1. Lesson 10-2 Principles of Saving and Investing LEARNING GOALS: -DISCUSS THE CONCEPT OF RISK VERSUS RETURN. -LIST AND EXPLAIN THE TYPES OF RISK THAT ARE FACED BY INDIVIDUAL INVESTORS. -DESCRIBE THE TAX ADVANTAGES AVAILABLE WITH CERTAIN TYPES OF INVESTMENTS.

2. Risk vs. Return  When selecting an investment, you must weigh the risk involved against the possible return expected.  Generally the higher the risk, the greater you possible return will be.  The ideal investment would have all of these features:  The principal is safe (no risk)  The rate of return (earnings) is high.  The investment is liquid (you can get your money quickly without penalty).  You can invest quickly and easily.  The costs of investing are low, both in terms of the amount invested as well as investment fees.  The earnings and long-term gains from the investment are tax-free or tax deferred.

3. Growth of Principal and Return on Investment  When money is set aside for savings, it should be growing. The principle grows through the compounding of interest.  When you put money into savings or an investment, you expect the value of the savings or investments to grow.  Return on investment (ROI) is a measurement of return expressed as a percentage.  To find (ROI), divide the amount you gained by the amount you invested.  The gain could also include other amounts you received such as dividends.

4. Types of Risk  Investment risk is the potential for change in the value of an investment.  Inflation Risk is the chance that the rate of inflation will be higher than your investment rate of return. When this occurs, your investment loses value.  Industry Risk is the chance that factors affecting an industry as a whole will negatively affect the value of an investment.  Political Risk is the chance that a political event (such as a new law or policy, war, or an election) will affect the value of an investment.  When news is good, stock prices tend to rise. When news is bad, stock prices tend to fall.  Stock Risk is the chance that activities or events that affect a company will change the value of an investment.  Investment Risk vs. Gambling  A game of chance, or gambling, is hardly ever a good investment. “When you can’t afford to lose, then you can’t afford to play.”  Games of Chance should be considered entertainment only – not ways to make money.

5. Tax Advantages of Investing  Tax Deferral is a postponement of taxes to be paid.  There is no taxes on gains until the money is withdrawn from the account.  Also, the tax on the money contributed to the account may not have to be paid until later.  Tax-exempt means they are not subject to taxation.  Interest on Series EE and Series I savings bonds are tax free if they are used for education.  Interest earned on municipal bonds may be free from federal income tax.  Those under 18 can earn up to $1,900 of investment income tax-free  Employer sponsored retirement plans are tax deferred.

6. Lesson 10-3 Strategies for Saving and Investing LEARNING GOALS: -EXPLAIN THE CONCEPT OF SYSTEMATIC SAVING AND INVESTING -DESCRIBE HOW YOU CAN LOWER INVESTMENT RISK THROUGH DIVERSIFYING AND BUILDING AN INVESTMENT PORTFOLIO -EXPLAIN HOW YOU CAN MAXIMIZE INVESTMENT RETURN BY UNDERSTANDING THE FINANCIAL MARKETPLACE AND THE ECONOMY

7. Systematic Savings and Investing  Systematic means regular, orderly, or done according to a plan.  Systematic saving is a strategy that involves regularly setting aside cash that can be used to achieve goals.  Once money is set aside in savings, it should remain there until used to meet a planned goal.  The amount should be the most you can comfortably afford to pay each period.  Systematic investing is a strategy that involves a planned approach to making investments on a regular basis.  When you first start investing, you may wish to buy safe and liquid investments.  Later years, you may want to take more risk so your principal can grow faster over time.

8. Systematic Saving and Investing Strategies  Long-Term Focus – A systematic saving and investing plan is designed for growth in the long run, not for short-term results.  Investors may need to hold investments for 20 or more years to get the returns they want. In a given year, investments may actually lose money but over time gain.  Investment Tracking is a technique for making investment choices by following the prices of stocks and other investments over time.  Market Timing involves buying and selling stocks based on what the market is expected to do.  Dollar-cost Averaging is when a person invests the same amount of money on a regular basis, such as monthly, regardless of market conditions.  Overall, the dollar cost per share may be less than the average price.

9. Reducing Investment Risk  Diversify  Diversification involves holding a variety of investments for the purpose of reducing overall risk.  Build a Portfolio – all of a person’s savings and investments make up that person’s investment portfolio.  An investment portfolio is a collection of assets that provides diversification for an investor. The portfolio should be diversified.

10. Maximize Investment Return  Financial market refers to any place where investments are bought and sold.  Bull Market exists in the stock market when prices are steadily increasing. During a Bull market, price increases are often followed by profit-taking.  Profit-Taking occurs when people who own stocks that have increased in price sell those stocks  Bear market exists in the stock market when prices are steadily decreasing.  This is a good time to buy stocks that are sound investments.  Economic Conditions  When the economy is in a period of general growth, the market for many investments is growing.  When the economy is in a period of general slowdown, the market for investments is declining.

11. Assignments  Do problems 1-11, 15, 17 on pg. 329  Do problems 1-9, 17 & 18 on pg. 337