Savings and Investment Options

Stocks, Bonds, Mutual Funds, etc.

Risk v. Return

• GENERALLY SPEAKING– Higher risk investments Higher POTENTIAL

returns (and greater potential losses)– In economics, EVERY investment has risks– Ex. FDIC insured savings account

• Risk of inflation• Risk of missed potential returns

Low Risk, Low Return

• Savings deposit accounts (.10%-1.15%)• You put money here when you plan to use it soon

• Certificate of Deposits (.5 %-2.4%)• Money Market Accounts (1%)• Advantages?

– Security/Safety– Liquidity

• Your Portfolio• 6-12 months of expenses should be held in these for

emergencies

Higher Risk, Higher Return

• Bonds– Loans to government or businesses– Fixed period of time– Fixed interest rate

• (5% historical average return)

– CAN LOSE VALUE • Interest rates rise and you decide to sell your bond• Company or government defaults

• Your portfolio• A percentage of your assets should be invested in bonds

(depending on age and risk tolerance)

EVEN HIGHER RISK, EVEN HIGER RETURN

• Stocks (SHAREHOLDER)– Ownership (equity) in a corporation– You profit on stocks when:

• The company pays you dividends from profits• You sell your stock for a higher price than you paid • (average historical return 11%) capital gains

• CAN LOSE VALUE– Company’s profits drop– Company goes bankrupt– Stock market drops in value for other reasons

• YOUR PORTFOLIO• A percentage of your assets should be

invested in stocks depending on age and risk tolerance

Moderate Risk, Moderate Return• Mutual Funds (and ETF’s)

– Portfolio of many stocks and/or bonds– Net Asset Value- cost for one “share” of fund– You pool your money with other investors– Index funds vs. Actively managed funds– Diversification!!!!

• The main way to manage risk

• YOUR PORTFOLIO• The average investor can maximize returns while

minimizing risk by investing in mutual funds that contain stocks and bonds

Other Investment Choices

• Gold (speculative)

• Commodities (oil, wheat, copper, etc.)

• Currencies (“Forex”)

• These tend to be more volatile (risky) than other investment choices

IRAs: Individual Retirement Accounts: $5,000 per year

• Conventional IRA• You invest money

and save on taxes now

• “Tax deferred”• You don’t pay taxes

till you withdraw after retirement

• Roth IRA• “Tax free”• You invest money

now after paying taxes on it

• You pay no taxes on the money when you withdraw after retirement