1. L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY P LANNING Y OUR F INANCIAL F UTURE

2. L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Assessing Your Tolerance for Investment Risk 1.You and a friend are participating in a stock market game. You both have noticed that the share prices of some companies can move a lot, up or down, in any given day. Your friend says: “When it comes to investing, it’s a scary world out there.” When you think about investing your own money, which of the following phrases most likely comes to mind? A.Very worried about losses. B.Uncertain, but ready to plan for investing C.Welcoming of a new investment opportunity D.Excited about a new investment adventure P LANNING Y OUR F INANCIAL F UTURE S LIDE 21.3

3. L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Assessing Your Tolerance for Investment Risk 2. Imagine you received a surprise gift of $20,000. You decide to invest the money. Which alternative do you think is best for you over the long term? A.Deposit the money in a savings account, a money market account, or a similar safe investment. B.Invest it in safe, high-quality bonds or bond mutual funds. C.Invest it in stocks or stock mutual funds. D.Invest it in very high-risk bonds and stocks. P LANNING Y OUR F INANCIAL F UTURE S LIDE 21.3

4. L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Assessing Your Tolerance for Investment Risk 3. As you are planning to invest the $20,000, your financial advisor explains where your account total might be after one year. Which range would make you the most comfortable? A.$19,000 to $21,000 B.$17,000 to $23,000 C.$13,000 to $27,000 D.$10,000 to $30,000 P LANNING Y OUR F INANCIAL F UTURE S LIDE 21.3

5. L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Assessing Your Tolerance for Investment Risk 4. Imagine that you reached a decision about how to invest the $20,000 gift. How do you think you would feel afterward? A.Worried B.Satisified C.Hopeful D.Excited P LANNING Y OUR F INANCIAL F UTURE S LIDE 21.3

6. L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Assessing Your Tolerance for Investment Risk 5. For the last five years, your $20,000 investment has returned an average of 8 percent per year. However, it loses 16 percent over the next year. What would you wish to do? A.Sell all of the investment. B.Sell half of the investment. C.Hold onto the investment as it is. D.Buy more of the same investment. P LANNING Y OUR F INANCIAL F UTURE S LIDE 21.3

7. L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Assessing Your Tolerance for Investment Risk These questions reflect levels of investment risk. If you most often circled “A,” you are very risk averse (you don’t like risk). If you most often circled “B,” you are moderately risk averse. If you most often circled “C,” you are willing to take moderate risks. If you most often circled “D,” you are willing to take larger risks? Which answers did you provide most often? Why? P LANNING Y OUR F INANCIAL F UTURE S LIDE 21.3

8. L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Different Kinds of Risks Risk of principal: The risk that some or all of the original deposit or investment may be lost. Market risk: The risk that the forces of supply and demand or unforeseen events may affect the value of an investment. Interest-rate risk: The risk that interest rates will change. An investor, for example, might hold a fixed-rate investment, such as a bond. If the bond holder decides to sell the bond before maturity and market interest rates are higher than what the bond is earning, the price of the bond will be lower. Inflation risk: The risk that the return on an investment will not keep pace with inflation, and the saver’s purchasing power will fall. P LANNING Y OUR F INANCIAL F UTURE S LIDE 21.1

9. L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Risk Pyramid P LANNING Y OUR F INANCIAL F UTURE S LIDE 21.2

10. L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Three Criteria for Investment Decisions 1. Liquidity: How quickly an investment can be converted to cash. Savings account is very liquid (as long as the bank is open) with no penalty for withdrawal. Stocks and bonds are nearly liquid (they can be sold any time), but there is market risk (if you need the cash, you may have to sell them for less than the purchase price). P LANNING Y OUR F INANCIAL F UTURE S LIDE 21.3

11. L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Three Criteria for Investment Decisions 2. Protection of Principal: The risk that some or all of the investment may be lost. Can happen when there is a downturn in the stock market and stocks lose their value. Can happen when bonds are sold before their maturity. Can happen if a CD is cashed in before its term. Can happen if real estate loses value (as in the case of the housing market in 2008) P LANNING Y OUR F INANCIAL F UTURE S LIDE 21.3

12. L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Three Criteria for Investment Decisions 3. Estimated rate of return: The expected annual gain on an investment. Investments with low rates of return—like a savings account may be very safe, but returns are often below the level of inflation (increase in prices). P LANNING Y OUR F INANCIAL F UTURE S LIDE 21.3

13. L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Important Things to Know about Your Clients How much does the client have in savings? Is the client able to save some money each month without borrowing? Is the client responsible for people who are financially dependent? How much risk is the client willing to take in order to pursue a higher rate of return? How close is the client to retirement? Does the client expect his or her savings to generate current income? Is the client primarily hoping for growth? Would the client benefit from tax-deferred or tax-exempt investments? P LANNING Y OUR F INANCIAL F UTURE S LIDE 21.4

14. L EARNING, E ARNING, AND I NVESTING FOR A N EW G ENERATION © C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY Elements of a Financial Plan Financial goals Net worth statement Income and expense statement Insurance plan Saving and investment plan L ESSON 21 – P LANNING Y OUR F INANCIAL F UTURE S LIDE 21.3