Saving and Investing Investment Risk

Key Investment Principles Risk and Return higher risk, higher potential return lower risk, lower return higher the interest rate or rate of return, the more savings you will have

Types of Investment Risk Financial Risk risk that the business or government will not will not be able to return your money Market Price Risk risk that the price of an investment will go down related to supply and demand behavior of buyers and sellers can easily change the price Diversification spreading investments over a number of different vehicles decreases risk example Liquidity ability to turn your investments into cash or spendable funds savings account vs real estate

Types of Investment Risk Inflation and Taxes Risk inflation-rise in the price of goods and services taxes-income taxes on gains buying power – lose Item Purchased TodayCost in 20 Years (4.5% average annual inflation rate) Cost in 20 Years (3.5% average annual inflation rate) Movie Ticket for $7$16.88$13.93 Gas for $20$48.23$39.80 Airline ticket for $500$1,205.86$ Fraud Risk misrepresentation of investments—investigate! Boiler Rooms Ponzi Schemes—Bernie Madoff

Investor (Personal) Risk How much risk are you willing to take? How much risk do you need to take? Risk Tolerance amount of risk you WANT to take Risk Capacity amount of risk you NEED to take

Tools To Help Offset Risk Diversification not putting “all your eggs in one basket” reduces your risk key involves investing in categories or types of investments that are affected by different kinds of risk

Tools To Help Offset Risk Dollar-Cost Averaging putting a set amount of money aside at regular intervals for investing excellent for long-term investing helps avoid buying high and selling low Example on board

Review Key Investment Principles - 3 Types of Investment Risk – 5 Types of Investor Risk - 2 Tools To Help Offset Risk - 2

Assignment Risk Tolerance/Capacity Quizzes Link on my website for assignment