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Personal

Management

Session 3

Previously Covered

• Session 1

– Introduction to Personal Management

– Requirement 4 – Saving and Investing

– Requirement 5 – Stocks

• Session 2

– Requirement 3 – Money Concepts

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Session 3

• Today we will cover requirement 6 of Personal

Management

• Attendance is not required!

– If you miss a session, you can use this material to help you fill

out your worksheet

– Credit will be given when you complete your merit badge review

with your counselor

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Disclaimer

• I am not a formal financial advisor. Before making

any important decisions about money, please be

sure to talk to your parents or someone who has a

formal background in finance.

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Requirement 6

• You have $1,000 to invest; explain the advantages

and disadvantages of the following

– Common Stocks

– Mutual Funds

– Life Insurance

– A certificate of deposit (CD)

– A savings account or U.S. savings bond

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Common Stock

• What is it?

– A share of a publicly traded company

• How expensive is it?

– Price is based on an auction system (stock market)

• How can I buy / sell stock?

– Stocks used to be expensive to trade (buy or sell)

– Online brokers offer very inexpensive platforms for trading stocks

– Special investment programs for kids offer the ability to buy as

little as a single share of stock

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Common Stock (Continued)

• What can $1,000 buy?

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Video Games Symbol Current Price $1000 Buys… 52 Wk High 52 Wk Low

Activision / Blizzard ATVI 20.90$ 47 24.18$ 16.06$

Electronic Arts EA 35.70$ 28 38.64$ 20.47$

Microsoft MSFT 46.22$ 21 47.57$ 32.70$

Sony SNE 17.76$ 56 21.60$ 15.23$

Food

McDonalds MCD 94.56$ 10 103.78$ 90.53$

Taco Bell / KFC YUM 72.35$ 13 83.58$ 64.08$

PepsiCo PEP 92.80$ 10 94.21$ 77.01$

Shopping

Amazon AMZN 321.38$ 3 408.06$ 284.38$

Best Buy BBY 33.53$ 29 44.66$ 22.15$

Walmart WMT 75.79$ 13 81.37$ 71.51$

Entertainment

Walt Disney DIS 88.64$ 11 91.20$ 63.10$

Lions Gate LGF 32.43$ 30 37.49$ 24.54$

Amazon 1 Year Chart

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Amazon is primarily known as an online store. However they also make tablets, phones, and

provide cloud storage.

Walt Disney 1 Year Chart

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You probably know that Disney owns a number of theme parks.

However, they also own ESPN, ABC, Pixar, Marvel and even Star Wars.

Common Stock Pros and Cons

Pros

• Extremely fluid (easy to

buy or sell)

• Tons of data about

companies on the

Internet

• Online brokers make

trading inexpensive

Cons

• Could lose money

(stock prices go down)

• Can make bad choices

(companies can and do

go out of business)

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Why Buy Common Stocks?

• Capital appreciation

– This is what happens when a stock price goes up over time

– Historically over a long period of time stocks have averaged 8%

• Income

– Many stocks pay dividends (shares of profits) back to

shareholders

• Liquidity

– As long as the market is open you can buy or sell your stock very

quickly

– There is a three day delay before the trade is “settled” to your

account and you get your money

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Common Stock Risk Level

• Common stocks on average have higher risks than

other investments

• Some companies are far riskier than others!

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Common Stock Discussion

Questions

• Discuss: Would you buy common stock if you

needed the money next month?

• Discuss: When should you consider buying common

stocks in your investment portfolio?

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Mutual Funds

• In our first session we looked at this chart for three

different stock returns over time

• Which stock is the best individual investment?

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$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

1 2 3 4

A

B

C

Stock A is very stable Stock B is more aggressive

Stock C is highly volatile

Mutual Funds (Continued)

• Most people don’t have the time or interest to

thoroughly research individual stocks

• A Mutual Fund is a collection of stocks selected by a

fund manager

– Generally there is a theme to the selections

– One fund may focus on Growth

– Another fund may focus on Income (Dividends)

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Mutual Fund Performance

• Suppose we invest in all three stocks shown earlier

• The fund does not go up (or down) as steeply as

individual stocks

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$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

1 2 3 4

A

B

C

M

Stock A is very stable Stock B is more aggressive

Stock C is highly volatile Mutual Fund M benefits

from investing in all three

The is called “diversification” because you own more than

one investment.

Mutual Funds Pros and Cons

Pros

• Diversification

• Investment choices are

made by a professional

money manager

– You pick a “theme” or style

of investment you are

comfortable with

Cons

• Could lose money

(stock prices go down)

• Fund managers take

some of your money

each year

– Even if the fund goes

down!

