't surrender the policy and receive any money back. There is no savings component, and so nothing comes back to you if you terminate the policy. •You can't borrow against the policy because there is no cash value buildup inside the policy for you to borrow! •Permanent policies may have those features but they cost a lot more.

Correlation

by adding uncorrelated asset classes, we can reduce volatility (risk, or standard deviation), while preserving returns. -as you move out of stocks and into bonds the returns begin to drop and standard deviation (violatility) But at some point, continuing to add bonds begins to increase the standard deviation of the portfolio, so it doesn't help to keep adding bonds, your returns are going down, but your volatility is beginning to rise again!

Ex 1 estimating initial cost of buying a house

est. initial costs of buying a home: the down payment, points, and closing costs on the purchase of a $150,000 house Borrowing $120,000, with 20% down at a rate of 6% with 2 points. Down payment- $30,000 Points- 2,400 loan origination fee- 1,200 loan application fee- 300 appraisal fee- 300 title search fee- 200 title insurance- 500 attorney's fee- 400 recording fee- 20 credit report- 50 termite and radon inspection fee- 150 notary fee- 50 Total Initial costs- $35,570

Fixed-rate mortgages and adjustable-rate mortgage

fixed: -Monthly payment doesn't change regardless of market interest rate changes. -Can lock in low rates for the life of the loan. -An assumable loan can be transferred to a new buyer. -Prepayment privilege allows early cash payments to be applied to principal. Many mortgages restrict prepayment or charge a penalty for prepayment. Adjustable: (ARMS) -With an adjustable rate mortgage, you are able to obtain a loan at a lower interest rate than the rate you would obtain with a fixed rate mortgage. -For example, a bank may offer you a 30 year mortgage at a fixed rate of 5%, and they may also give you the opportunity to accept an adjustable rate mortgage with an ARM rate of 3%. -The interest rate on your loan will fluctuate according to some index of interest rates based on the rising or falling cost of credit in the economy. (1 Year T-Bill Rate or other index) -The "interest rate risk" is assumed by the borrower (you). Your rate of interest may increase or decrease on an annual basis (sometimes monthly) -Initial rate - sometimes called a "teaser rate"—low for only a short time period (3-24 months) then adjusted upward. It is below the ARM rate, and will adjust to the ARM rate (index plus margin %) down the road. -Margin—the amount over the index rate that the ARM is set. For example, your ARM may be set at the one-year Treasury Bill rate ("index rate") plus 2%. If the Treasury Bill index rate is 6% your ARM rate will be 8% because the 2% "margin" was added to the index. -Adjustment interval—how frequently the rate can be adjusted. Typically this time period is one year - generally on the anniversary of your loan. -Rate Cap—Limits how much the interest rate on the loan can change. It can be a periodic rate cap, or lifetime cap, or both. Example: If the Index (T-bill Rate) goes up 3% your ARM rate would normally go up 3%. But if a 2% periodic cap applies, your rate will only go up 2% for the year. A lifetime cap puts a ceiling on the overall interest rate that can be charged on the loan. • -Payment Cap—sets a dollar limit on how much the monthly payment can increase during any adjustment period. This can backfire because the interest rate may continue to rise, adding to the total amount due on the loan. -If interest rates go up, the monthly payment may be too small to cover the interest due— this is called "negative amortization" and the loan balance outstanding actually grows! ARMS: advantage- the low interest rate in early years Downside- resetting interest rates push ARM monthly payments upward Fixed-rate mortgage: -in general, fixed-rate is better than ARM -payments never change -allows for control and planning if you want: fixed payments, stay in residence long period of time, stable interest rate .... choose FIxed rate mortgage

The Callan Table

referred to as the patchwork quilt of investing -shows diff classes of assets behave diff. over the years. and why its important to diversify your holdings. -illustrate that its highly unlikely any professional money manager. consumer or other investment advisor can predict how different asset classes will behave in the future.

asset allocation

the process of apportioning your money among the asset classes in order to achieve certain returns you have targeted, while remaining within your risk tolerance

combine capital gains and dividend income for total percentage returns

total % return= (ending value-beg value) + dividend/ beg. value example: January 1: Purchase Stock for $25 Dec. 31: Stock is Selling for $35 Dividend Paid - $2 Rate of Return = ($35 - $25) +$2 $25 Rate of Return = $12/25 Rate of Return = 48% check the figures: Assume you purchased $1,000 worth of the stock: •$1,000/25 = 40 shares purchased •40 shares paying $2/share provides $80 in dividend income. •40 shares x $10 appreciation = $400 cap gains. •$400+$80 = $480 / 1,000 = 48% -neither dividends nor capital appreciation are guaranteed with common stock. -the board may decide NOT to pay dividends (for many years) -also, the stock may not appreciate as expected because the company may experience lower than expected growth

Home closings

upfront costs which include down payment and closing costs (settlement costs) -down payment is the upfront payment to establish equity in the house -closing costs include a lot of fees and costs associated with finalizing the transfer of the property -Both take place at the "closing" which is the meeting where the transaction takes place and ownership is transferred.

defined-benefit pension plans

•A defined benefit plan is commonly referred to as a "pension plan" where you receive a specific ("defined") monthly dollar amount as retirement income based on a percentage of your pre-retirement salary, years of service, etc. These plans are generally "non-contributory" which means that you do not pay anything into them. •It's a guaranteed payment amount (sort of like receiving a monthly Social Security check, and is not dependent market performance of investments. . •In contrast, a defined contribution plan does NOT guarantee a specific benefit to be paid, and is dependent on market returns to provide retirement income. The employer sets up a plan which has an account for each employee. Contributions are made by the employer, the employee, or even by both in some cases. At retirement, the employee receives the amount that is in the account and does NOT receive a guaranteed income payment based on prior salary, years of service, etc. Think about it.... With a defined benefit plan, your money is not in the stock market and at risk of depletion if you pull money out too soon or during a market decline - you receive a check every month from the pension plan similar to your Social Security Check. Pretty nice!

