Introduction to Investing

1. Introduction to Investing "Take Charge of Your Finances"

2. Savings vs. Investing: Goal One: 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 WHAT IS INVESTING Goal Three: Goal Two: Helps you reach a desired standard of living. Focus on wealth accumulation

3. Risk One: Risk Two: 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? INVESTMENT RISK RETURN RISK Risk Four: Risk Three: RISK TO RETURN Economics: How is the economy. How are other countries’ economies? Recession increases the risk. Business Risk: company that you invested in could go bankrupt.

4. Amount Invested: Total Return on Investment: 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? Most investments earn a higher rate of return than savings tools. They are higher risk! RETURN ON INVESTMENT Example: Rate of Return: Derek’s rate of return on investment is 16.7%

5. 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%

6. Types of Investment Tools

7. Definition: Risk/Return: 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% STOCKS Advantage: Disadvantage: Company could go out of business and you lose all your money. Cost to buy and sell. Dividend: Company pays shareholders part of the profits

8. Definition: Risk/Return: You are lending the company money. Company borrows for capital expenses Usually sold in blocks of 1,000 Return is based on the credit score of the company. 5-9% average over last 10 years. BONDS Advantage: Disadvantage: Lose some of the value if you must sell early. Companies credit rating could change. You receive annual interest payments. Principal is repaid at maturity date.

9. Definition: Risk/Return: A collection of both stocks and bonds. They are sold by Net Asset Value (NAV). Varies on the type of fund. Traditionally a good return. MUTUAL FUNDS Disadvantage: Advantage: 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.

10. Definition: Risk/Return: Missouri has increased 3.1% over the last year. Expect a 2.7% increase this year. Pay realtor fees to sell. Any residential or commercial property or land. Also includes rights to the land. REAL ESTATE Disadvantage: Advantage: 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.

11. Definition: Risk/Return: Buying and selling of gold, oil, wheat and corn. Also known as the futures market. High return and high losses. Very volatile. COMMODITIES Disadvantage: Advantage: Big profits if your prediction is right. Too risky for inexperienced investor. Can’t predict the future.

12. Definition: Risk/Return: Buying and selling anything that has value. For example: cars, comic books, coins, jewelry. Receive no interest or dividends. Return is hard to determine. Reputation changes value. COLLECTIBLES Disadvantage: Advantage: 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.

13. Financial Risk Pyramid Everyone has a tolerance level for the amount of risk they are willing to take. Collectibles and Commodities What is your level of risk? Real Estate RISK RETURN Stocks Mutual Funds Corporate Bonds US Savings Bonds Savings Account Money Market Certificate of Deposit

14. Definition: Assumptions: Only an approximate. No additional payments are added to initial investment Interest rate must remain constant. Allows your to calculate how long it will take to double your investment. Can be used to determine years or the rate needed. RULE OF 72 Example Two: Example One: 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?

15. Jessica’s Investment Jessica has a $2,200 in a mutual fund with an 18% interest rate. Approximately how long will it take for her money to double?

16. Jacob’s Car Jacob 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?

17. Formula: Variables: 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) FV = P (1 + r /n)n*t COMPOUND INTEREST Example Two: Example One: “It is the greatest mathematical discovery of all time.” You deposit $2500 in a mutual fund paying a rate of 3.25% compounding monthly. What is your balance after 2 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 FV = 2500 (1 + .0325 /12)12*2 $2,667.66 $2,689.78

18. Diversification: Time Value of Money: 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. LANGUAGE OF INVESTMENTS Taxes: Pay Yourself First: “Knowing the language allows you to tell your money what to do.” All profits on the investments discussed must be claimed as income. Therefore taxes must be paid of the income. You should automatically put a minimum of 10% of your income aside for saving and investing.

19. Investment Philosophy Everyone 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, aggressive

20. Tax-Sheltered Investments 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 Tax-sheltered investments are usually not tax-free! • Retirement • Child/dependent care • Education expenses • Health care expenses

21. When are taxes for tax-sheltered investments usually paid? OR What is the benefit of a tax-sheltered investment if taxes still have to be paid? There are often limits to the amount that can be invested

22. 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 employee Example: Employee benefits from having double the amount of money invested! Employer contributes the same amount of money to the employee’s investment account

23. Advantages to Employer-Sponsored Investments Makes investing automatic Reduces tax liability It is recommended that a person utilize these investment tools as much as possible if they are offered Possibility for employer to match investment