Unit 3 - Investing: Making Money Work for You

1. Unit 3 - Investing: Making Money Work for You

2. Savings and Investments Unique Investment Features Unique Savings Features Common Features Short-term Low risk Earns small amount of interest Easy to get to Long-term More risky No guarantee investment will grow Have to sell to get cash

3. Amount Saved Per Week Value After 10 Years Investing Weekly at 5% Interest $ 7.00 $ 4,720 $ 14.00 $ 9,440 $ 21.00 $ 14,160 $ 28.00 $ 18,880 $ 35.00 $ 23,600

4. 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 • Afee 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

5. 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

6. Investing Annually to Achieve a Goal Value of $20 1 Year 2 Years 4 Years 6 Years $20.80 $21.63 $23.40 $25.31 4% $21.00 $22.05 $24.31 $26.80 5% Building…. $21.20 $22.47 $25.25 $28.37 6% $21.60 $23.33 $27.21 $31.74 8% $22.00 $24.20 $29.28 $35.43 10%

7. To Have $50,000 at 8% Interest Number of Years Saving Monthly Amount Daily Amount* 6 $543.33 $17.79 4 $887.31 $29.06 2 $1,928.03 $63.17 * Assumes a 365-day year for daily amounts

8. Investing a $10,000 Lump Sum Interest Rate 5 Years 10 Years 15 Years 20 Years 5% $12,763 $16,289 $20,789 $26,533 6% $13,382 $17,908 $23,966 $32.071 7% $14,026 $19,672 $27,590 $38,697 8% $14,693 $21,589 $31,722 $46,610 9% $15,386 $23,674 $36,425 $56,044 10% $16,105 $25,937 $41,772 $67,275 11% $16,851 $28,394 $47,846 $80,623 12% $17,623 $31,058 $54,736 $96,463

9. Investing $1,000 Annually Interest Rate 5 Years 10 Years 15 Years 20 Years 5% $5,526 $12,578 $21,579 $33,066 6% $5,637 $13,181 $23,276 $36,786 7% $5,751 $13,816 $25,129 $40,995 8% $5,867 $14,487 $27,152 $45,762 9% $5,985 $15,193 $29,361 $51,160 10% $6,105 $15,937 $31,772 $57,275 11% $6,228 $16,722 $34,405 $64,203 12% $6,353 $17,549 $37,280 $72,052

10. 72 Years Needed to Double Investment = Interest Rate 72 = Interest Rate Required Years Needed to Double Investment Rule of 72

11. Rule of 72: $10,000 Invested INTEREST RATE Year 12% 3% 6% $20,000 6 12 $40,000 $20,000 $80,000 18 72 ÷ 12% = 6 years $10,000 x 2 = $20,000 Doubles again in 12 years Doubles again in 18 years Doubles again in 24 years 24 $20,000 $40,000 $160,000 72 ÷ 3% = 24 years $10,000 x 2 = $20,000 72 ÷ 6% = 12 years $10,000 x 2 = $20,000 Doubles again in 24 years

12. 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

13. Commo- dities Penny Stock Speculative Stock / Bonds / Mutual Funds Collectibles Blue-Chip Common Stock Growth Mutual Funds Real Estate Balanced Mutual Funds High-Grade Preferred Stock High-Grade Convertible Bonds High-Grade Municipal Bonds or Mutual Funds Money Market Accounts or Mutual Funds High-Grade Corporate Bonds or Mutual Funds Insured Savings / Checking Accounts U.S. Savings Bonds Certificates of Deposit Treasury Issues FinancialPlanningPyramid Highest Risk Highest Earnings Lower Risk Lower Earnings

14. 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

15. 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!!!

16. Test Your Financial IQ

17. 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!

18. 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)

19. 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)

20. 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!

21. 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

22. 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

23. 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)

24. 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.

25. 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

26. 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

27. 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