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Investment Planning
Chapter 11
How Will This Affect Me?
Investing is the means by which many important financial goals in life are achieved. This chapter
discusses how to determine the amount of investment capital is needed to reach common
financial goals and explains how to invest for retirement, to fund major expenditures, to earn
needed income, and to establish tax shelters. The market context in which investing occurs is
described, and how to buy and sell investments is explained. A framework for evaluating
investments is also presented, which includes how to describe, monitor, and manage a portfolio.
Sources of investment information are discussed, as well as some of the useful investing tools
available online. After reading this chapter you should be able to plan your investments to better
meet your financial goals.
Chapters 11, 12, and 13 are the most important in the text, at lease I think so. This chapter gives
an overview of the way to invest, the terminology of investing, and the various exchanges where
you invest. To get the most from the chapter, the students need to do some investing. Not with
real money, but investing in real securities. Therefore, I suggest that you create teams of about
four students each and “give” them $100,000 to manage for at least one month during the
semester. The student can send an email to their “broker” to execute their trades. I suggest that
you allow only trades at the end of day prices, the closing prices, and not trades during the day.
You can assign one team to be the broker or if available, a student assistant can be the broker.
The broker will have to keep record of various buys and sells. The teams can compare the value
of their portfolio at the end of period and a winner declared. Perhaps you can give a prize such
as a five dollar gift certificate at Wendy’s or McDonalds or wherever. To prevent students from
just buying and holding the entire time, I would require trades once a week and portfolios of at
least five companies. You could use a short period in the class once a week to ask what the
students are investing in just to assess the level of interest and activity. And you may get an idea
of where you will invest. Or not.
Learning Objectives
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.
11-1 Discuss the role that investing plays in the personal financial planning process and identify
several different investment objectives.
11-2 Distinguish between primary and secondary markets, as well as between broker and dealer
markets.
11-3 Explain the process of buying and selling securities and recognize the different types of
orders.
11-4 Develop an appreciation of how various forms of investment information can lead to better
investing skills and returns.
11-5 Gain a basic understanding of the impact of the Internet on the field of investments.
11-6 Describe an investment portfolio and how you’d go about developing, monitoring, and
managing a portfolio of securities.
Financial Facts or Fantasies?
These may be used as “teasers” to get the students on the right page with you. Also, they may be
used as quizzes after you covered the material or as “pre-test questions” to get their attention.
• An aggressive investor would short sell a stock if he or she expects its price to go down.
Fact: Short sales are made in anticipation of a drop in the price of a security; an investor makes
money on a short sale when prices decline. However, selling short is quite risky and should only
be done by risk-hardy, well-informed investors.
Financial Facts or Fantasies?
These may be used as a quiz or as a pre-test to get the students interested.
1. True False Stocks listed on the New York Stock Exchange are traded in the over-the-
counter market.
2. True False If you lose a lot of money because a broker gave you a poor
investment recommendation, you can recover most or all of your
loss by filing a claim with the Securities Investor Protection
Corporation.
3. True False An aggressive investor would short sell a stock if he or she expects
its price to go down.
4. True False You should pay little attention to annual stockholders’ reports
because they are so biased.
5. True False Coming up with a sound asset allocation plan will likely have more
of an impact on long-term investment return than the specific
securities you hold in your portfolio.
Answers
Financial Planning Exercises
1. Calculate amount to invest to meet objectives. Use Worksheet 11.1 Phoebe Jones is now
employed as the managing editor of a well-known business journal. Although she
thoroughly enjoys her job and the people she works with, what she would really like to do
is open a bookstore of her own. She would like to open her store in about eight years and
figures she’ll need about $50,000 in capital to do so. Given that Phoebe thinks she can make
about 10 percent on her money, use Worksheet 11.1 to answer the following questions.
a. How much would Alison have to invest today, in one lump sum, to end up with $50,000
in eight years?
b. If she’s starting from scratch, how much would she have to put away annually to
accumulate the needed capital in eight years?
Problem 1 Chapter 11, Parts a and b
1. $
2. 10 %
A.
3.
•based on 8
10 %
4.
•
B.
5. $
6.
•based on 8
10 %
7.
•
8.
•
9.
•based on 8
2.144
2.144
23,325.37$
-
line 1 - line 7
Future Value Annuity Factor, from Appendix B, computed here
years to target date and a projected average
50,000.00$
years of target date and a projected average
return on investment of
Terminal Value of Initial Investment
line 5 × line 6
Balance to Come from Savings Plan
Required Lump Sum Investment
line 1 ÷ line 3
Making a Series of Investments over Time:
Amount of Initial Investment, if any (see Note 2)
Future Value Factor, from Appendix A, computed here
Projected Average Return on Investments
Finding a Lump Sum Investment:
Future Value Factor, from Appendix A, computed here
years to target date and a projected average
return on investment of
Invest lump sum to end up with $50,000 in eight years.
Financial goal:
Targeted Financial Goal (see Note 1)
50,000.00
c. How about if she already has $10,000 socked away; how much would she have to put
away annually to accumulate the required capital in eight years?
Using a financial calculator:
50,000 +/-
FV
10,000
PV
8
N
10
I/YR
PMT
$2,497.76
Problem 1 Chapter 11, Parts c
1. $
2. 10 %
A.
3.
•based on 8
10 %
4.
•
B.
5. $
6.
