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Bellwork: Rule of 72

Bellwork: Rule of 72. 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?.

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Bellwork: Rule of 72

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  1. Bellwork:Ruleof 72 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? 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? Allows a person to easily calculate when the future value of an investment will double the principal amount

  2. Rule of 72 • It is an approximation • Albert Einstein is credited for figuring this out; At 10% interest rate, money doubles every 7.2 years • Can also be used to figure out what interest rate is needed to double your money. • 72/years=% interest needed to double

  3. The Fundamentals of Investing Advanced Level

  4. Investments Investments -assets purchased with the goal of providing additional income from the asset itself but with the risk of loss

  5. All Investments Have Some Risk Investments have the potential for higher returns

  6. Investments are Important to Building Net Worth Savings Tools = Monetary Assets (liquid – quickly and easily converted to cash) Investment Tools = Investment Assets (may not be easily converted to cash or penalties charged to access the funds early) Investments are less liquid than savings tools

  7. Investments Help Accomplish Long-Term Goals It is recommended that at least 10% of net income is dedicated to savings and investments each time income is received

  8. Saving vs. Investing

  9. Saving vs. Investing What types of feelings result from saving and investing?

  10. Rate of Return Total return on investment expressed as a percentage of the amount of money saved

  11. What is Mandy’s Rate of Return? Mandy’s rate of return on investment is 5% 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?

  12. Bellwork • Read the article: Six feet under as a retirement plan? • Write down two statements or statistics that particularly caught your attention. • Elaborate on these statements • Americans are not saving for retirement because… • Americans are more likely to have established savings if… • My thoughts on this are…

  13. Risk vs. Return Activity

  14. Inflation Inflation Risk The danger that money won’t be worth as much in the future as it is today Strive to have the rate of return on investment be higher than the rate of inflation How does inflation relate to investing? Inflation Rise in the general level of prices

  15. Investments • Title: Investing • Bond • Stock • Real Estate • Speculative Investment • Mutual Fund/Index Fund • Lending vs. Owning • Investment Philosophy • Portfolio Diversification • Brokerage Firms • Taxes

  16. Types of Investment Tools What do you already know about each investment tool?

  17. Investments http://www.learn360.com/ShowVideo.aspx?ID=930142 What It Means to Buy a Company’s Stock

  18. Bond Maturity date – specified time in the future when the principal amount of the bond is repaid to the bondholder

  19. Stock • A share of ownership in a company • Owner of the stock Usually a stockholder owns a very small part of a company

  20. Stock Returns - Dividends

  21. Stock Returns – Capital Gains

  22. How to read a stock quote Current price and change for the day (9:30-4 ET ) Dividends High and low stock prices for the last 52 weeks Earnings per share Price of first trade of the day How many shares traded on last trading day / average trades in last 30 days # of shares held by investors and company insiders Market Risk in relation to market = +1 more risk -1 less risk Total value of company % of shares held by institutional managers Price to Earnings Ratio: Good to compare similar stock

  23. Real Estate Ownership of residential or commercial property or land Real estate can be time consuming but the potential for returns is high

  24. Speculative Investments • Type of return depends on the investment • Options • Futures • Collectibles

  25. Mutual Funds When a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds

  26. Mutual Funds Reduces investment risk Fees may be high Saves investors time

  27. Ariana has $150 to InvestOption 1 - Stock Ariana invests in one company’s stock Company C has had a bad year and their market price drops significantly. Ariana may lose her $150 investment

  28. Ariana Has $150 to InvestOption 2 – Mutual Fund • Market price of companies C and F decreased • Market price increased for all other companies • Ariana has reduced her investment risk and may still earn money

  29. Index Fund

  30. Lending vs. Owning When investing, consumers either lend money to the company/organization or they own the asset Examples Returns

  31. Knowledge of the General Risk Level Helps Manage Risk Owning Lending Type of return Type of Investment • Decreasedinflation risk Increasedpotential for high returns Increasedinvestment risk

  32. Characteristics of Investment Tools Order cards from lowest to highest Investment Risk Order cards from lowest to highest Potential Returns Order cards from lowest to highest Inflation Risk

  33. Investment Philosophy If someone was an aggressive investor, what types of investment tools would they primarily have in their portfolio?

  34. Portfolio Diversification Investing in a mutual fund is an automatic form of portfolio diversification

  35. Stock Exchange Investments are purchased from a stock exchange (except for real estate and some speculative investments)

  36. Brokerage Firms Brokerage firms facilitate the buying and selling of investments on the stock exchange

  37. Discount Brokerage Firm Fees Will usually charge a fee for completing a buy/sell transaction • Additional fees may include: Total fees are often lower, but an individual must have the knowledge and time to monitor their investments

  38. Full-Service Brokerage Firm Fees Financial advisors are compensated for the time and knowledge they provide investors. Most charge fees using one of these methods. In addition to fees, financial advisors may earn commissions paid by the company.

  39. Choosing a Brokerage Firm Important to research the financial advisor and firm he/she works for

  40. Tax-Advantaged Investments Savings and investments are a form of unearned income and therefore subject to income tax Tax-advantaged investments reduce, defer or adjust the current year tax liability • Most common: • Retirement • Education Government encourages people to invest in certain types of investments

  41. When are taxes for tax-advantaged investments usually paid? OR

  42. Investing for Retirement

  43. Retirement Accounts The trade-off to tax advantages is most accounts have penalties if money is withdrawn early There are many other types of plans available

  44. Summary

  45. Risk Tolerance • In General, how would your best friend describe you as a risk taker? • A real gambler • Willing to take risks after completing adequate research • Cautious • A real risk avoider

  46. Risk Tolerance • You are on a TV game show and can choose one of the following. Which would you take? • $1,000 cash • A 50% chance at winning $5,000 • A 25% chance at winning $10,000 • A 5% chance at winning $100,000

  47. Risk Tolerance • You have just finished savings for a “once-in-a-lifetime” vacation. Three weeks before you plan to leave, you lose your job. You would: • Cancel the vacation • Take a much more modest vacation • Go as scheduled, reasoning that you need the time to prepare for a job search • Extend your vacation, because this might be your last chance to go first-class

  48. Risk Tolerance • If you unexpectedly received $20,000 to invest, what would you do? • Deposit it in a bank account, money market account, or an insured CD • Invest it in safe high quality bonds or bond mutual funds • Invest it in stocks or stock mutual funds

  49. Risk Tolerance • In terms of experience, how comfortable are you investing in stocks or stock mutual funds? • Not at all comfortable • Somewhat comfortable • Very comfortable

  50. Risk Tolerance • When you think of the word “risk” which of the following words comes to mind first? • Loss • Uncertainty • Opportunity • Thrill

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