Introduction to Investing

"Take Charge of Your Finances"

WHAT IS INVESTING

Savings vs. Investing:

Goal Two:

Goal One:

Goal Three:

Savings is short term 1-3 years.

Investing is long term, 3 or more years.

Investing is higher risk and less liquidity.

Increase future income

Focus on wealth accumulation Helps you reach a desired standard of living.

INVESTMENT RISK

Risk One:

Risk Three:

Risk Two:

Risk Four:

RISK RETURN

RISK TO RETURN

Liquidity: Investments are more difficult to access than savings tools.

Inflation Risk: rise in prices over the years.

Will my money be worth as much in the future?

Economics: How is the economy. How are other countries’ economies?

Recession increases the risk.

Business Risk: company that you invested in could go bankrupt.

RETURN ON INVESTMENT

Amount Invested:

Rate of Return:

Total Return on Investment:

Example:Most

investments earn a higher rate of return than savings tools. They are higher

risk!

Profit or income that is generated by the investment

Similar to the dollar interest earned.

Amount invested is the same thing as principal—amount you saved or start with

Derek invested $900. When he withdrew his money from the

investment, he had a total of $1,050. What is Derek’s rate of return?

Derek’s rate of return on investment is 16.7%

What is Mandy’s Rate of Return?

Mandy saved $2,200 in a money market deposit account. After one year, she had $2,310. What is Mandy’s rate of return?

Mandy’s rate of return on investment is 5%

Types of Investment Tools

STOCKS

Definition:

Advantage:

Risk/Return:

Disadvantage:

A share of ownership in a company such as Apple or Microsoft.

You are known as a shareholder.

Buy Low and Sell High!

Moderate to High Risk

Average rate of return is 12%

Dividend: Company pays shareholders part of the profits

Company could go out of business and you lose all your money.

Cost to buy and sell.

BONDS

Definition:

Advantage:

Risk/Return:

Disadvantage:

You are lending the company money.

Company borrows for capital expenses

Usually sold in blocks of 1,000

You receive annual interest payments.

Principal is repaid at maturity date.

Lose some of the value if you must sell early.

Companies credit rating could change.

Return is based on the credit score of the company.

5-9% average over last 10 years.

MUTUAL FUNDS

Definition:

Advantage:

Risk/Return:

Disadvantage:

A collection of both stocks and bonds.

They are sold by Net Asset Value (NAV).

Very popular, over ½ of Americans have mutual funds.

Professionally managed.

Diversfied.

Must pay yearly management fees.

You don’t control the fund.

Cost to buy and sell.

Varies on the type of fund.

Traditionally a good return.

REALESTATE

Definition:

Advantage:

Risk/Return:

Disadvantage:

Any residential or commercial property or land.

Also includes rights to the land.

You get to live in your investment.

You have control over your investment.

Rental property provides monthly income.

You have responsibilities as a homeowner.

Borrow money to make money.

Must have good renters for rental property.

Missouri has increased 3.1% over the last year.

Expect a 2.7% increase this year.

Pay realtor fees to sell.

COMMODITIES

Definition:

Advantage:

Risk/Return:

Disadvantage:

Buying and selling of gold, oil, wheat and corn.

Also known as the futures market.

Big profits if your prediction is right.

Too risky for inexperienced investor.

Can’t predict the future.

High return and high losses.

Very volatile.

COLLECTIBLES

Definition:

Advantage:

Risk/Return:

Disadvantage:

Buying and selling anything that has value.

For example: cars, comic books, coins, jewelry.

Almost anything can be considered a collectible.

20-year rule: item comes around every 20 years.

No exact value.

Only make money if someone is willing to buy it.

Receive no interest or dividends.

Return is hard to determine.

Reputation changes value.

Financial Risk Pyramid

Savings Account

Money Market

Certificate of Deposit

US Savings Bonds

Corporate Bonds

Stocks

Mutual Funds

Real Estate

Collectibles and

Commodities

RISK RETURN

Everyone has a tolerance level for the amount of risk they are willing to take.