Universal Life Insurance

•A lower cost alternative to whole life insurance - it combines term insurance with tax-deferred savings •Unlike whole life insurance, you can have flexible payments and death benefits •Your premium covers the term cost (or "mortality charge"), administrative fee; the remainder goes toward cash value. •The policy is credited with interest (unlike variable life which invests in mutual funds containing stocks, bonds and other securities)

Health care exchanges

•Affordable Care Act, Obamacare, Patient Protection and Affordable Care Act Plans (the Health Insurance Marketplace

Asset classes

•Asset Classes are groups of investments with similar characteristics. •Four major asset classes are Stocks, Bonds, Cash and Real Estate. •Taking the major asset class of Stocks as an example, we can break this major class down into multiple additional classes with similar characteristics simply based on the size of the company, as follows: ØLarge Company Stocks (large cap growth, large cap value) ØMid Size Company Stocks ØSmall Company Stocks ØMicro Company Stocks •In addition to classifying stocks by size, we can break them down based on location: ØUS large (or small, micro, etc) ØInternational large (or small, micro, etc) ØEmerging Markets

example

•Assume Katru, age 40, with an annual salary of $100,000, dies. •Assume her spouse, David, (age 40) has few skills and also has a physical limitation making it likely that he will need the same income (no reduction due to one spouse's death) to cover daily living expenses until age 65 since he is unable to work. -salary to be replaced= $100,000 how much life insurance is required to generate $100,000 annually for 25 years at an assumed interest rate of 5% N=25 PMT= $100,000 I= 5% FV=0 solve for PV= ($1,409,394)

The efficient market hypothesis

•At the core of the efficient markets hypothesis ("EMH") is the insight that new information about a stock is disseminated to the public so rapidly and fully that stock prices nowadays instantly adjust to the new data. •According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. Basically, this means it's impossible for even the best of experts to consistently outguess millions of other experts and "pick" stocks that will be winners or losers before everyone else "catches on". •As such, assuming the EMH is correct, it should be impossible to consistently outperform the overall market through expert stock selection or market timing techniques, •Further, if this is the case, the only way an investor can possibly obtain higher returns is by purchasing riskier investments, NOT by outguessing the collective market. •Believers in EMH (people who believe that nobody can consistently beat the market averages) will build their portfolios using passive investment vehicles such as index funds, and they stick with their long-term allocations, engaging in no stock picking or market timing activities.

fine-tuning your policy: contract clauses, riders, settlement options

•Beneficiary Provision - The primary beneficiary is the person who will receive proceeds at your death. A secondary or "contingent" beneficiary is the person who will receive the proceeds if the primary beneficiary is no longer around or disclaims the benefit. •Coverage Grace Period - generally 30 day grace period to pay premium after the due date. •Loan Clause - allows you to borrow against cash value. •Nonforfeiture Clause - you receive cash surrender value, reduced paid-up insurance, or may be extended term insurance. •Policy Reinstatement Clause - provides the rules for reinstating the policy after the grace period has ended •Suicide Clause - a policy will not pay if the insured person commits suicide within 2 years after the effective date of the policy. •Incontestability Clause - this is in your favor, prohibiting the insurance company from contesting the policy after typically 2 years based on innocent misstatements in the application. •Waiver of Premium for Disability Rider - if the insured becomes disabled, the insurance company will no longer require the insured to pay the monthly premium. •Accidental Death Benefit Rider or Multiple Indemnity if you die by accident (vs natural causes) •Guaranteed Insurability Rider (right to purchase additional insurance without proving insurability) •Cost-of-Living Adjustment (COLA) Rider - you can increase the death benefit with the inflation rate without proving insurability •Living Benefits Rider (allows payments to be made to the insured prior to death - can be used to offset medical costs of a terminally ill insured person)

Correlation and asset allocation

•Choosing assets with low correlation with each other can help to reduce the risk of a portfolio. The goal is to combine your investments in such a way that you maximize the amount of returns for a given level of risk. Stated another way, your goal is to reduce risk as much as possible for a given amount of expected returns. •Let's assume you are a conservative investor and you are thinking of investing 100% of your money in an all bond fund. •The bond fund has an expected return of 6%, and a standard deviation (variability) of 10% per year. •Your advisor suggests you consider investing a portion of your money in a stock fund which has an expected return of 12% but a standard deviation of 15%. •Notice the volatility of each of those assets standing alone, and then go to the next slide where you can compare the overall volatility of the two when combined.

managed care and efforts to improve quality

•Close monitoring of patients with chronic conditions •Routine identification of risk factors during office visits (not just seeing patients for problems they bring to the doctor). •Systems to monitor patients to be sure they are up to date on meds, receiving care, etc. •Coordination of care between inpatient and outpatient settings and exchange of information between care providers. •Managed care plans cost less (lower premiums) than traditional fee-for-service plans.

Second question: how much life insurance do you need?

•Consider all needs you believe should be addressed using life insurance: •Immediate needs covered at death •Support of Spouse, partner for xx years (5, 10, age 65?, through retirement?) •Support of children (through high school, college) •Should major debts be eliminated? (mortgage, loans) •Many different approaches to finding target amount but two common approaches are: •The Earnings Multiple •Needs Based Planning •Bottom line - the methods are very subjective

a detailed analysis of future expenses

•Determine the needs of a family after the death of the breadwinner: • •Immediate needs at time of death •Debt elimination (auto, home, student loans) •Immediate transitional funds (spouse's education or job training; child care) •Dependency expenses (support/education) •Other special needs •Retirement income?

Reducing Risk Through Diversification

•Diversification is the process of spreading an investment across assets (and thereby forming a portfolio). (Jordan/Miller) •The principle of diversification tells us that spreading risk across a number of assets will eliminate some, but not all risks associated with investing. •Risks that can be eliminated through diversification are called "diversifiable risks". •Diversification allows extreme good and bad returns to cancel each other out. •Spreading your investments across multiple asset classes is one way to reduce volatility (risk) without negatively impacting returns!

Smart buying in action: summary of fees and charges

•Down payment •Closing/settlement costs -Points or "interest points" - a fee equal to 1% of the total loan amount. Points are a front interest charge (1 point = 1% of loan). Higher points generally result in a lower interest rate on your mortgage. Points are a way of compensating a lender for reducing their interest rates. Points ARE deductible on your income tax return, remember Schedule A (Itemized Deductions) like mortgage interest. -Loan origination fee - 1% of the loan charged by the lender to review and finalize the loan -Loan application fee - $200-$300 fee to defer some of the lender's processing costs -Credit report ($75) -Home Inspection ($250-$400) -Appraisal fee ($200 - $300) and required by lender -Termite/Radon Inspection ($75+) -Title Search fee ($250) ( may be conducted by the attorney, or attorney may retain a title insurance company to check run a title search (make sure there are no encumbrances, liens, etc on the property) -Title Insurance ($250) - an insurance policy issued by a title insurance company that pays the mortgage company (or homeowner if purchased for the homeowner) in the event there are problems with the title later (e.g. an heir to the estate from Kansas shows up in North Caroline and claims that the property was "willed" to them 20 years ago). -Attorney fee to handle the closing is $400-$500 or more, depending on the region, complexities of the closing. -Survey fee is sometimes required to certify the boundaries of the lot. (Varies by size of lot/land) -Notary Fee ($50-$100)

Health insurance- three major sources

•Employer-sponsored health care coverage -Your choices are limited to what employer offers. -Coverage and costs vary depending on the number and types of plans your employer may provide. -You make annual elections and typically can modify your level of coverage each year. -Many employers are now offering "high deductible health plans" combined with a health savings account ("HSA"). •Health insurance exchanges (the healthcare marketplace) -Contain a range of plans to choose from -You can also purchase coverage directly from private carriers. *Private Insurance Basic health coverage models: •Traditional fee-for-service or indemnity plans— you are reimbursed for medical expenditures at a specified level (e.g. 80%/20%, and you have flexibility in selecting doctors, facilities, etc. •Managed Care—most expenses are covered but you may have a limited choice of doctors, hospitals, and clinics. The main types of manage care plans are HMOs and PPOs, discussed later.

