Outcome A3: Understand the various savings and investing alternatives commonly available.

Investment Portfolio  Bank Accounts  Government Bonds  Stocks/Shares  Mutual Funds

Bank Accounts  Safe place to keep money you need “fast”  When you put your money into a savings account, you are really “lending” your money to the bank.  Each month the bank will pay you extra money into your bank account to say “thank you” for lending them your money. This “extra money” is called “interest”

Government Bonds  Instead of lending our money to a bank, we can lend our money to the government.  When you lend your money to the government for a certain period of time, and they promise to pay you back all of your money plus extra or interest, it’s called a “bond”.  Just like a bank account, government bonds pay you interest too, but usually you have to tell the government how long you want to lend them your money. (1 year, 2 year…30 years)  A government bond is a safe investment since you are guaranteed to get all of your money and interest back.

Stocks/ Shares  Instead of lending your money, you can own something…  You can own a “part” or a “share” of a company like McDonalds, or Irwin Toys, or even a bank.  We don’t have enough money to buy the whole company, but we can own a little piece or “share” of those companies.  How do you make money when you buy stocks or shares?

Stocks/ Shares Cont’d…  How do you make money when you buy stocks or shares? When the company that you bought shares in does well and “makes lots of money” or “profit”, then you also make money because you own part of that company. –Your stock increases in value. BUT, when these companies don’t do well-when they lose money, you also lose money because you are an owner.-The value of your stock decreases. 

Stocks continued…  So, putting your money into stock can be a little bit risky.  When you invest in government bonds, or put money into a bank account, you get all of your money back, plus interest. You don’t have the same guarantee, when you invest in stocks or shares.  The value of your stock can go up, (you make money) or down (you lose money) depending on whether the company you own a part of is doing well, or not so well.

Stocks vs Mutual Funds  Instead of owning a share or stock in just one company, what do you think of owning a little share of lots of different companies?

Mutual Funds  There are lots of people who don’t have enough money to buy a whole company, but do have enough to buy a little bit…  They can own a little bit of a lot of different companies.  These people can put their money together into one “big pot” or “fund”.  This “fund” is called a “mutual fund”. (e.g. Mutual friends on Facebook)  With all the money in this “big pot” or “fund”, they can buy a little piece of many different companies.

Mutual Funds  If we want to own a part of this fund, we have to put some money into the fund, or buy a piece of it.  The “piece” of the mutual fund you buy is not really called a “piece”, it is called a unit.

Mutual Funds  Let’s say you invest your money in only one company and that company runs into money problems… Guess what?...You lose money.  BUT…if you invest your money in 100 different companies, chances are that some will lose money and some will make money.  When you invest in a mutual fund, you are putting your money to work with the money of other investors like yourself.

Mutual Fund  A “fund manager” then takes all the money and goes shopping for shares in hundreds of different companies.  These shares become the ingredients of the mutual fund that mix well together and make the mutual fund big and strong.  So the benefits of mutual funds? They are easier to afford. They can be less risky. Managed by people with lots of experience in investing.

Mutual Funds cont’d…  At the end of the day, mutual funds sometimes pay you extra too!  The extra that mutual funds pay is not called interest, it’s called “dividends”.

Golden Rule of Investing  DIVERSIFY!!!  Don’t put all your eggs in one basket! Let’s say we have 9 eggs which we place into one basket.  If something happens to knock the basket over and the eggs come tumbling out and break-we have no eggs. But…let’s say we spread the 9 eggs around-3 eggs into each of 3 baskets.  Now, if one of the baskets of eggs spills, only 3 eggs break, and we would still have 6 eggs left.

Eggs in a Basket…  Now pretend that the eggs are our money…  If all of our money was in one place-let’s say one stock-and something happened to that one stock and the price went down very low, we could lose a lot of our money.  BUT…if we didn’t put all of our money into one basket, if we put some into bonds and some into the bank, then if something happened to our stock, we would still have our money which was invested in a bond or our bank account.

3 Basic Assets  Cash  Fixed Income  Equity

Cash  This is where you put the money you may need soon.  It can be taken out at any time.  Our bank account is a member of this group.

Fixed Income  Investments that pay interest, but your money is usually locked in for a longer time-longer than a bank account.  Our bond is in this group.

Equity  Equity means “ownership”.  If we want to buy stocks or shares or mutual funds, we talked about owning pieces or units of one company or a group of companies.  Stocks/shares and mutual funds are in this asset class and are generally called “equity” investments.  Equity investments can be sold at any time, but they are investments that should be made with a long term view.  The companies we are investing in take time to grown and so our investment needs time to grow.

Balanced Portfolio  When you invest your money and you want to diversify, you should have some of your money spread among each of these 3 basic asset classes: 1) cash, 2) fixed income and 3)equity.  If you do, then you have created a balanced investment portfolio.