Week in Review - September 26th

Week in Review- September 26^{th –} By Hannah Cassin

The week of September 19^th through the 22^nd was an exciting and busy week in Economics. We had the chance to talk with Scott Conyers, a successful investment manager, begin our stock trading game, and have our first student-led class of the year. Here are some highlights important information from the past week:

Important Key Terms:

Efficient Markets Theory- The idea that asset prices already reflect all available information, making it impossible to “beat the market.”

APR- Annual percentage rate- The amount of interest on a loan amount that must be paid annually. A lower APR means lower monthly payments, and this should be under 20%.

Credit Score- Credit scores are calculated depending on your credit history, including your ability to pay off loans. A higher credit score means you are a less risky candidate to loan money to. Credit scores can also determine whether you get a high or low interest rate.

Compound interest- The type of cumulative interest generated in accounts such as Roth IRAs. Having a “snowball” effect, this type of interest increases increases the longer you have the account, as interest will accumulate off of the principal sum and past interest. Most lenders/investors prefer compound interest, as it provides the most returns.

Simple interest- Only the principal generates interest each period. Most borrowers prefer simple interest as it means less interest over time.

IRA- Individual Retirement Account where withdrawals are penalty-free after turning 59 ½, Distributions begin at age 70 ½, and beneficiaries pay taxes on inherited IRAs.

Roth IRA- Similar to an IRA, except all withdrawals are tax-free, no withdrawals required during the account holder’s lifetime, and beneficiaries can stretch distributions over many years.

Active Investing- Choosing when to buy or sell stocks.

Passive Investing- An example of passive investing is investing in an index fund, such as the S&P 500. This offers less risk than actively investing, and steady returns.

Dividends – Some companies regularly pay dividends to investors when they don’t need all of the money that they are making. Growing companies, or companies without extra earnings usually do not pay dividends.

Current Events:

http://www.wsj.com/articles/who-wants-to-host-an-olympic-games-anyone-1474499468

            This article, entitled “Who Wants to Host the Olympic Games? Anyone?” by Mathew Futterman for the Wall Street Journal captures the ideas that we discussed during Vikram and Charley’s teach a class. This piece uses the example of Rome’s recent withdrawal of their bid for the 2024 Summer Olympics. Mayor Virginia Raggi made headlines after announcing that she wouldn’t support the bid because, as she put it, the Games were not “sustainable” and “would add significant debts.” This leaves just Budapest, Los Angeles, and Paris in the running to host the games. The article ended with a point that economists often argue: that the International Olympic Committee should choose four or five permanent hosts for the Olympics to cycle through every 20 years. Many economists agree that this would be a much more cost effective solution, especially now that hosting the games seems to be a burden and a waste of resources for many cities. This not only connects to the Olympics class, but also to our conversation with Scott Conyers. Scott stressed how he only invests in companies where he sees value.  I think that we can look at the Olympics with the same lenses, as building arenas, hotels, and transportation are a huge investment for any city. If these investments are not going to retain their value after the games, then the risk is too high. This also connects to the PV=FV/(I+L) ^n equation, as we see future value decreasing as risk increases.

http://www.usatoday.com/story/money/personalfinance/2016/09/20/raise-interest-rates-baby-boomers-millennials-gen-x/90690432/

            This article from USA Today, entitled “Rising interest rates good news for Boomers, not for Millennials,” sums up much of our discussion on investment strategy and how our investing habits can change with age. Author Michael Rowand’s article also touches on the bigger issue that just a few politicians are making changes which benefit older, more politically active people rather than younger citizens. Most Baby-Boomers are retired or preparing to retire, thus will benefit from higher interest rates, which lead to increasing returns on safe investments. For younger Americans, higher interest rates will prove difficult. Higher rates will lead to higher mortgages, car loans, and larger student loan payments after federal student loan rates adjust next summer. This article connects back to our discussion on how investment strategies tend to change with age, and how incentives for either borrowing or investing affect different age groups differently.

Takeaways:

My biggest takeaway from the past week is that it is important to begin saving as soon as possible. I realized how much of a difference it can make in my life to begin investing now, and how valuable it is that I am learning how to wisely invest money. One theory we discussed was how to save for 10 years or less and become a millionaire at retirement. At first, this seemed like the best idea ever, and I wondered why everyone didn’t invest as much of their money as they could into a Roth IRA from a young age, but my perspective changed after thinking about this more. I wondered if it was really worth spending my twenties desperately trying to earn enough to put $3,000 away into a Roth IRA every year just so that I could buy a condo in Florida when I retire? Would I be maximizing my utility more by earning some money, but also traveling and having other experiences while I’m still young? Although I will do my best to save for retirement since I now know the many benefits, I believe it’s worth discussing the costs associated with giving up so much of one’s income at a young age.

Scott Conyers had some very interesting insights that have made him such a successful investor. The idea of “bubbles,” and how although they appear beneficial while in the bubble, end up hurting the economy once the bubble “pops.” Scott’s anecdote about the .com boom and how he managed to make money by avoiding investments in internet companies during this time made me realize how important it is to recognize bubbles when they’re happening and be mindful of how quickly the market can change. Additionally, talking about assuming when investing with Scott was very interesting. Most of us are used to Catlin Gabel’s classroom environment where most students and teachers use Apple computers, and iPhones are the norm. The discussion reminded me that my “normal,” where most of my peers have expensive electronics, is much different than the average American, which I need to keep in mind when investing in companies.