What is your

level of risk?

RULE OF 72

Definition:

Example One:

Assumptions:

Example Two:

Allows your to calculate how long it will take to double your investment.

Can be used to determine years or the rate needed.

Only an approximate.

No additional payments are added to initial investment

Interest rate must remain constant.

Doug invested in a corporate bond earning a 6.5% interest rate. How long will it take for his money to double?

Doug wants his money to double in 12 years. What interest rate is needed to achieve this?

© Family Economics & Financial Education – Updated April 2011 – Investing Unit – Introduction to Investing – Slide 15Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Jessica’s InvestmentJessica has a $2,200 in a mutual fund with an

18% interest rate. Approximately how long will it take for her money to double?

© Family Economics & Financial Education – Updated April 2011 – Investing Unit – Introduction to Investing – Slide 16Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Jacob’s CarJacob currently has $5,000 to invest. He

wants to double his money in 4 years to buy a new car. What interest rate is needed?

COMPOUND INTEREST

Formula:

Example One:

Variables:

Example Two:“It is the greatest

mathematical discovery of

all time.”

FV = P (1 + r /n)n*t

FV=Future value of your investment.

P=Present value of your investment.

R=Rate (as a decimal)

N=Number of times interest compounds per year.

T=Time (number of years)

You invest$2000 in a mutual fund paying a rate of 5% compounding semi-annually. What is your balance after 6 years.

FV = 2000 (1 + .05 /2)2*6

$2,689.78

You deposit $2500 in a mutual fund paying a rate of 3.25% compounding monthly. What is your balance after 2 years?

FV = 2500 (1 + .0325 /12)12*2

$2,667.66

LANGUAGE OF INVESTMENTS

Diversification:

Pay Yourself First:

Time Value of Money:

Taxes:“Knowing the language

allows you to tell your

money what to do.”

Reduces the risk by spreading investments among a variety of investment tools.

The sooner you start the more time you have to compound your money.

You should automatically put a minimum of 10% of your income aside for saving and investing.

All profits on the investments discussed must be claimed as income.

Therefore taxes must be paid of the income.

© Family Economics & Financial Education – Updated April 2011 – Investing Unit – Introduction to Investing – Slide 19Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Investment PhilosophyEveryone has a tolerance level for the

amount of risk they are willing to take on

Investment Philosophy- an individual’s general approach to investment riskThe greater

the risk a person is

willing to make on an

investment, the greater the

potential return will be

Generally divided into three categories: conservative, moderate, aggressive

© Family Economics & Financial Education – Updated April 2011 – Investing Unit – Introduction to Investing – Slide 20Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Tax-Sheltered Investments

Government tries to encourage certain types of investments by making them tax-

sheltered

Tax-sheltered

investments are usually

not tax-free!

Tax-sheltered investments-

eliminate, reduce, defer, or adjust the current year

tax liability

•Retirement•Child/dependent care•Education expenses•Health care expenses

© Family Economics & Financial Education – Updated April 2011 – Investing Unit – Introduction to Investing – Slide 21Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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When are taxes for tax-sheltered investments usually paid?

There are often limits to the amount that can be invested

OR

What is the benefit of a tax-

sheltered investment if

taxes still have to be paid?

© Family Economics & Financial Education – Updated April 2011 – Investing Unit – Introduction to Investing – Slide 22Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Employer-Sponsored Investment Accounts

• Type of tax-sheltered investment• Money is automatically taken out of

employee’s paycheck• Employers often contribute a portion of

money to the investment with no additional cost from the employeeExample:

Employer contributes the same amount of

money to the employee’s

investment account

Employee benefits from

having double the amount of money

invested!

© Family Economics & Financial Education – Updated April 2011 – Investing Unit – Introduction to Investing – Slide 23Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Advantages to Employer-Sponsored Investments

Reduces tax liability

Makes investing

automatic

Possibility for employer to match

investment

It is recommended that a person utilize these investment

tools as much as possible if

they are offered