Table Of ContentINVESTINGDEMYSTIFIED
Paul J. Lim
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DOI: 10.1036/0071444122
PREFACE
Thisbookisgearedforalltheinvestorsandwould-beinvestorsouttherewho
know the importance of managing their money for the future but who aren’t
entirelycertainhowtogoaboutit.That’sprobablythemajorityofthegeneral
population.PublicopinionpollstellusthatmoreAmericansthinkandworry
about money—and how to invest it—than any generation in this country’s
history. Part of this, as we’ll explain, is due to the fact that more of us are
responsibleforourownfinancialfuturesthaneverbefore.Yetfewerthanone
in five of us feel like we’re doing very well at this incredibly important task,
whichexplainswhyBabyBoomersandmembersofGenerationXworrymore
about their financial well-being than their own mortality.
But while investing is now a daily part of our national conversation, the
language of investing and some basic investing concepts are still foreign to
many of us. The sad reality is, no one really teaches us how to become in-
vestors. Few high schools these days even offer economics courses, let alone
lessons in personal finance or investing. Unless your parents were investors
themselves and taught you the ins and outs of the stock and bond markets,
you were probably left to figure it out on your own.
Chances are, you were thrown head first into the markets—with little clue
about how to stay afloat—the minute you started a new job and enrolled in
the company’s 401(k) retirement plan. Those enrollment papers not only ask
you if you want to participate, but what investments you want to put money
intoandhowmuchmoneyyouwanttoinvestineach.Termslike‘‘small-cap
growth fund’’ and ‘‘long-term government bonds’’ are thrown at us as if we
intuitivelyunderstandwhatallofitmeans.Yetinthisdayandage,wehaveto
know what these things mean to take control of our financial futures.
Hopefully, this book will answer some of your basic questions and take
some of the mystery out of investing. When you boil it down, learning to
ix
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CONTENTS
Preface ix
PART 1: GETTING READY 1
CHAPTER 1 Why We Invest 3
CHAPTER 2 Before You Get Started 15
CHAPTER 3 Demystifying the Language
of Investing 30
CHAPTER 4 What Kind of Investor Are You? 58
PART 2: YOUR ASSETS 77
CHAPTER 5 Demystifying Stocks 79
CHAPTER 6 Demystifying Bonds 109
CHAPTER 7 Demystifying Cash 135
CHAPTER 8 Demystifying Mutual Funds I 146
CHAPTER 9 Demystifying Funds II 163
CHAPTER 10 Demystifying Other Assets 185
vii
viii CONTENTS
PART 3: SELECTING YOUR ASSETS 213
CHAPTER 11 Demystifying Stock Selection 215
CHAPTER 12 Demystifying Bond Selection 242
CHAPTER 13 Demystifying Mutual Fund Selection 260
PART 4: ORGANIZING YOUR ASSETS 287
CHAPTER 14 Demystifying Asset Allocation 289
CHAPTER 15 Demystifying Asset Location 309
Final Exam 325
Glossary 333
Answer Key 353
Index 357
x PREFACE
invest is really a four-step process. First, you have to figure out who you are
andwhatkindofinvestoryouplantobe.Then,youhavetobecomefamiliar
with the assets that serve as the building blocks to an investment portfolio.
Then you have to figure out how to research and select those assets. And fi-
nally, you have to learn how to mix and organize those assets into a com-
prehensive and diversified portfolio that will serve your specific set of needs.
Let’s outline how we hope to address these topics in the coming chapters.
Getting Ready
In Part One, ‘‘Getting Ready,’’ we want to familiarize you not only with the
basic concepts of investing—like risk and returns—but also investing jargon.
WebegininChapter1withadiscussionon‘‘WhyWeInvest.’’That’sfollowed
in Chapter 2 with laying the groundwork. We talk about all the things you
have to consider ‘‘Before You Get Started.’’ In Chapter 3 we focus on ‘‘De-
mystifyingtheLanguageofInvesting,’’inordertoexpediteourconversation
aboutkeyinvestingtermsandconcepts.Andthen,inChapter4,‘‘WhatKind
of Investor Are You?’’ we discuss what strategies may work well with your
sensibilities as a saver and investor.
Some investors find success by investing directly in the stock market by
buying shares of individual companies. Others prefer to go through pro-
fessionally managed mutual funds. Some have built nice nest eggs by buying
andholdingadiversifiedbasketofstocksandfunds.Othershavedonewellby
concentrating their bets on only their best ideas. Some make money by fo-
cusing on those investments that offer the greatest growth. Still others focus
not on the best investments, but the best-priced investments. In other words,
they go bargain hunting.
History has shown that money can be made in all sorts of ways, and we’ll
outline some of those different schools of investing for you.
Your Assets
In Part Two, ‘‘Your Assets,’’ we turn our attention to the building blocks of
investing.Youcanmakemoney,aswejustdiscussed,instocksandbonds,just
as you can in real estate and gold. So we will discuss the basic types of in-
vestmentsyoucanchoosefrom,outliningtheirrisksandrewards.InChapter5
we’ll focus on ‘‘Demystifying Stocks.’’ In Chapters 6 and 7 we turn our
PREFACE xi
attention to ‘‘Demystifying Bonds’’ and ‘‘Demystifying Cash.’’ And in
Chapters8and9wewillspendtimewithperhapsthemostpopularinvestment
for most households, mutual funds, in ‘‘Demystifying Mutual Funds I and
II,’’ Then, in Chapter 10, we turn our attention to ‘‘Demystifying Other
Assets,’’ including real estate, commodities, and a new class of fundlike
investments we will call ‘‘unmutual funds.’’
Selecting Your Assets
InPartThreeweturnourattention‘‘SelectingYourAssets.’’Wewilloutline
some basic ways investors can research and sort through the thousands of
choices before them, starting with stocks and bonds and then working our
way to the most popular investment vehicles, mutual funds. We will cover
those topics in Chapters 11 through 13.
Organizing Your Assets
InPartFour,wewilladdressissuessurrounding‘‘OrganizingYourAssets.’’In
Chapter 14, ‘‘Demystifying Asset Allocation,’’ we discuss the importance of
creating an asset allocation strategy, and talk about ways to determine what
therightmixofstocks,bonds,andcashisforyou.Andfinally,inChapter15,
‘‘Demystifying Asset Location,’’ we go into the different types of asset ac-
counts in which you can hold your stocks and bonds, and the strategies you
might employ.
Again,justasthereisnosingleinvestmentthat’srightforeveryone,thereis
no single investment account that’s best for all investors. Some may find it
more appropriate to invest primarily in a Roth IRA. Others will find tradi-
tional IRAs better. Still others may decide that it’s beneficial to invest some
money in a regular, taxable brokerage account.
Bytheendofthisbook,nomatterwhoyouareorwhatkindofinvestments
you choose, we hope you’ll feel more comfortable as an investor—and we
hope you’ll start to invest in a manner that is both appropriate for your cir-
cumstances and suitable to your sensibilities.
INVESTING DEMYSTIFIED
PART ONE
Getting Ready
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