Examples of costs

•Example: Christy was recently diagnosed with a complex medical condition. Her doctor's bill was $8,400. Her health insurance policy has a $500 deductible and an 80%/20% coinsurance provision, and a $2,500 "maximum out of pocket" cost, and then the insurance pays 100% thereafter. In total, how much will Christy pay for medical expenses? Balance: medical bill- $8,400 deductible- balance after deductible- $7,900 total paid- $8,400 Insurance Pays: medical bill- deductible- 0 balance after deductible- $6,320 (80%) total paid- $6,320 Patient Pays: medical bill- deductible- $500 balance after deductible- $1,580(20%) total paid- $2,080 •Example #2 Increase Costs to See How Out of Pocket Maximum Works. Assume Christy slipped on ice after leaving the doctor's office and broke her arm, incurring another $5,000 in medical expenses. Medical Bill for broken arm: $5,000 Amount Already Paid out of pocket: $2,080 Out of pocket remaining ($2,500-$2,080): $420

Types of Health care plans

•Fee-for-service (or traditional indemnity). •HMOs - Health Maintenance Organization - HMO's are cost efficient (meaning lower premiums for you), they provide preventive care and coordinated care using a contracted network of healthcare providers. Disadvantage = lack of choice (limited network of providers). With HMO plans, you may be responsible for all charges if you go out of network for services. You must select a Primary Care Physician (a "gatekeeper"), and a primary care physician referral is required before you see a specialist. •PPO - Preferred Provider Organizations - These are a cross between traditional fee-for-service plan and an HMO (no "gatekeeper" with PPO); Doctors and hospitals agree to pricing system; An advantage is that it allows for health services at a discount if you use the preferred provider network, and the networks are usually large (choice of provider). You are not required to obtain a referral (because no primary care doctor is required). Disadvantage- premiums are usually higher than with HMO plans. You can go out of the network but will pay a larger portion of your bill. •HDHP - High Deductible Health Plan - least expensive monthly. Disadvantage: You will be responsible for meeting a very high out of pocket deductible before the policy will pay. The Advantage is that premiums are very low, and you can save/build up a separate "health saving account ("HSA"). You must be covered by a high deductible heath plan to contribute to a Health Savings Account ("HSA")

Traditional IRA (Individual Retirement Account)

•First, the contribution limit for IRAs is $6,000 (2019) •There are limits on the amount you can contribute to a traditional deductible IRA base on your income IF you participate in a company retirement plan at the same time. •Note that the 401(k) plan contribution limit is $19,000/yr. •IRA's are "Tax Advantaged" accounts — contributions to "Traditional" IRAs are generally tax deductible. Note that I said "Traditional". There are exceptions but let's keep it simple. •Earnings are tax deferred. No taxes are paid on the contributions or earnings until the funds are distributed many years later - earnings can grow without being taxed until withdrawn/distributed to the taxpayer. •There are some restrictions on timing and amount of withdrawal. Unless an exception applies, you will have to pay a 10% penalty (plus income taxes) on amounts you withdraw from a traditional IRA before the age of 59 ½.

investing in markets... risk and returns are related

•In the marketplace, there are people with capital (money), and people who produce goods and services who may need that capital in order to pursue an idea or expand their business (develop a patented product, or purchase inventory, buildings to set up a business). •People with available capital (let's say, you) want to rent out their capital and get a nice return. •If the company in which you are considering investing is small, new or considered somewhat risky, the investor (you) may hesitate and say to yourself.... "I will invest, but I am only doing so with the expectation that I receive some nice returns". I can always simply invest in a less risky, more established company elsewhere There is a company down the street that looks. So in order to attract my money, I am really sticking my neck out by handing my money over to this small, new business, but I believe in the product and I believe the company will generate better returns than larger companies that are returning average market rates. •To the business, they view it as a "the cost of capital" - in order to attract capital, a company has to convince the public (you) that they will compensate them for the risk they are taking by investing in the company. And, as the data will show, over a long period of time small companies have produced returns for investors that have exceeded the returns of large companies. Of course, this is because it involved more risk, but for taking more risk, there are greater returns. •Here's another example of how risk and returns go hand in hand: Consider your own situation today. Assume you want to obtain a bank loan to buy a house, and so you go to a bank and request a loan. Behind you walks in the second wealthiest man in the world, Warren Buffett, and he's there for a loan also (I know, he doesn't need a loan from anyone but just stay with me on this). Who will get the better interest rate on their loan? Warren Buffett, of course, because the bank knows there is virtually NO risk in loaning Warren Buffett the money. So in order to compete with the "bank down the street" they may offer Warren Buffett a loan at 2%, yet they'll turn to you, or me, and the loan could be 5% or more, simply because we are considered a greater risk (simply because we are not billionaires like Warren Buffett, and we could have other debts, lose our jobs, become ill and unable to pay on the loan.) •Well, the same logic holds true when you invest in stocks... In a way, you are sort of acting as "the bank". You have the cash to invest in a company, and you do this by putting money in an IRA, 401(k), etc), and when you select funds in which to invest, you are assessing the risk of companies that need your capital. If the company has more risk (small, not financially sound, new to the market, etc), you may do what a bank does.... Allow your money to be used but with an expectation that you'll be compensated down the road for the extra risk you are taking by allowing a risky business the use of your money. •This is why "small company" stocks have historically outperformed large company stocks (e.g. 12% or more annualized returns vs 10% for S&P 500 stocks... They carry more risk. Having a small amount of small company holdings in your portfolio can enhance the returns of your portfolio (but you don't want too many, because of volatility.. More on this to come).

