Introduction to Investing

1. Introduction to Investing Take Charge of Your Finances Family Economics and Financial Education

2. Saving and Investing Once an appropriate amount of liquid assets are reached Remember: The purpose of savings is to develop financial security. Refocus goals from savings to investing

3. What is Investing? • The purchase of assets with the goal of increasing future income • Focuses on wealth accumulation • Appropriate for long-term goals What are examples of long-term goals that can be accomplished by investing?

4. Rate of Return • Investments usually earn higher rates of return than savings tools • Rate of Return • The total return on an investment expressed as a percentage of the amount of money invested Remember: Return is the profit or income generated by savings and investing.

5. What is Mandy’s Rate of Return? Mandy saved $2,200 in a money market deposit account. After one year, she has a return of $110. What is Mandy’s rate of return? Mandy’s rate of return on investment is 5%

6. What is Derek’s Rate of Return? 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%

7. Risk POTENTIAL RETURN RISK • Risk • The uncertainty regarding the outcome of a situation or event • Investment Risk • The possibility that an investment will fail to pay the expected return or fail to pay a return at all

8. Investment Risk • Risk is a trade-off for the potential to receive high returns • All investments carry some level of risk Financial Risk Pyramid Illustrates the trade-offs between risk and return for a number of saving and investing tools What is the risk level of savings tools?

9. Financial Risk Pyramid Speculation Increasing potential for higher returns Increasing risk

10. Inflation Inflation The rise in the general level of prices The rate of return on an investment should be higher than the rate of inflation. Inflation Risk The danger that money won’t be worth as much in the future as it is today Inflation risk should not be a concern with savings since the goal of savings is to provide current financial security

11. Investment Philosophy Each individual has a tolerance level for the amount of risk they are willing to take on The greater the risk a person is willing to make on an investment, the greater the potential return will be. Investment Philosophy An individual’s general approach to investment risk Generally divided into three categories: conservative, moderate, and aggressive

12. Portfolio Diversification Portfolio Diversification- reduces risk by spreading investment money among a wide array of investment tools Creates a collection of investments that will provide an acceptable return with an acceptable exposure to risk Referred to as “Building a Portfolio.” Assists with investment risk reduction

13. Types of Investment Tools

14. Stocks • Stock • A share of ownership in a company • Stockholder or shareholder • Owner of the stock Usually a stockholder owns a very small part of a company.

15. Return on Stocks

16. Bonds • A form of lending to a company or the government (city, state, or federal) • The company or government pays annual interest to the investor until the maturity date is reached • The specified time in the future when the principal (or initial investment) amount of the bond is repaid to the bondholder Bonds are less risky than stocks but do not have the potential to earn as much as a stock.

17. Mutual Funds • Mutual fund- Created when a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds • Always research the fees charged by a mutual fund. Reduces investment risk by helping people diversify their portfolio Saves investors time Fees can be high

18. Index Fund • Index fund • A mutual fund that was designed to reduce fees by investing in the stocks and bonds that make up an index • Index- a group of similar stocks and bonds • Examples- Standard and Poor 500, Wilshire 5000 • Offer high diversification with low fees What is the difference between a mutual fund and an index fund?

19. Real Estate • Includes any residential or commercial property or land as well as the rights accompanying that land • A family home is not considered an investment asset • Can be risky and more time consuming but has potential for large returns • Examples of real estate investments include rental units and commercial property.

20. Speculative Investments • Have the potential for significant fluctuations in return over a short period of time • Examples- future, options, commercial paper, collectibles • Recommended for people with an aggressive investment philosophy and a high level of financial security

21. Buying and Selling Investments Investors must utilize a brokerage firm that acts as a buying and selling agent for the investor (except for when buying real estate and certain speculative investments). Offer investment advice and one-on-one attention from a broker Complete investment transactions Only complete investment transactions Offer no advice to investors but charge 40-60% less

22. Taxation Profits earned on investments are considered to be unearned income Income taxes MUST be paid on this money Includes all forms of returns: interest, dividends, and price appreciation Taxes are due on most investment returns in the year the unearned income is received

23. Tax-Sheltered Investments • The government tries to encourage certain types of investments by making them tax-sheltered • Tax-sheltered investments • Eliminate, reduce, defer, or adjust the current year tax liability • Examples- retirement, child/dependent care, education expenses, health care expenses Tax-sheltered investments are not tax-free!

24. Tax-Sheltered Investments • Taxes are either paid when the money is put into the account or when the money is taken out of the account • There are limits to the amount of money that can be invested • An individual should invest as much money as possible in tax-sheltered investments What is the benefit of a tax-sheltered investment if taxes still have to be paid?

25. Employee-Sponsored Investment Accounts • Allow employees to reduce their tax liability and make investing automatic • Money is automatically taken out of an employee’s paycheck • Employers often contribute a portion of money to the investment with no additional cost from the employee It is recommended that a person utilize these investment tools as much as possible if they are offered.

26. Rule of 72 Rule of 72 Allows a person to easily calculate when the future value of an investment will double the principal amount

27. Albert Einstein Credited for discovering the mathematical equation for compounding interest, thus the “Rule of 72.” At 10% interest rate, money doubles every 7.2 years, T=P(I+I/N)YN “It is the greatest mathematical discovery of all time.”

28. What Can the “Rule of 72” Determine? How many years it will take an investment to double at a given interest rate using compounding interest How long it will take debt to double if no payments are made The interest rate an investment must earn to double within a specific time period How many times money (or debt) will double in a specific time period

29. “Rule of 72” FYI • The rule is only an approximation • The interest rate must remain constant • The equation does not allow for additional payments to be made to the original amount • Interest earned is reinvested • Tax deductions are not included within the equation

30. Doug’s Certificate of Deposit Doug invested $2,500 into a Certificate of Deposit earning a 6.5% interest rate. How long will it take Doug’s investment to double? • Invested $2,500 • Interest Rate is 6.5%

31. Jessica’s Credit Card Debt Jessica has a $2,200 balance on her credit card with an 18% interest rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for her balance to double? • $2,200 balance on credit card • 18% interest rate

32. Jacob’s Car Jacob currently has $5,000 to invest in a car after graduation in 4 years. What interest rate is required for him to double his investment? • $5,000 to invest • Wants investment to double in 4 years

33. Any Questions?