Basics of Saving and Basics of Saving and InvestingInvesting

Debra PankowDebra PankowSeptember 2003September 2003

Major PointsMajor Points

Difference between saving Difference between saving and investingand investing

Risk/rate of return trade-offRisk/rate of return trade-off Time value of moneyTime value of money Level of risk toleranceLevel of risk tolerance Key factors in personal Key factors in personal

investment plan/asset mixinvestment plan/asset mix

SavingsSavings vsvs InvestmentInvestment

SafeSafe

Easily AccessibleEasily Accessible

Low returnLow return

Short-term goalsShort-term goals

RiskRisk

Volatile in short Volatile in short time frametime frame

Potential Potential appreciationappreciation

Mid & Long-term Mid & Long-term goalsgoals

Comparing the ReturnsComparing the Returns

Savings Savings AccountAccount StocksStocks

Initial Initial InvestmentInvestment

$100$100 $100$100

Current IncomeCurrent Income $2$2(interest)(interest)

$2 $2 (dividend)(dividend)

Capital GainCapital Gain $0$0 $3$3

Total ReturnTotal Return $2$2 $5$5

Rate of ReturnRate of Return 2%2% 5%5%

Rule of 72Rule of 72

The Number 72The Number 72 Interest RateInterest Rate Years to DoubleYears to Double

Average Annual Rates of Average Annual Rates of Return, 925-2000Return, 925-2000

0

2

4

6

8

10

12

14

LgStock

SmStock

GovBnds

T Bills Inflation

(Ibbotson Associates,2001)(Ibbotson Associates,2001)

RiskRisk

InflationInflation Business FailureBusiness Failure Changes in the EconomyChanges in the Economy Interest Rate ChangesInterest Rate Changes

Risk/Rate of Return Risk/Rate of Return RelationshipRelationship

DiversificationDiversification

Savings/Certificates of Savings/Certificates of DepositDeposit

BondsBonds Variety of SecuritiesVariety of Securities

Small StocksSmall StocksLarge StocksLarge StocksMutual fundsMutual funds

Personal AssessmentPersonal Assessment

Time LineTime Line

Risk ToleranceRisk Tolerance

Personal Financial GoalsPersonal Financial Goals

Working with Financial Working with Financial ProfessionalsProfessionals

Know yourselfKnow yourself Know what professional you Know what professional you

may need may need Know your professionalKnow your professional Ask the right questionsAsk the right questions Keep lines of communication Keep lines of communication

openopen

Basics of Saving and Basics of Saving and InvestingInvesting