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Why Buy Mutual Funds?

• Capital appreciation

– This is what happens when a stock price goes up over time

• Income

– Many stocks pay dividends (shares of profits) back to

shareholders

• Liquidity

– Mutual fund trades occur each day after the market is closed

• Diversification

– Buying 10 shares of a mutual fund is generally less risky than

buying 1 share of 10 different companies… and it’s cheaper too

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Mutual Fund Risk Level

• Mutual funds can be less risky than stocks…

• … but aggressive funds are still quite risky

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Mutual Fund Discussion Questions

• Discuss: Would you buy a mutual fund if you needed

the money next month?

• Discuss: When should you consider buying mutual

funds in your investment portfolio?

• Discuss: One advantage of mutual funds is

diversification… that must mean buying lots of

mutual funds is even better, right?

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Life Insurance

• What is it?

– Income replacement in case you die

• How expensive is it?

– Price is based your age and health factors

– For example people who smoke pay more

– Also depends on type of insurance (term versus whole life)

• How can I buy life insurance?

– Through an insurance company broker

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Term Versus Whole Life Insurance

Term Life

• Protection for a specific

period of time

• 10 year, 20 year or 30

year terms are common

• Most affordable

• You only collect if you

die before the term is

up

Whole Life

• Lasts your entire life

• Builds cash value

• Premiums (cost) is

generally higher than

term

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Life Insurance Pros and Cons

Pros

• Helps your family cover

financial obligations in

case you die

• Low risk

Cons

• Term insurance – you

can outlive the

coverage

• Lower return on

investment (ROI)

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Why Buy Life Insurance?

• Income Protection

– If you die your family will not struggle for lack of funds

• Capital Appreciation

– Whole life can build cash value

• Tax Deferred Savings

– There is generally no tax on life insurance payouts

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Life Insurance Risk Level

• Life insurance is considered very low risk

• With term life the primary risk is you outlive your

policy term

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Life Insurance Discussion

Questions

• Discuss: If you don’t make much money do you still

need life insurance?

• Discuss: Do kids need life insurance?

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Certificate of Deposit (CD)

• What is it?

– A certificate of deposit is a record that you put a certain amount

of money into a bank

– The money earns interest but must be left for a specific amount

of time

• How expensive is it?

– There are generally no costs related to investing in a CD unless

you take your money out early

• How can I buy a CD?

– Banks or other financial institutions such as brokerages can sell

CDs

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Term Versus Interest Rate

• To receive higher interest you have to leave your

money in the CD longer

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Term Range National Average

3 month CD 0.03% APY - 0.45% APY 0.10% APY

1 Year CD 0.60% APY - 1.12% APY 0.25% APY

3 Year CD 0.60% APY - 1.51% APY 0.51% APY

5 Year CD 0.90% APY - 2.52% APY 0.82% APY

CD Pros and Cons

Pros

• Safe – funds are

insured by Federal

Deposit Insurance

Corporation (FDIC)

• Typically fixed interest

rate

• No costs unless closed

early

Cons

• If you take money out

early you can lose most

of your interest

• Higher interest rates

require longer

investment terms

• Low liquidity – you

have to wait for your

funds to mature

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Why Buy CDs?

• Safety

– The overwhelming advantage of CDs is the fact that they are

insured against loss

– If you put $1000 into a CD you will get $1000 back plus interest

– Unlike common stocks a CD will never lose value

• Income

– CDs pay interest based on the principle (invested) amount

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Certificate of Deposit Risk Level

• CDs are extremely low risk

• In order to lose money the entire country would have

to go bankrupt

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CD Discussion Questions

• Discuss: Why would you choose a CD over common

stock or other investment option discussed so far?

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Savings Account

• What is it?

– A bank account

• How expensive is it?

– Fees may vary but most banks offer very low (or zero) cost

options for kids

– Credit Union of Texas offers a student account (ages 13 to 18)

with a minimum opening balance of only $0.01

• How can I open an account?

– Simply take some money to a bank and ask to open a savings

account

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Savings Account Pros and Cons

Pros

• Safe / FDIC insured

• Can easily go to the

bank to deposit or

withdraw funds

• Unlike CDs there is no

minimum time

requirement for a

deposit

Cons

• Typically very low

interest rates

• Credit Union of Texas

currently pays 0.10% on

student savings

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Why Have A Savings Account?