Smart Buying in Action: Housing - do your homework

•Investigate the potential home and all that goes along with it: -Schools -Shopping -Distance to Job(s) - lake house with an hour+ commute (and expense) vs. shorter commute -Sound/light/fencing, lawn vs wooded lot. (take experienced person with you) -What is exposed in the winter when all leaves are gone? (noise, views) -Drainage/slope/trees (old/new) -Yard maintenance; neighbors, pets (noise/distance); -Heating & Cooling, (type, age) natural surroundings that could help or hurt electric bills. -Exterior siding (brick, wood, vinyl siding) -Condition of decks

returns expected on investments

•Less risk = less expected return (Example: short term government bonds) •More risk = more "expected" return (Example: Stocks. The returns are not guaranteed, but are supported by historical evidence which is generally reliable). ØOver the long term, stock market returns have averaged more than 10%. (S&P 500 index has a 10% historical rate of return) ØFrom 2000 to 2010 returns were basically flat (0%) - the "lost decade" for investors ØFrom 2010 to 2017 annualized returns were almost 14%.

Roth IRA (great for young, low income tax bracket workers)

•Like traditional IRAs, the contribution limit for Roth IRAs is $6,000. •Contributions to Roth IRAs are not tax deductible but made out of after-tax income. •But..... the money grows tax free and withdrawals are tax free later as long as you follow the IRS rules! •And, unlike traditional IRAs, there are no withdrawal restrictions* or tax penalty on your contributions. Traditional IRAs impose a 10% penalty for withdrawals made before the age of 59.5. You can actually withdraw your contributions (not earnings) without a penalty from a Roth IRA. You can't do this with a traditional IRA. •Distributions from traditional IRAs (deductible IRAs) MUST begins at age 70.5. But with Roth Accounts, you are NOT required to start taking distributions at age 70.5. In fact, if it's your Roth account (you own the account and didn't inherit it), you never have to take a distriubution!

characteristics of a long term investor

•Long term investors do not engage in market timing. Market timers attempt to predict short term changes in the market, outguessing trends in the markets. They need to know 'just the right time' to get in, and to get out. •Research shows that most of a market's gains are realized in a few trading days that happen now and then. •If you attempt to time the market, you are just as likely to miss an upswing as you are to miss a downswing. what contributes most to successful investing is not market timing but the amount of time you spend invested in the market.

death benefit settlement options

•Lump-Sum Settlement (one tax-free payment) •Interest-Only Settlement (pays interest on the lump sum but funds remain with insurer until later requested) •Installment Payments Settlement •Life Annuity Settlement -Straight Life Annuity -Life Annuity with period certain (pays a minimum number of payments even if you die immediately after the annuity starts) -Joint Life and Survivorship Annuity

company matching contributions

•Many 401(k) and 403(b) plans which are similar to 401(k) plans have company matching contribution provisions. •The employer may match a certain percentage of the amount you contribute •Examples: 100% of the first 3% of your Salary that you contribute; or maybe a formula that matches 50% of the first 6% of Salary you defer. Many variations are possible. EX: Joanna works for a company with a 401(k) plan. The company provides a matching contribution of 50% of the first 6% of the employee's salary that the employee contributes to the 401(k). If Joanna earns $50,000 and contributes 8% of her salary, how much will the employer match be in dollars for the year? Answer: Answer: Since her contribution is at least 6%, the company will provide a matching contribution of 50% of the first 6% of her pay. $50,000 x 6% x .5 = $1,500. Total employer and employee contribution = $4,000 (e/e) and $1,500 (e.r) = $5,500.

contributions and tax deferral

•Most retirement plans are tax-deferred - no income tax while the account grows. •Contributions can be made on a tax deductible basis. -You take a deduction for the amount of contribution you make to the plan (the amount you contribute is not included in the current year's income, which lowers your tax for the year). $5,000 contribution, 25% tax rate = $1,250 tax which is deferred until later. •Your money is invested in funds you select, and these funds grow on a tax-deferred basis - no taxes while growing. •The deferred amount + earnings are taxed when you withdraw the funds at retirement or for other needs.

term insurance and its features

•Renewable term insurance (you can renew without having to prove good health; the premium will increase with age) •Terms typically range from 5 to 30 years. You can pay level term premiums or you can pay an annual renewable premium that increases every year. •Decreasing term insurance - The cost (premiums) remain the same each year, but the amount of Coverage (also referred to as "Face Amount", or "Death Benefit") decreases •Group term life insurance - a term insurance typically provided by employers at low cost to employees. •Convertible term life insurance (the advantage is that you can purchase term cheaply, then convert to permanent later without having to pass medical exam.)

plan and IRA account rollovers

•Rollovers - The IRS rules allow taxpayers to roll assets (transfer their assets) from their retirement plans to an IRA, and between IRAs. •No tax on Rollover. Rollovers made directly from a retirement plan to an IRA, or from an IRA to another IRA are tax-free. You are not taxed on the movement of funds from one retirement account to another as long as you follow the rollover rules. •Rollovers are an excellent way to consolidate assets when you have multiple plans and IRAs. Why consolidate? To reduce your paperwork and make asset allocation decisions much easier to make. •Imagine having 5 IRAs and each IRA has different types of investments, many of which could overlap. It could be difficult to "rebalance" and control the percentages of each asset class. Consolidating your investments solves this problem.

difference in savings, investing and speculating

•Saving - the process of setting money aside to make a purchase in the near future (e.g. months to just a few years. The most important element is the safety of your money. You don't want your money to fluctuate in value. It typically involves putting your money in savings accounts, money market accounts or Certificates of Deposits. •An investment is an asset that generates value, generating returns. Stocks generate returns, bonds generate returns. You use investing to "grow" your money. •Speculation can be compared to gambling. You stand to gain a lot, but you also may lose everything (day trading, short term market timing and stock picking in an attempt to "beat the market"). Investors should never gamble with the money they intend to rely upon to grow and be there when they retire. Why Invest? 1.To fight inflation which erodes purchasing power over time 2.To take advantage of compounding of returns

volatility (uncertainty)

•Stock market volatility is the range of price change a security experiences over a given period of time. If the price stays relatively stable, the security has low volatility. A highly volatile security is one that hits new highs and lows, moves erratically, and experiences rapid increases and dramatic falls. •As the length of the investment horizon increases, you can afford to include more volatile assets in your portfolio. This means, for some, that having a portfolio containing 70%, 80%, 90% or more in stocks is not unreasonable. •If investment horizon is longer, will probably end up with a lot more if you invest in stocks, even though they will have more volatility in the short term. The key is to NOT sell those holdings in the short term when unexpected fluctuations can occur. Invest for the long term and, over time, reduce stock holdings to reduce overall portfolio volatility.

