Unit 3 - Investing: Making Money Work for You

Savings and Investments

UniqueSavingsFeatures

UniqueInvestment

Features

CommonFeatures

Short-termLow riskEarns small amount of interestEasy to get to

Long-termMore risky

No guarantee investment will growHave to sell to get cash

Investing Weekly at 5% Interest

Amount SavedPer Week

Value After10 Years

$ 7.00

$ 14.00

$ 21.00

$ 28.00

$ 35.00

$ 4,720

$ 9,440

$ 14,160

$ 18,880

$ 23,600

How is this possible?

Time Value of Money value of money figuring in a given amount of

interest earned over a given amount of time

Interest ▪ A fee paid by a borrower of assets to the owner as

a form of compensation for the use of the assets▪ Price paid for the use of borrowed money

Time▪ Present Value▪ Future Value

Compounding

As an investment increases in value, its earnings start to generate even more earnings

Driven by two variables: Time more time = more

money Rate of Return higher rate of return

= more money

Investing Annually to Achieve a Goal

Value of $20 1 Year 2 Years 4 Years 6 Years

4%

5%

6%

8%

10%

$20.80

$21.00

$21.20

$21.60

$22.00

$21.63

$22.05

$22.47

$23.33

$24.20

$23.40

$24.31

$25.25

$27.21

$29.28

$25.31

$26.80

$28.37

$31.74

$35.43

Building….

To Have $50,000 at 8% Interest

6

4

2

Number ofYears Saving

MonthlyAmount

DailyAmount*

$1,928.03 $63.17

$29.06

$17.79

$887.31

$543.33

* Assumes a 365-day year for daily amounts

Investing a $10,000 Lump Sum

11%

10%

9%

8%

7%

6%

5%

12%

InterestRate

5Years

20Years

15Years

10Years

$12,763

$17,623

$16,851

$16,105

$15,386

$14,693

$14,026

$13,382

$16,289

$31,058

$28,394

$25,937

$23,674

$21,589

$19,672

$17,908

$20,789

$54,736

$47,846

$41,772

$36,425

$31,722

$27,590

$23,966

$26,533

$96,463

$80,623

$67,275

$56,044

$46,610

$38,697

$32.071

Investing $1,000 Annually

11%

10%

9%

8%

7%

6%

5%

12%

InterestRate

5Years

20Years

15Years

10Years

$5,526

$6,353

$6,228

$6,105

$5,985

$5,867

$5,751

$5,637

$12,578

$17,549

$16,722

$15,937

$15,193

$14,487

$13,816

$13,181

$21,579

$37,280

$34,405

$31,772

$29,361

$27,152

$25,129

$23,276

$33,066

$72,052

$64,203

$57,275

$51,160

$45,762

$40,995

$36,786

Rule of 72

72Interest Rate

=Years Needed to

Double Investment

72 Interest RateRequired

=Years Needed to

Double Investment

Rule of 72: $10,000 Invested

6

12

18

24

Year 3% 6% 12%

INTEREST RATE

$20,000 $40,000 $160,000

$20,000

$40,000

$80,000

$20,000

72 ÷ 3% = 24 years $10,000 x 2 = $20,000 72 ÷ 6% = 12 years

$10,000 x 2 = $20,000Doubles again in 24 years

72 ÷ 12% = 6 years $10,000 x 2 = $20,000

Doubles again in 12 yearsDoubles again in 18 yearsDoubles again in 24 years

Types of Investments

Income Investments Lending your money to a bank or credit union in

exchange for earning interest Example: savings accounts (1%), bonds (1% - 3%),

Certificates of Deposits (1% - 3%)

Growth Investments Investors become owners Example: stocks

Historically, over long periods of time, growth investments have outperformed income investments

FinancialPlanningPyramid

PennyStock

Commo- dities

CollectiblesSpeculative Stock / Bonds /Mutual Funds

RealEstate

Blue-ChipCommonStock

GrowthMutual Funds

High-GradeConvertible

Bonds

High-GradePreferred

Stock

BalancedMutual Funds

High-GradeCorporate Bondsor Mutual Funds

High-GradeMunicipal Bondsor Mutual Funds

Money MarketAccounts

or Mutual Funds

Certificatesof Deposit

U.S. SavingsBonds

Insured Savings / Checking Accounts

TreasuryIssues

Highest RiskHighest Earnings

Lower Risk

Lower Earnings

Investing Tips

Buy Low Sell High

Diversification Spread the risk around; some high risk,

some low; some long term, some short, etc.

Dollar Cost Averaging Systematically invest the same amount in

the same investment at regular intervals to reduce the impact of price swings

Data on 5 Stocks Due Today!

Remember, Do NOT print Financial Data, instead provide the following: Balance Sheet

▪ Total Assets▪ Total Liabilities

Income Statement▪ Total Revenue▪ Net Income

Don’t forget to log any purchases or sales on your Making a Trade Sheet!!!

Test Your Financial IQ

How much will $100,000 grow to in 30 years at a 5% and 8% annual return?

In 30 years, $100,000 will become $432,194 if invested at 5%

$100,000 will become $1,006,266 if invested at 8%

That is 132% more. Your investment choices make a big difference!

How much did the average investor earn between 1988 – 2008?

The S&P 500 Index earned an average annual return of 8.4% during 1988-2008 ($1 would have become $5)

The average individual investor earned an annual return of just 1.9% ($1 would have become $1.50)

How much money would an investor have lost if they missed the best 30 days of the year between February 1989 and February 2009?

$10,000 invested in the S&P 500 Index in February 1989 would have become $29,382 in February 2009.

If an investor had missed the best 30 days of daily return, it would have become $6,531 (77% less).

If an investor had missed the best 10 days, it would have become $15,123 (48% less)

If you delay saving and investing until you are 40, rather than 30, how much less money will you have when your 65?

Assuming an annual return of 7% per year, if you invest $10,000 per year from age 30 to age 40 ($100,000 invested), you would have $809,844 at age 65.

If you invest $10,000 per year from 40 years old to 65 years old ($250,000 invested), you would have $690,564 at 65 years old. This is 15% less!

During what years and periods, did bonds perform better than stocks?

From 1929 to 1949 (20 years) and from 1968 to 2009 (41 years), $1 invested in bonds was a better investment than in stocks

From 1926 – 2008, by how much did large company stocks outperform bonds and T-bills?

From 1926 to 2008:

large company stocks had a 9.6% annual return

Government long bonds had a 5.7% annual return

Treasury bills had a 3.7% annual return

Over a 10-year investing period, what is the probability that stocks have a negative absolute return?

Over any 10-year rolling period from 1969 to 2008, stocks had only a 1% probability of a negative absolute return

(vs. 37% for gold or commodities)

Since 1890, what has been the real return on housing prices?

Housing price increases since 1890 have been close to 0% factoring in the effects of inflation.

Housing prices adjusted for inflation were also flat between 1945 and 2000.

How much would $1 invested in 1926 have grown to if invested in large caps, bonds, gold, or cash?

Small cap stocks $9,550 in 2008

Large caps $2,045

Bonds $99

Gold $41

Cash $20

When were the last times US large-cap stocks total return was negative over a 10-year period?

The last two times US large-cap stocks total return was negative over a 10-year period was in 1938 and 2008

Between 1983 and 2003, the US stock market return was 13%, what was the average investors return?

The US stock market return was 13% but the average investor had a 7.9% return which was 5.1% less.

The average equity fund return was 10.3%. This highlights why you need a good financial advisor