• Safety

– Like CDs a savings account is FDIC insured up to $250,000

– Unlike stocks a savings account will never lose value

– Unlike CDs there is no requirement to invest for a set amount of

time

• Interest Income

– Savings accounts typically pay lower interest that CDs

• Liquidity

– Savings accounts are more liquid than CDs

– You can get your money out the next day the bank is open

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Savings Account Risk Level

• Savings accounts are insured by the Federal Deposit

Insurance Corporation (FDIC)

• Accounts up to $250,000 are protected by law

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Savings Account Discussion

Questions

• Discuss: What is the primary use you might have for

a savings account?

• Ask your bank if they offer a “Christmas” account

– Account designed to take monthly deposits from January to

November

– Funds are available to buy Christmas presents in December

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United States Savings Bonds (EE)

• What is it?

– Pays a fixed interest rate for 30

– Owning the bond means you get regular interest payments

• How expensive is it?

– A $50 US Savings Bond is purchased for $25

– After 20 years of interest payments it can be redeemed for $50

• How can I buy bonds?

– Through a bank or brokerage

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Bonds Pros and Cons

Pros

• Extremely safe –

backed by the US

Government

• Low cost – bonds can

be purchased for as

little as $25

Cons

• Principle is paid on

bond maturity

• US Bonds cannot be

transferred to another

person

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Why Buy Bonds?

• Capital Appreciation

– Bonds build value over time

• Income

– Bonds pay interest

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United States Bonds Risk Level

• Extremely low risk

• Bonds are backed by the government and therefore

quite safe

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US Bonds Discussion Questions

• Discuss: Bonds cannot be transferred to another

person. What impact does that have on your

decision to buy one?

• Discuss: What is the primary advantage of bonds?

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Comparing Investment Choices

• Primary factors include

– Return on Investment

• How much am I going to make

– Volatility and Risk

• How likely am I expecting to see a return

– Liquidity

• How easily can I buy or sell the asset

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Comparing Investment Choices

• Number these in order of highest to lowest risk, 1 is least risky and 3 is most risky – ______ Mutual Fund

– ______ Common Stock

– ______ Savings Account or Certificate of Deposit

– ______ US Savings Bond

• Number these in order of potential Return on Investment (ROI), 1 is least return and 3 is most – ______ Mutual Fund

– ______ Common Stock

– ______ Savings Account or Certificate of Deposit

– ______ US Savings Bond

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Tracking Investments

October 2013 to September 2014

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Stock returns were from October 2013 to September

2014

S&P 500 was used to simulate a mutual fund

investment; it’s actually an ETF or Exchange Traded

Fund

CD and Savings Account rates were both 0.10%

AMZN Stock DIS Stock S&P 500 1 Year CD Savings Acct

Investment 2.75 Shares 14.75 Shares 5.8 Shares $1,000.00 $1,000.00

October $1,001.08 $999.31 $1,000.15 $1,000.21 $1,000.08

November $1,082.46 $1,027.78 $1,029.79 $1,000.42 $1,000.17

December $1,096.67 $1,126.90 $1,056.47 $1,000.63 $1,000.25

January $986.40 $1,071.00 $1,019.23 $1,000.83 $1,000.33

February $995.78 $1,191.95 $1,065.63 $1,001.04 $1,000.42

March $925.02 $1,181.03 $1,074.45 $1,001.25 $1,000.50

April $836.36 $1,170.27 $1,081.93 $1,001.46 $1,000.58

May $859.51 $1,239.15 $1,107.05 $1,001.67 $1,000.67

June $893.15 $1,264.67 $1,129.90 $1,001.88 $1,000.75

July $860.72 $1,266.73 $1,114.70 $1,002.09 $1,000.83

August $932.36 $1,325.73 $1,158.72 $1,002.29 $1,000.92

September $888.83 $1,308.92 $1,147.82 $1,002.50 $1,001.00

Dividends $12.69 $15.90

Ending Value $888.83 $1,321.60 $1,163.72 $1,002.50 $1,001.00

ROI -11.12% 32.16% 16.37% 0.25% 0.10%

$800.00

$900.00

$1,000.00

$1,100.00

$1,200.00

$1,300.00

$1,400.00

AMZN Stock DIS Stock S&P 500 Savings Acct 1 Year CD

Return on $1,000 Investment (ROI)

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Amazon -11.12%

Disney 32.16%

S&P 500 16.37%

CD 0.25%

Savings Account 0.10%

What’s Next?

• Continue your financial record (Requirement 2)

• Prior to next meeting complete requirement 7

• For those that have completed requirement 2 work

on requirement 8

• Any questions? Contact me at drathbun@aol.com or

see me at any troop meeting.

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