•based on 8
2.144
23,325.37$
10,000.00
Note 2:
If you’re starting from scratch—i.e., there is no initial investment—enter zero on
line 5, skip lines 6 and 7, and then use the total targeted financial goal (from line 1)
as the amount to be funded from a savings plan; now proceed with the rest
of the worksheet.
some target date in the future.
years of target date and a projected average
Required Lump Sum Investment
line 1 ÷ line 3
Making a Series of Investments over Time:
Amount of Initial Investment, if any (see Note 2)
Future Value Factor, from Appendix A, computed here
Projected Average Return on Investments
Finding a Lump Sum Investment:
Future Value Factor, from Appendix A, computed here
years to target date and a projected average
return on investment of
Invest lump sum to end up with $50,000 in eight years.
Financial goal:
Targeted Financial Goal (see Note 1)
50,000.00
d. Given that Alison has an idea of how much she needs to save, briefly explain how she
could use an investment plan to help reach her objective.
2. Rationale for stock exchange listings.
Why do you suppose that large, well-known
companies such as Apple, Starbucks, and Facebook prefer to have their shares traded on
the NASDAQ rather than on one of the major listed exchanges, such as the NYSE (for
which they’d easily meet all listing requirements)? What’s in it for them? What would
they gain by switching over to the NYSE?
3. Types of financial markets. What is the difference between primary and secondary
markets and between broker and dealer markets?
4. Market and limit orders
.
Thomas Smith places an order to buy 100 shares of Google.
Explain how the order will be processed if it’s a market order. Would it make any
difference if it had been a limit order? Explain.
5. Finding and applying market index quotes. Using resources like The Wall Street Journal
or Barron’s (either in print or online), find the latest values for each of the following
market averages and indexes, and indicate how each has performed over the past six
months:
6. Obtaining stock market quotes. Using the Internet site for Yahoo! Finance (http://finance
.yahoo.com), find the 52-week high and low for Coca-Cola’s common stock (symbol KO).
What is the stock’s latest dividend yield? What was Coca-Cola’s most recent closing price,
and at what P/E ratio was the stock trading?
7. Interpreting stock report information.
Using the Value Line Investment Survey report in Exhibit 11.5, find the following
information for Apple.
a. What was the amount of revenues (i.e., sales) generated by the company in 2017?
b. What were the latest annual dividends per share and dividend yield?
c. What is the earnings per share (EPS) projection for 2019?
d. How many shares of common stock were outstanding?
e. What were the book value per share and EPS in 2017?
f. How much long-term debt did the company have in the third quarter of 2018?
8. Choosing an online broker. Based on Exhibit 11.3, which online broker do you
believe would be best for you? Explain your rationale.
9. Tracking portfolio performance
.
Use Worksheet 11.2 to help Max and Heidi Wood, a
married couple in their early 30s, evaluate their securities portfolio, which includes these
holdings.
a. IBM. (NYSE; symbol IBM): 100 shares bought in 2011 for $170.40 per share.
b. Procter & Gamble (NYSE; symbol PG): 150 shares purchased in 2010 at $61.85 per
share.
d. Google (NASDAQ; symbol, GOOG): 200 shares purchased in 2014 at $519.98 per share.
e. The Woods also have $8,000 in a bank savings account that pays 1.25 percent annual
interest.
1. Based on the latest quotes obtained from the Internet, complete Worksheet 11.2.
2. What’s the total amount the Woods have invested in these securities, the annual income
they now receive, and the latest market value of their investments?
Name(s): Date: 29/10/2018
Type of
Investment
Description of
Investment
Vehicle
Date
Purchased
Amount of
Investment
(Quote—$
Amount)
Overall Return
Latest Value
Cumulative Amount
of
Annual Income
from Dividends,
Interest, etc.
Common Stock 100 sh, IBM 2011 $17,040 -29.79% 11,964.00$ 628.00$
Common Stock 150 sh, PG 2010 $9,278 42.66% 13,236.00$ 430.50$
Common Stock 200 sh, GOOG 2014 $103,996 96.18% 204,016.00$ -$
Bank CD Rate 1.25 2017 $8,000 0.00% 8,000.00$ 100.00$
Totals Totals $138,314 237,216.00$ 1,158.50$
Instructions: List number of shares of common and preferred stock purchased as part of the description of securities held; then put the price paid
per share under the “Quote” column
and total amount invested (number of shares × price per share) under the “$ Amount” column. Enter the principal (par) value of all bonds held in
place of number of shares: “$
Amount” column for bonds = principal value of bonds purchased × quote (for example, $5,000 × .755 = $3,775). List mutual funds as you did for stock.
For real estate, enter total
market value of property under “Quote” column and amount actually invested (down payment and closing costs) under “$ Amount.” Ignore the
“Quote” column for savings vehicles.
AN INVENTORY OF INVESTMENT HOLDINGS
Max and Heidi Wood
YOU CAN DO IT NOW
The “You Can Do It Now” cases may be assigned to the students as short cases or problems.
They will help make the topic more real or relevant to the students. In most cases, it will only
take about ten minutes to do, that is, until the student starts looking around at the web site. But
they will learn by doing so.
YOU CAN DO IT NOW
How’s the Market Doing Right Now?
YOU CAN DO IT NOW
Get a Quick Perspective on Your Asset Allocation
YOU CAN DO IT NOW
Track Your Portfolio for Free
Financial Impact of Personal Choices
Read and think about the choices being made. Do you agree or not? Ask the students to discuss
the choices being made.
Nancy and Elliot Get Serious About Their Retirement Asset Allocation
Test Yourself
11-1 Briefly discuss the relationship between investing and personal financial planning.
11-2 What’s the difference between an investment plan and a capital accumulation plan?
11-3 Why is it important to have investment objectives when embarking on an investment
program?
11-4 How does a primary market differ from a secondary market? Where are most
securities traded: in the primary or the secondary market?
11-5 What is the difference between the broker and dealer markets?
