Page 569 - Introduction to Business

CHAPTER 15 Personal Financial Planning 543

considered relatively low risk, have expected but limited growth potential, and gen-
erally pay moderate dividends. About 200 value-oriented mutual funds disap-
peared during the Internet boom, when technology stocks were very popular. In the
aftermath of the technology stock bust, value stocks regained some popularity.
Stocks continually rise and fall in price. If you are bothered by an investment
that constantly fluctuates in value, then the stock market is not for you. Sometimes
stock prices fall dramatically, as happened in the stock market crash of October
1987, when the market dropped 508 points, or 26 percent, in one day. In the follow-
ing years, however, stock prices increased dramatically, greatly offsetting the 1987
downturn. They then plunged in late summer of 1990 as a result of the invasion of
Kuwait and the sharp increase in oil prices. NASDAQ first closed over 2000 on July
16, 1998. In March 2000, NASDAQ went above 5000 when the tech bubble reached
its zenith. Only one year later, the NASDAQ was down to the 1600 level. The market
had a significant drop after the September 11, 2001, terrorist attack.
Over the past 65 years, common stocks have returned an average of 12 percent
annually. One of the keys to successfully investing in stock is to maintain a balanced
portfolio of stocks. Stocks themselves should be only one component in your total
portfolio of savings and investments. Let us assume that stocks represent 50 per-
cent of all of your savings and investments. The other 50 percent of your total port-
folio may consist of Treasury securities, bank CDs, and real estate. The 50 percent
invested in stock should be allocated among different types of stock, possibly three
or more different types of mutual funds.
A recommended approach to acquiring a balanced portfolio is to invest in a
mutual fund, especially an index fund. Instead of acquiring individual shares of
stock, you may purchase shares of a mutual fund, which itself is made up of shares
of many different companies. Some basic investment guidelines to follow are
Determine your investment goals and your risk tolerance level.
Set your target-level annual return for the next three years.
Decide how much you can afford to invest each year.
Keep track of your investment performance.
One final consideration in making equity investments is your purchasing strat-
egy. A popular approach is called dollar cost averaging. This method seems to work dollar cost averaging An investment
well and is extremely simple. You ignore price trends and invest a fixed amount at approach where the investor ignores
price trends and invests a fixed amount
regular intervals. Thus, some shares will be acquired at relatively high prices and
at regular intervals
some shares at low prices.
The opposite of the dollar cost averaging approach is the market timing market timing approach An investment
approach. In market timing, you attempt to purchase shares when their price is low strategy where the investor attempts to
purchase shares when their price is low
and to sell when their price is high. Many investment firms offer market timing
and to sell when their price is high
services. Some are much more successful than others. If you use a market timing
service, be sure to investigate the past performance of the service.

Your Home
Home ownership remains the great American dream. Thanks to mortgage loans,
the dream has become reality for many Americans. A mortgage loan supplies the
cash many people need to purchase a home. The loan is usually repaid over a long
period of time, usually 15 or 30 years. Mortgage is defined as a claim on property, mortgage A claim on property, given to
given to a person who has loaned money in case the money is not repaid when due. a person or institution that has loaned
money in case the money is not repaid
The term mortgage has historically carried an implication of servitude. It is when due
derived from an old French word meaning “death pledge,” or pledge payable on
death. The term amortize is also derived from an old French word, which meant “to

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