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short term financial objectives |
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1-3 years: finishing school, getting a job, building up a cash reserve, cleaning up or establishing a credit rating, getting out of debt |
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starting salary for people graduating this semester (SP 09) |
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annual cost of health insurance for a single employee |
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3-6 months worth of expenses |
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medium term financial objectives |
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3-10 years: getting married, going on a big vacation, buying a house, having kids |
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average cost for a 150 person wedding in the US |
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the average existing home price in Austin in 2008 |
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current cost of raising a kid from birth through age 17 |
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long term financial objectives |
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10 or more years: paying for your child's tuition, retiring |
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public 4 year $57,332, private $136,528 future public $229,100, private $545,600 |
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the risk of losing money because of events that occur in a single firm; mitigate this risk by DIVERSIFYING. hold of portfolio of 40 randomly selected stocks. |
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the risk of loss during overall economic downturns. to mitigate this risk DIVERSIFY OUTSIDE OF THE US. |
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the risk of losing the purchasing power of your capital because it gets eaten up by inflation. mitigate this risk by investing in stocks that return profits above inflation |
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the average inflation rate over the last 20 years |
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from 1926-1996 average annual returns of large cap stocks |
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average annual return on small cap stocks form 1926-1996 |
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the risk that interest rates will rise above your bond coupon rate, therefore the bond price will fall, and no one will want to buy your bond when you want to sell it. mitigate this risk by NOT BUYING LONG TERM BONDS. |
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the risk that you will be unable to sell your investment at the time you need to, for the price that its worth. mitigated by matching the TIME HORIZONS of your investments with the time horizons of your financial objectives. |
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savings accounts; money market accounts; money market mutual funds; Certificates of Deposit (CDs), short-term treasury bills |
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short-and intermediate-term bonds; short-and intermediate-term bond mutual funds; conservative stock mutual funds, individual blue chip stocks, Employee Stock Purchase Plan (ESPP) |
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stock mutual funds, intermediate-term bonds, intermediate- and long-term bond funds, individual stocks, real estate |
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the percentage of US households who held at least 1 mutual fund in 2003 |
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invest in firms that are growing faster than their industries in order to earn above-average capital gains (especially during bull markets) |
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invest in IPOs and small firms that are growing faster than their industries. These funds attempt to earn significantly above-average returns |
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invest in firms they consider to be undervalued, in the hope of earning above average returns. If the analysts determine that the "true" value of the firm's stock is more than the current price, they consider the firm to be undervalued by the market, and they add it to their fund. Value funds attempt to reap above average, long-term capital appreciation, as well as dividend income. |
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invest in firms with market caps with less than half-a-billion dollars in an attempt to earn above average capital gains. Perform extremely bad during bear markets. |
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invest in steadily growing blue chip companies that pay dividends. They attempt to earn long-term capital appreciation with higher current income (from the dividends) than growth funds earn |
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income and equity-income funds |
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invest in firms that pay high dividends in order to ensure that current income stays ahead of inflation. They do not earn significant capital appreciation. They are for investors who need income. |
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invest in firms that are all within a particular industry. Lots of eggs in one basket. |
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invest in firms outside the US. They are useful for diversifying beyond the US stock market, and can mitigate losses from US economic downturns |
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invest in funds that are in developing economies. In terms of performance and risk, they are similar to US-based aggressive growth funds (that is small caps) |
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invest in bonds. Bond funds focus on earning income while preserving the invested capital. Diversify. Risk is that their values can fall as interest rates rise. |
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can own either stocks or bonds. Passively managed. Meant to mirror a particular stock or bond index. Very low expense ratios. |
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provides investment information, analysis, and advice. |
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executes transactions according to your instructions |
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an order to buy or sell a stock or bond as soon as your order reaches the market. This is the most common kind of trade |
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when you specify the exact price at which to execute the market order |
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an order to buy or sell at no worse that the specified price |
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borrowing money from your broker. magnifies any gains or losses. |
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borrowing stock from an investor, then selling in the hope that the price will fall. Thus, when its time for you to repay the stock. you have to repay a lesser amount. |
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Term
Dow Jones Industrial Average (DJIA) |
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Definition
the oldest index. It tracks the cost to purchase stocks of the largest 30 US companies. Fell 33.8% in 2008. |
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an imaginary collection of stocks from the 500 largest and most reputable US firms. It declined 38%% in 2008. |
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tracks the performance of 2000 small US firms. Year to date its down 46.9% |
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Russell 3000 and Wilshire 5000 |
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track the total stock market |
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difference between traditional 401K and Roth IRA |
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Definition
401K is taxed at withdrawal, IRA is taxed at contribution. Neither are taxed on earnings. |
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