Advanced Investments

There are two main goals for this course. The first goal is for you to become an informed consumer of the plethora of investment information out there. The second goal is for you to be able to identify the pros and cons of a specific investment approach and then make a conscious choice based on a full understanding of the trade-off between alternatives. In order for you to be able to optimally react and make conscious choices, it is important for you to have a well-defined objective or goal in mind. This lecture will identify a set of nontrivial potential goals an investor might have. Return Targets and Risk • Think about an appropriate set of goals and objectives you might have as an investor. That is, what are the different aspects of investment performance you might care about? These objectives include things like the following. ○ Return targets/benchmarks and risk ○ Time horizon and desire for bequests ○ Growth versus income, liquidity • The first item is risk and return. If risk and return were considered separately, everyone would make trivial choices: Everyone wants high return and no risk. But there are very few things you can do that will increase your average returns without increasing risk. • The most notable thing you can do to increase return without bearing more risk is to invest with pretax dollars via a pension fund, 401(k), or individual retirement account. These accounts either let you invest with salary before it is taxed or let you deduct your investment from your taxable income. You will be taxed eventually, but always in the future. This is better than getting taxed