ERISA (Employee Retirement Income Security Act)

•The Employee Retirement Income Security Act (ERISA) of 1974 requires plans to provide participants with information about the plan including important information about plan features and funding. •ERISA Requires accountability of those persons responsible for managing the plan and your money, called plan fiduciaries, giving you the right to sue for benefits if mismanaged. -provides a shield, protecting ERISA covered retirement plan assets from the reach of your creditors -for IRA, state laws vary, provide a dollar amount of exemption from creditor access (ex: 1,000,000 or unlimited) -bankruptcy, all plan assets are protected, IRA have around $1.2 million in protection

the Affordable care act

•The Patient Protection and Affordable Care Act (PPACA), passed in 2010, does not create a national health insurance plan administered by the federal government as a single payer system. It did, however, impose certain minimum standards and levels of coverage to be provided by private insurers in the marketplace. •The PPACA sets national standards for how health insurance is structured and priced, and places new requirements on individuals and employers. •Major changes include: 1.The creation of health insurance exchanges (See Next Slide) where individuals who may not otherwise qualify for healthcare coverage can purchase a policy; 2.Adds new regulations on all health plans that will prevent health insurers from denying coverage to people for any reason, including health status, and from charging higher premiums based on health status and gender; 3.Young adults will be allowed to remain on their parents' health insurance up to age 26. 4.Health insurers are prohibited from imposing lifetime limits on coverage.

Time Horizon

•Time horizon is the length of time over which an investment is made or held before it is liquidated. •Time horizons can range from seconds in the case of a day trader, all the way up to decades for a buy-and-hold investor or an individual who is investing in a retirement plan. •Time horizons are most commonly expressed in years. For example, if a 30-year-old person is considering retiring at age 65, the time horizon for retirement planning would be 35 years. Most advisors would recommend a more aggressive investment portfolio at the beginning of an investment with a time horizon of this length, as it is generally considered long-term investing(e.g. 80% stocks, 20% bonds). •As the person approaches age 65, the time horizon shortens, leading many to shift to a more conservative portfolio (e.g. 70% bonds, 30% stocks) •If investment horizon is longer, will probably end up with a lot more if you invest in stocks, even though they will have more volatility in the short term. •The key is to NOT sell those holdings in the short term when unexpected fluctuations can occur. Invest for the long term and, over time, reduce stock holdings to reduce overall portfolio volatility.

determinants of the cost of automobile insurance

•Type of automobile •Use of automobile •Driver's driving record •Where you live •Discounts that you qualify for •Insurance credit score

why terms like diversification and correlation are important?

•Up to this point we've been looking at individual securities (stocks, bonds) and their behavior/characteristics relative to the market. •We have seen that some stocks contain more risk and produce varying returns in different economic conditions (e.g. small company stocks are highly volatile, and they swing significantly in price while large cap stocks are generally less volatile). •When we move to the mutual fund discussion we'll be mixing different allocations of large groups of large & small stocks, international stocks, and different types of bonds - all of which have different historical rates of return, and volatility. •If you are building your own portfolio (e.g. not investing in a 'pre-designed' target date retirement fund or static allocation fund in which the fund manager has already done this work for you, then you will need to know how the investments in each fund move in relation to the market, because you'll be investing across several types of mutual funds. •The Chapter on Mutual funds further explains how you can select just a few funds (even one!) to accomplish your goals, or select among numerous funds to create your own portfolio consisting of 5 or more asset classes.

important terms

•Vesting - Being "vested" means to gain the right to own the contributions made by your employer (like the company matching contribution or profit-sharing contribution) for a specified number of years. Vesting provisions appear in many retirement plans. •Vesting schedules are used to encourage continued employment by reducing or eliminating benefits IF the employee leaves the company within a short period of time (e.g. 1 year, 3 years, maybe even up to 6 years. •Persons who are not 100% vested lose a portion of the contributions and earnings that were attributed to the employer's contributions to their retirement account. •Of course, you are always vested (you always own) the amount you have personally invested in the plan.

Volatility

•Volatility involves risk, but it is NOT the same as risk. •Risk is the chance you will lose your money. •Volatility, in a picture, can be described as the up and down movement in the value of an investment. It can be measured in weeks, months, and years. People notice and react most to monthly swings in their stocks. The more volatile the stock, the riskier it becomes. •How is it measured? - It's called Standard Deviation, which is basically the variation of swings on one side or the other, of an average return. •For example in the chart below, notice that the simple average return for US Large Stocks is 12.5%, and the Compounded Return for the same asset class is 10.9% (less). This is because of the Volatility of that asset class(14.6%). Volatility creates lower returns. To the degree you can reduce volatility without reducing returns, the overall compounded return will be HIGHER. •See the Small US Stock line. Notice that with a 20.1% level of volatility, the compounded return is almost 3% lower than the simple average return of 15.8.

401(k) plan

•What does the term 401(k) mean? 401(k) is simply a tax code section which allows you to set aside some of your pay in a company retirement plan, and NOT tax you on the amount you invested until you remove the money from the account. •For 2019, the contribution limit is $19,000. Compare IRAs which have a $6,000 annual contribution limit. •With 401(k) plans, persons over the age of 50 are allowed to make a "Catch up" contribution of an additional $6,000. (Compare IRA Catch-up with $1,000 limit).

Diversification and correlation of assets

•When it comes to diversified portfolios, correlation represents the measure of how investments move in relation to one another. •When assets move in the same direction at the same time, they are considered to be highly correlated, or positively correlated. •When one asset tends to move up when the another goes down, the two assets are considered to be negatively correlated. •A correlation of +1 means that prices move in tandem (together in the same direction) •A correlation of -1 means that prices move in opposite directions. •A correlation of 0 means that the price movements of assets are uncorrelated; in other words, the price movement of one asset has no effect on the price movement of the other asset.

Variable life (a form of permanent)

•With variable Life, instead of having interest credited by the insurance company at money market rates of return (Universal Life), you can invest in a wide range of investments including mutual funds, or sub-accounts that act like mutual funds by investing in stocks and bonds, and money market securities. •The key point with variable life is that you assume the risk of loss if the cash value doesn't support the future cost of insurance - no guarantees. •With variable life the death benefit may rise or fall base on performance of investments -Advisors may suggest that you simply purchase low cost term coverage and invest the difference, avoiding commissions, and trading costs associated with these policies. I tend to agree. Buying term and investing the difference in an S&P 500 Index Fund or similar investment based on your risk tolerance can help you avoid many fees/expenses and will allow you to achieve market rates of return with a wider range of mutual fund investing options.

