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INVESTING
Conclusion
• The Rule of 72 can tell a person:• How many years it will take an investment to double at a
given interest rate using compounding interest;• How long it will take debt to double if no payments are made;• The interest rate an investment must earn to double within a
specific time period;• How many times money (or debt) will double in a specific time
period.
Things to Know about the “Rule of 72”
The “Rule of 72”• Is only an approximation•The interest rate must remain constant•The equation does not allow for additional payments to be made to the original amount
• Interest earned is reinvested•Tax deductions are not included within the equation
Doug’s Certificate of Deposit
• Invested $2,500• Interest Rate is 6.5%
72 = 11 years to double investment
6.5%
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?
Jacob’s Car
• $5,000 to invest• Wants investment to double in 4 years
72 = 18% interest rate
4 years
Jacob currently has $5,000 to invest in a car after graduation in 4 years. What interest
rate is required for him to double his investment?
Another Example
• $3,000 to invest• Wants investment to double in 10 years
72 = 7.2% interest rate
10 years
Stocks, Bonds & Mutual Funds
What is investing?
Investing is purchasing a financial product or other item of value with an expectation of favorable returns.
What is the purpose of investing?
The purpose of investing is to save money in order to improve financial well-being.
Stocks, Bonds & Mutual Funds
ROI is the rate of revenues received for every dollar on invested in an item or activity.
ROI rates vary with eachinvestment.
What is return on investment (ROI)?
Stocks, Bonds & Mutual Funds
Stock is an instrument that signifies ownership in a corporation and represents claim on a share of a corporation’s assets and profits.
Stocks are typically riskier and long-term investments.
What are stocks?
Stocks, Bonds & Mutual Funds
Bonds are interest-bearing certificates used as a way for government or business to raise money.
The bondholder lends money to the bond issuer for a set amount of time and interest. When the bonds are “sold” back to the issuer, the interest earned is given to the bondholder.
Bonds are typically low-risk and good for short-term investments.
What are bonds?
Stocks, Bonds & Mutual Funds
Mutual funds are open-ended investments that are professionally managed and consist of a variety of investment instruments including stocks, bonds, options, commodities, and money market securities.
Diversification provides greater safety and reduces risk.
Mutual funds are long-term investments.
What are mutual funds?
Stocks, Bonds & Mutual Funds
Real estate is a piece of land and any buildings or structures on it.
Real estate is a long-term investment.
What is real estate?
Stocks, Bonds & Mutual Funds
Collectibles are items which have value due to its rarity and desirability, such as antiques, coins, cars, and art.
Collectibles are long-term investments.
What are collectibles?
Stocks, Bonds & Mutual Funds
Precious metals are natural metals that have value, such as gold, silver, platinum, and palladium.
Precious metals are long-term investments.
What are precious metals?
Stocks, Bonds & Mutual Funds
Do all investments offer a guaranteed positive return on investment (ROI)?
NO! Although some investments are more likely to have a positive return on investment.
Stocks, Bonds & Mutual Funds
The greater the risk an investment may lose money, the greater its potential to provide a positive substantial return. The inverse is also true.
How are risk and return related?
Stocks, Bonds & Mutual Funds
• Age• Risk tolerance• Investment goals
What factors determine the degree of risk investors take?
Stocks, Bonds & Mutual Funds
Very Conservative – seeks to maintain the original value of the investments and is prepared to accept lower returns for lower risk.
Conservative – seeks relatively stable returns and accepts some risk through a diversified portfolio.
Moderate – seeks higher medium-term returns and accepts the possibility of negative returns over short periods.
Aggressive – seeks high long-term returns and accepts the higher possibility of sustained negative returns over short periods.
Very Aggressive – seeks to maximize long-term returns and accepts the possibility of greater volatility and short-term capital losses.
Investor Profiles
Stocks, Bonds & Mutual Funds
Types of investments• Individual stocks• Individual bonds• Mutual funds• Real estate• Collectibles• Precious metals
PiggyBank
Savings Account
Individual Bonds
Mutual Funds
Individual Stocks
Real Estate
Collect-ibles
Precious Metals
Do you need a minimum amount of money to start/buy it?
No Maybe Yes Yes Yes Yes No Yes
Can you get initial money back?
Yes Yes Yes Maybe Maybe Maybe Maybe Maybe
Does it pay interest?
No Yes Yes Maybe Maybe No No No
Can someone steal it?
Yes No No No No No Yes Maybe
Is it professionally managed?
No Yes Yes Yes No No No No
Is it easy to access the money?
Yes Yes No Yes Yes Maybe Maybe Maybe
Best for Long-Term or Short-Term Goals?
Short Short Short Long Long Long Long Long
Identify the attributes (qualities) for different investments. Answer the questions for each type of investment.
Investment Attributes
Stocks, Bonds & Mutual Funds
Jane will be retiring in five years. She needs a low-risk place to put her money that will earn interest. Where might she invest? Why?
Bonds would be a good place for her retirement monies. They are typically low-risk and still pay interest.
Stocks, Bonds & Mutual Funds
John will be retiring in 38 years. He has an emergency fund that could support him for nine months if something were to happen. John wants his money to work for him and he is not scared of market fluctuations. Where might he invest? Why?
Stocks and/or mutual funds would be good options. Typically, stocks and mutual funds perform well over time and outperform other investments.
Stocks, Bonds & Mutual Funds
Sarah needs to start an emergency fund. Where might she invest? Why?
A savings account in a bank would be a good option for her. It is a low-risk investment, easily accessible and it earns interest.
Stocks, Bonds & Mutual Funds
Anne is saving for a new car. She wants to buy the car in three years. Where might she invest? Why?
A savings account in a bank would be a good option for her. She would earn interest, and it is a low-risk investment.
Stocks, Bonds & Mutual Funds
There are different types of investments and all have different ROI.
The greater the risk on an investment, the greater the possibility of high returns and also negative returns.
The type of investment should align with your investment profile.