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.
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.
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.
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.
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There is no taxes on gains until the money is withdrawn from the account.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.
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
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.
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.
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.
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.


Bear market exists in the stock market when prices are steadily decreasing.


Profit-Taking occurs when people who own stocks that have increased in price sell
those stocks
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.
Assignments
 Do
problems 1-11, 15, 17 on pg. 329
 Do
problems 1-9, 17 & 18 on pg. 337