Healthcare Reimbursement Account (HRA)

•an employer account (no employee money is used to fund the account). With such a plan, the employer basically tells employees "I've set aside $x,000 for you, and if you have any medical expenses that are NOT covered by your major health plan, bring those receipts to me, and I'll reimburse you up to $x,000 for the expense." -Advantage: -the employer is giving them $x amount in add. benefits for working there, tax-free. helps avoid taxes, receives reimbursement for medical expenses Chart: -who funds it: employer -who owns it: employer -high deductible: NO -taxation: reimbursements are tax-free to the employee -portability to another employer: NO -balance carry over to next year: Yes if employer allows

Standard Exclusions

•intentional injury or damage •using a vehicle without owner's consent •using vehicle with fewer than four wheels •using another person's vehicle regularly •using own vehicle but not listed on policy •carrying passengers for a fee •driving in a race or speed contest

Traditional or Roth

•it's usually a sound decision for anyone who is in a low tax bracket to have their contribution taxed early (don't take a deduction for your contribution) and put that money in a Roth IRA. •Reason: It makes sense to have money taxed at a low rate (e.g. 10%, 12%) and have all future growth, AND distributions from the account received tax-free. •With a traditional deductible IRA, you take a deduction currently (again, perhaps when you are in a 10% bracket), but all earnings and distributions will be taxed later, maybe 30-40 years later, at whatever rate bracket you'll be in at that time, which, for many people, will be greater than 10%, etc.

Flexible Spending Account (FSA)

•used to reimburse employees for costs they would have to pay out of pocket with after-tax dollars, but instead of the employer putting up the money, the employee enters into a "salary reduction agreement" and has part of h/her pay deducted -BEFORE IT IS TAXED- and placed into an account for the employee. Again, the advantage to the employee is greater purchasing power with before-tax dollars. The employee needs to be careful to estimate the amount h/she will spend for the year before placing their money into the account, because any funds left over at the end of the year will be forfeited (the use it or lose it rule) with minor exceptions not covered here. Chart: -who funds it: employee -who owns it: employer (employee converts salary to make it employer) -high deductible: NO -taxation: contributions and reimbursements are tax-free to the employee -portability to another employer: NO -balance carry over to next year: only $500 of unused funds can carry over to next year

Why consider stocks?

- over time, common stocks outperform all other investments - stocks reduce risk through diversification - stocks are fairly liquid -don't behave the same as bonds which are fixed -When you buy common stock, you purchase are purchasing an ownership position in the company. It could be a very tiny fractional amount, or a large amount of ownership. So keep in mind that, unlike bonds (loans to corporations and to government), stocks are ownership type instruments. Returns from stocks come from: -Dividends: the company's distribution of profits to stockholders -Capital appreciation: the increase in the selling price of a share of stock. ØDiabold is purchased for $10/share 1/1/2000. The share price as of 1/1/2017 is $50/share. ØTotal increase in share value = $50 - $10 = $40 (capital appreciation, long term capital gain treatment)

Life insurance

- use of insurance products to provide financial control over specific risks we all face

language of common stocks

-A bull market is one characterized by rising prices (imagine: bull horns up) ' -A bear market is one characterized by falling prices (imagine: bears strike downward when attacking). I actually remember it by imagining a bear chasing me down a mountain! -Limited Liability - Your exposure to liability is limited to the amount of your investment. -Dividends are claims on income: ◦Profits are paid in the form of dividends or may be plowed back into R&D, expansion, hiring, etc. -Claims on Assets - common shareholders are last in line when it comes to liquidation. Secured creditors are paid first, followed by unsecured creditors and bondholders, followed by preferred shareholders, with remainder, if any, paid to common stockholders.

Stocks

-As mentioned, ownership of stock means you own a fractional interest - or equity - in a corporation. -Your fractional interest is represented by the shares of stock you own. -Note that you do not own the physical assets - you can't walk in to an Apple store and walk out with a computer simply because you own some Apple stock. -As an equity owner, you are able to receive profits when the corporation earns profits. -Those profits are paid to you in the form of dividends. -The Board of Directors will determine when dividends will be paid. Chosen by shareholders, the primary job of a public company's board of directors is to look out for the shareholders' interests. The board plays a supervisory role, overseeing corporate activities and assessing performance. -The Board of Directors is responsible for hiring and firing top managers, and for setting their compensation. -As profits (and dividends) increase, the company is perceived as being more valuable to investors, and so the price of the stock moves up, creating gains on the capital invested by the shareholders ("Capital Gains") -You may lose your entire investment but you are not personally held liable for company actions/violations, losses.

additional mortgage loan options

-Balloon Payment Mortgage Loan - with a balloon mortgage, you'll pay fixed payments over a period of time (5-7-10 years, etc.) and then the entire loan will come due at the end of the period. -Issues with Balloon Mortgages - will you have the funds to pay the entire balance in 5- 7 or 10 years? -Another Issue: Will the property be worth more or less than the mortgage due in 5-7-10 years. Will you have equity in the home -What if interest rates rise and you have to refinance in 5-7-10 years at a higher rate? -Interest Only Mortgage —interest only payment for initial set period, then pay both interest and principal for remainder of loan. Advantage to 15 year mortgage: -lower interest rate -discipline to force savings -save quite a bit of interest over the life of the mortgage -equity is built up at a faster pace -increased equity may allow you to trade up to a more expensive house Advantage to a 30 year mortgage: -lower payments give you more financial flexibility -provides affordability -if mortgage contains a prepayment provision, you can mimic payment pattern of 15 year mortgage while maintaining financial flexibility -if you borrow from credit card , you be better off paying credit card debt before you took on higher mortgage payments.

compare "lending-type" instruments (bonds)

-Bonds provide a coupon interest rate which is the actual rate of return the bond pays. Most are fixed rates and are paid throughout the life of the bond until it "matures". -The face value of the bond is paid back to you at the maturity date. The amount paid back to you is the "par value" or "principal" ex: You purchase a 10 year bond with a par value of $1,000 and interest rate of 5% per year (.05 x 1,000 = $50 interest/yr). You will receive $50 per year for 10 years and then receive the $1,000 face amount back.

behavioral finance: factors resulting in suboptimal "Active Choices"

-Bounded Reality - people are limited in how much complexity in financial planning and investing they can handle. -Overweight of past performance as an indicator of future performance. Future performance can easily be exactly the opposite of past performance, yet people disregard this fact. Fund managers who stand out in the crowd with large returns are more likely than not to revert to the mean (fall back in line). Funds advertise their winning managers - and people flock to them, but the managers rarely perform the same the next year. -Investor Overconfidence - Every student in this class is an above-average driver.... -Herd Behavior - Country Club talk..... Believing that the person at the table next to you bragging about h/her hot stock tip ... is RiGHT! -Inappropriate risk discounting - "Sara Lee Corp is in my hometown and I know half the people who work there... It's a fine company so I am investing a lot in their stock." -Mental Accounting - believing that different cash resources have a different level of importance (tax refund is a windfall), or inheritance..... (or holding on to a stock because it belonged to your mother, favorite uncle, etc.

