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Chapter 6: Investment Planning - Coggle Diagram
Chapter 6: Investment Planning
1. Why Establish an Investment Program? (LO1)
Setting Investment Goals
Be Specific & Measurable
Key Questions:
What for? How much?
How to obtain? How long?
How much risk?
Performing a Financial Checkup
Balance your budget
Pay off high-interest debt first
Build an emergency fund (3-9 months' expenses)
Have access to other liquid cash sources (Line of Credit, Credit Card Advance)
Getting the Money to Start
Willingness to sacrifice/spend less
Participate in savings programs (Payroll deduction)
Save extra for 1-2 months/year
Use windfalls (gifts, inheritance)
Time Value of Money
Small, regular sums grow significantly over time.
The rate of return makes a huge difference (e.g., 3% vs 7% on $2,400/year).
2. Factors Affecting Investment Choices (LO2)
Safety & Risk
Safety = Minimal risk of loss
Risk = Uncertainty of outcome
Potential return is directly related to risk.
Speculative investments = High risk.
The Risk-Return Trade-Off
Higher risk -> potential for higher return.
Lower risk -> probability of smaller return.
Example: Savings Account (Low Risk/Low Return) vs. Equities (High Risk/High Return)
Components of Risk
Inflation Risk
Interest Rate Risk
Business Failure Risk
Market Risk
Global Investment Risk
Investment Income
Safe & Predictable: Savings Acc., CDs, Govt. Bonds, T-bills
Higher Potential: Corporate Bonds, Preferred Stocks, Income Mutual Funds, Real Estate
Investment Growth
Increase in value over time.
Common Stocks (Growth Companies), Mutual Funds, Bonds, Real Estate
Speculative: Gemstones, Collectibles
Investment Liquidity
Ease of buying/selling without affecting value.
Example: Real estate is illiquid; stocks are liquid.
Type of Investments
Savings Account
safe, convenient, PIDM protection
low return, some fees/min balance
Fixed Deposits (FD
)
Conventional : no interest 91-3m), early withdrawal penalty
Islamic :
al-Mudharabah
, no interest
Shares
High return potential, liquid, disversification
Tips : research, diversify, CDS + trading account
ETFs
Track index/assets
Diversification + traded like stocks
Bonds
Fixed income, coupon rate, maturity 1-30 years
Types : Government, Corporate, Islamic
Property
Less volatile, long-term growth
Factors : price, location, developer, condition
REITs
Real estate funds, steady dividends
Liquid + diversified
Unit Trust
Equity, Income, Islamic, Property funds
Diversification, pro management, fees
Gold
Preserve value, hedge vs inflation, safe haven
Forms: billion, dinar, digital gold