Money Management Skills



Lecture 4: The Key Financial Instruments

PDWXUHIRUDQXPEHURI\HDUV,QJHQHUDOERQGVZLOOJLYH\RXD

KLJKHULQWHUHVWUDWHWKDQOLTXLGLQYHVWPHQWVVRRQFH\RX¶YH¿OOHG

up your emergency savings account, start thinking about putting

PRQH\LQWRERWKERQGVDQGVWRFNVWRHDUQDKLJKHUUHWXUQ

% ,QDGGLWLRQERQGFRXSRQSD\PHQWVDUHWD[HGDWWKHRUGLQDU\LQFRPH

WD[UDWH2WKHUW\SHVRILQYHVWPHQWVVXFKDVVWRFNVRUH[FKDQJH

WUDGHGIXQGVZLOOSD\GLYLGHQGVRUJURZLQYDOXH%RWKRIWKHVH

have historically been taxed at lower rates, so these are known as tax-

DGYDQWDJHGLQYHVWPHQWV%RQGVDUHWD[GLVDGYDQWDJHGLQYHVWPHQWV

% 7KHUHDUHWZRLPSRUWDQWWKLQJVWRUHPHPEHUDERXWERQGLQYHVWLQJ

7KH¿UVWLVWKDW\RXVKRXOGWKLQNRI\RXUWRWDOLQYHVWPHQWSRUWIROLR

as a combination of taxable accounts and tax-sheltered accounts,

VXFKDVDN,I\RXZDQWWRLQYHVWSHUFHQWRI\RXUSRUWIROLR

LQERQGVDQGSHUFHQWLQVWRFNVWKDWGRHVQ¶WPHDQWKDWERWK\RXU

WD[DEOHLQYHVWPHQWDFFRXQWVDQG\RXU,5$NDFFRXQWVVKRXOG

EHDPL[RIVWRFNDQGERQGIXQGV6PDUWLQYHVWRUVZLOOSXW

WKHLUWD[GLVDGYDQWDJHGERQGIXQGVLQWKHLUNDQGWKHLUVWRFNV

LQWKHWD[DEOHDFFRXQW

% The second thing to remember is that if you invest in a bond fund,

the duration of that fund will determine how much the fund will rise

DQGIDOOLQYDOXHZKHQLQWHUHVWUDWHVFKDQJH,QJHQHUDOORQJWHUP

ERQGVZLOOEHPRVWVHQVLWLYHWRDFKDQJHLQLQWHUHVWUDWHV+RZHYHU

long-term bond funds on average have a higher rate of return over

WLPHWKDQVKRUWWHUPERQGIXQGV

% The other characteristic of bond funds you need to consider is

ZKHWKHUWKH\LQYHVWLQJRYHUQPHQWERQGVRUFRUSRUDWHERQGV7KH

most important reason to pay attention to this is because government

bonds may be tax advantaged, in which case you should put them in

DWD[DEOHDFFRXQW&RUSRUDWHERQGVDUHWKHPRVWWD[GLVDGYDQWDJHG

LQYHVWPHQWWKH\VKRXOGJRLQDQ,5$RUDN