Part D: physical damage to your automobile

-Collision Coverage - Think "Accident"...when your car runs into things (pays for damages to your car up to cash value of your vehicle) EX: your car hits an object (tree), collides with another car, rolls over, is damaged due to hitting a pothole Collision- more expensive to carry... consider a higher deductible -Comprehensive - covers those things totally out of your control - hail, ice, wind, fire EX: an object falls on your car (tree), an animal collides with it, your car is damaged due to fire or natural disaster, vandalized or stolen Comprehensive- less expensive to carry... consider lower deductible

Conventional and Government- backed mortgages

-Conventional loans—from a bank or other lender. The loan is secured by the property being purchased. If you default, the lender takes possession of the property and sells it to pay off the amount remaining on the mortgage. -Government-backed loans—loan is still provided by a traditional lender (bank, etc.) but it is insured by government—FHA and VA (for veterans) loans. The government essentially "backs the loan", guaranteeing to the lender that the loan will be paid. -lower interest rate (.5% to 1% lower than conventional loans), -smaller down payment, (as low as 3.5%) -less strict financial requirements (lower credit score) -Disadvantages include more paperwork, higher monthly costs(mortgage insurance premium for life of loan), house must meet quality standards FHA loans are assumable.. FHA loans can be fixed or variable rate (VA are fixed only)

securities markets

-Corporations issue stocks in order to raise capital. Stocks are bought and sold in securities markets. -New issues of stock are issued in a "primary market". Stock will be sold for the first time as an "initial public offering" or a subsequent offering called "seasoned new issue" or "seasoned equity offering" (ex: Nike decides to issue more stock) -All future trades take place in the "secondary markets". The stocks you trade will most likely be traded in the secondary markets (you purchase from or sell to another investor)

Part B: Medical Expenses Coverage (pays medical up to policy limits)

-Covers medical costs for you and your family and anyone occupying your vehicle -It covers you and your family even if not in an automobile (you are hit while walking) -Covers you if you are driving another car (but not other car's passengers)

comparing returns if earnings remain consistent over time

-Example of Low P/E "Value Stock" Company issues 1,000,000 shares of Stock Earnings for 2017 are $1,000,000, or $1 per share. You have the opportunity purchase 1 Share at $10 when the P/E ratio is 10. [P/E = $10/$1]. If the company earns $1,000,000 in 2018 and pays $1 in dividends per share, your yield will be $1 for each share you had purchased for $10, which means your ROR is 10%. $1 earnings /$10 cost = 10% -Example of High P/E "Growth Stock" Company issues 1,000,000 shares of Stock Earnings for 2017 are $1,000,000, or $1 per share. You have the opportunity to purchase 1 Share at $20 when the P/E ratio is 20. [P/E = $20/$1]. If the company earns $1,000,000 in 2018 and pays $1 in dividends per share, your yield will be $1 for the one share you bought for $20, which means your ROR is 5%. $1 earnings /$20 cost = 5% -You are compensated for buying an out-of-favor stock - the price was low when considering the fact that the company made a nice profit.... 10% return not bad!

life insurance- common terms

-Face amount — amount of insurance provided at death stated in the contract (Also Called "Death Benefit" or Coverage Amount) -The owner of the policy is referred to as the "policy owner" or "policy holder" -Beneficiary—the individual or entity designated to receive the proceeds -Insured - The insured is the person who the life insurance contract is underwritten on, and whose death triggers a claim. -Important note: The policy owner and the insured do not have to be the same person. For example, you can be the owner of a life insurance policy issued on the life of your spouse who is the insured. -A medical questionnaire may be required or a medical exam, when applying for coverage and insurance companies uses this info to determine whether they will insure you, and your premium rate.

factors resulting in inactivity

-Hyperbolic Discounting - human tendency to sharply discount (reduce the value of) the future. Consequences that occur at a later time are thought to be not so bad - because they are occurring much later. Example: 25% of persons who have a 401(k) plan fail to contribute at all. -Status Quo Bias - Status quo bias is a condition where a previous decision or action was taken, and the employee prefers to remain with the status quo and NOT change, even though facts now all point to action and change, thus leading to irrational behavior. -Procrastination is closely related to status quo bias.. Where you know what you should do but simply can't act (inertia). -Choice Overload - paralysis of analysis, too many fund choices, distribution options, etc. -Loss Averse behavior - people hate to lose more than they like to win. People feel remorse by a factor of 2 or 2.5 times the satisfaction they feel from a gain.

determining what you can afford

-Lenders have a maximum amount they are willing to lend. -You need an idea of the maximum amount the lender will lend. -There are three common methods used to determine how much loan will be offered. -We will cover only Method One: The "PITI-to-Monthly Gross Income Amount" (28% rule) -PITI stands for Principal & Interest (your mortgage), Real Estate Taxes, and Insurance. The rule says that the total of your mortgage being requested (P&I) + Taxes that will be paid + Insurance payments on the home (homeowner's coverage) cannot exceed 28% of your gross monthly income. Example: Gross monthly Income = $5,000 Mortgage Requested from Bank = $1,000 (P&I) Monthly Payment Real Estate Tax = $100 monthly going to pay county taxes Insurance on Home = $150 monthly Total monthly estimated payments will be = $1,250 Total monthly payments as a % of Gross Income = 25% Result: Amount is below the 28% "ceiling", so the bank is likely to issue the mortgage

retirement "risks"

-Longevity risk - depleting assets before you die. -Household "shocks" - Could be a natural disaster, unexpected legal expense, grand-child or child needing financial assistance -Tax increases by federal, state, local governments -Survivor Risk - one spouse survives but has few assets to provide support for h/her remaining life -Investment Related Risks: ØSequence of Returns Risk ØInflation Risk ØPoor Returns on stocks and bonds

Growth Stocks vs. Value Stocks

-Oddly, stocks which are trading at lower P/E Ratios are commonly referred to as "value stocks". -The P/E Ratio for these stocks is low, and the stock is considered inexpensive relative to the company's earnings, dividend payments, sales, etc. -The low valuations (low P/E) may be due to some news or event that indicates the company may not be doing well (legal issues, bad press, poor earnings report). -Value Investors look for companies that have fallen out of favor but still have good fundamentals. They buy these stocks at prices below the stocks' average historic levels or below the current levels in their industry groups. The less you pay for a stock, the more you'll receive in terms of rate of returns when the company pays dividends, or appreciates in value when the public discovers that the future is bright for the company and the price of the stock rises. -Many value investors believe that stocks become value stocks when investors overreact to negative events. -The idea behind value investing is that stocks of good companies may bounce back in time when the true value is recognized by other investors. But this recognition of value may take time to emerge and, in some cases, may never materialize.

