McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER PLAYLIST SONG: “For the Love of Money” by The O'Jays Investment Basics

11-2 Learning Objectives LO 11-1 Distinguish between savings and investments. LO 11-2 Analyze the risk and return on varying investment products. LO 11-3 Interpret the hierarchies of the investment pyramid. LO 11-4 Examine the importance of varying your investments. LO 11-5 Compare portfolio asset allocations for the different personal finance life stages.

11-3 Savings vs. Investments Who is rich? He that is content. Who is that? Nobody.” ~ Benjamin Franklin How much money should you have in savings vs. investments? What is the difference? “Savings is not to make you rich, but it is to keep you from being poor.” ~ J.B. Quinn Savings – No or low-risk investments with low returns.

11-4 Should You Save or Invest? Figure 11.1

11-5 Impact of Inflation on Savings Inflation is Savings - retain your purchasing power by Investing - beat the inflation rate Bureau of Labor Statistics Consumer Price Index page Consumer Price Index from 1913 – present

11-6 Insured Savings FDIC – NCUA – United States Treasury Bills, Notes, and Bonds  Risk Premium – The difference between the risk-free rate of return and the expected yield of an investment with risk.

11-7 Risk of Investing Investing has risk – the chance of losing some or all of your investment To compensate for risk and entice an investor, investments with risk must pay a premium Risk premium – “Zero” risk – FDIC, NCUA, U.S. Treasury bills, notes, and bonds – risk-free rate

11-8 Types of Risk Default Risk or Credit Risk – Risk that the company invested in may declare bankruptcy  2009 Chrysler bankruptcy: bondholders received $0.26 for every dollar they invested  Bondholders could lose their entire investment  FDIC and NCUA will insure deposits up to $250,000 until December 31, 2013, when the cap will revert back to $100,000

11-9 Types of Risk Interest Rate Risk – Risk taken on when you lock into a fixed-rate investment for a specific length of time

11-10 Types of Risk Interest Rate Risk – Risk taken on when you lock into a fixed-rate investment for a specific length of time

11-11 Types of Risk Market Risk – The risk that the value of your investment will decrease due to changes in the market 

11-12 Liquidity Risk – The risk that you will not be able to Types of Risk

11-13 Analyzing Your Risk Tolerance How much can you afford to lose? Rule of thumb: The higher the risk, the higher the potential return and the less likely you are to achieve the higher return Risk tolerance quizzes  Rutgers University’s Investment Risk Tolerance Quiz Rutgers University’s Investment Risk Tolerance Quiz  money.msn.com money.msn.com

11-14 Investment Pyramid

11-15 Diversification of Assets Diversification –  Why is diversifying your investments important? Portfolio – Holding more than one investment Asset Allocation – Diversified Balanced Funds – Both equities and bonds Targeted and automatic asset allocation mutual funds

11-16 Asset Allocation for Target Date Funds T. Rowe Price Balance Fund (RPBAX) Vanguard Target Retirement Fund Asset Allocation Tool Vanguard Target Retirement Fund Asset Allocation Tool

11-17 Portfolio Evaluation Re-evaluate your investment goals, risk tolerance, portfolio returns, and asset allocation Pick an easy date to remember to rebalance your portfolio   January 1 st 

11-18 Independent (16-24)  529 College Savings Account  Retirement Savings  Early Family (25-44)   529 College Savings Account   Auto Down Payment Life Stages and Accounts How Should the Assets Be Allocated?

11-19 Empty Nest (41-65)   Funds used within the next 10 years Retirement (66+)  Retirement funds  Investment funds  Life Stages and Accounts How Should the Assets Be Allocated?

11-20 Continuing Case Blake bought into a stock mutual fund as a retirement investment 6 months ago. Ever since then, he has watched the prices slowly drop each month. He is afraid that it will soon be worthless. He is tempted to cash in the stock and move what funds are left to another instrument. What advice would you give him?