First Question- DO you Need life insurance

-Probably- •Married with single wage earner •Children (support, education, health needs) •Special Needs situations •Large Taxable Estate -Good to have coverage if- -Spouse, parents, or others will suffer as a result of your death -You need liquidity to pay off debts, business needs -To fund charitable bequests -Maybe not necessary- -single/no children -working couples -independently wealthy (retired)

What is "THE MARKET"

-S&P 500 is used as the benchmark which tracks the 500 largest companies traded in the US and is only ONE measure of performance for US stocks. -Russell 2000 index tracks the smallest 2,000 companies -Russell 1000 index comprise of around 92% of total value of all listed US stocks, 1,000 largest stocks in US -Russell 3000 includes russell 1000 + russell 2000 (both big and small) Large cap= $10 billion+, Mid cap= $2B to $10 B, Small cap= $300 million to 2B ( some companies use diff. numbers to describe large, mid, and small cap

systematic and unsystematic risks

-Systematic Risk (Market-Related or "Non-diversifiable Risk")—portion of a security's risk or variability that cannot be eliminated through diversification. You are compensated in the form of stock returns for this risk. Stated another way, you "get paid" in the form of stock returns (stock appreciation and dividends) just for being in the market and allowing the market to use your money for capital needs. The market "rewards" you for this risk. The downside is that when the overall market falls (recessions), your investments will usually feel the impact. Your goal in that case is to CONTROL and MINIMIZE the magnitude of the losses by having a well-constructed portfolio. We'll talk about that! -Unsystematic Risk (or Firm-Specific or Company-Unique Risk or "Diversifiable Risk"). This a type of risk or variability of returns that can be eliminated with diversification. You are not compensated for keeping diversifiable risk because you can eliminate it by investing in a wide number of companies instead of overconcentrating your holdings in one company. -Two easy ways to diversify away unsystematic risk - 1 - hold more than one stock, hold dozens, or better yet, hundreds... maybe even thousands.. easy to do using mutual funds, and 2 - hold different TYPES of stocks, domestic, international, large company, small company.

The price/earnings ratio

-The Price Earnings Ratio (P/E Ratio) a popular way to assess the value of a company. -The calculation is Current Price of Stock divided by Earnings Per Share. -Companies with higher expected growth rates relative to some benchmark (e.g. S&P 500) will have a higher P/E Ratio than companies with a lower expected growth rate. -These stocks are commonly referred to as "growth stocks". -While the P/E Ratio of the S&P 500 may be the range of 10 - 30, the P/E Ratio of a growth stock could be 35, 50 or even higher. The PE Ratio of companies like Amazon and Netflix can range from 100 to 200 or more - why? Expectations of future profits and growth. -Growth companies include those that introduce new innovative products which are expected to increase earnings in the future. -People who pay high Prices relative to the Earnings Per Share believe there is a bright future. They believe the company will pay high dividends, or the stock will appreciate, making it worth the high cost they've agreed to pay for the stock. Why would you pay a lot for a stock if you didn't believe earnings would grow?

Part A: Liability for Bodily Injuries and Property Damage Caused by Accidents

-When you are found legally responsible for a car accident, bodily injury liability coverage is the part of your insurance policy that pays for the costs associated with injuries to the other person or people involved. -There are really two components, Bodily Injury and Property Damage. -The policy covers you, your family and anyone driving your car with your permission -The NC Minimum is $30,000/person; $60,000 all persons; $25,000 property damage -policy liability limits are usually quoted as "split liability limits" (100/300/100) which is $100,000 $300,000 and 100,000 -the first number is the total amount the insurer will pay for each person's injury, resulting from the auto accident -the Second number is the overall maximum that will be paid for all injuries, regardless of the number of people injured -the Third number is the total amount that will be paid for property damage caused by your vehicle.

Earnings Multiple Approach

-asks how much of a lump sum payment at death is needed to replace the individuals lost annual income, and how long? Example: If 25 years additional income is needed; multiply the deceased person's salary by a factor (see table left). Assuming returns after taxes and inflation will be 5%, you would multiply the salary by the factor of 14.09 to arrive at a lump sum amount of insurance needed to provide support.

role of attorney in closing

-attorney: the individual that brings both parties together in their office to take care of the closing. (where the transaction happens) -Homebuyers should contact an attorney to review the documents and advise them during the closing. Attorney fees are typically around $400 to $500. -Title is transferred to the new owner by way of a Deed. There are different types of deeds. The "Warranty Deed" is the cleanest and safest form of transfer. It guarantees that the title is free of any previous mortgages or other encumbrances (restrictions or claims against the property). -In contrast, a "Quitclaim Deed" has risks. It essentially transfers whatever ownership the previous owner had in the property, to the new owner. If the previous owner had a bad title, you'll have a bad title. Who would ever accept a quitclaim deed? -A title search is conducted by the attorney or title insurance company. They will search all records containing a history of ownership and encumbrances on the property. There is a fee for the title search. -Title Insurance is purchased. This is an insurance policy that protects the lender (generally always required by a mortgage company), and the buyer (if purchased) in the event problems with the title is discovered later (e.g. forged deed).

stock returns- two types

-capital gains (the appreciation of the stock) -Dividend income Example: Stock Purchase Price Jan. 1 = $25 Price one year later = $35 Dividend Received during year = $2 What is the dividend yield? Dividend/ beg. stock price $2/$25= 8% what is the capital gains yield? increase in price/beginning stock price $35-$25/$25= $10/$25= 40$ cap gains yield

term vs. permanent life insurance

-for most individuals on a limited income and budget, term insurance is the better alternative. -low cost for term coverage "Buy term and invest the difference" -High cost permanent life premiums can lead to less coverage than you actually need

term insurance and its features

-pays the death benefit if insured dies during the coverage period -its primary advantage is affordability -primary disadvantage is that the cost increases each time the policy is renewed.

Part C: Uninsured Motorist's Protection Coverage

-protects you or anyone driving your car with permission when the other driver doesn't have liability coverage that would have otherwise been used to pay for losses (injuries and property damage.) -Uninsured motorist coverage will pay up to the policy amount of your liability insurance for injuries and property damage to your car that would have been the responsibility of the other driver.