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Introduction
The statement “Past performance does not guarantee future results” lets you know that just because an investment increased in value in the past doesn’t mean it will increase in value in the future.
All investments come with a level of risk or the possibility they might decrease in value.
There is a direct relationship between the return on an investment and the risk associated with the investment.
The higher the return, the greater the possibility you might lose some or all of the money you have invested.
Time is critical to successful investing because there is an inversely proportional relationship between age and risk tolerance.
July 2011
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2. Objectives • Explain why all investments come with some level of risk
You should be able to do the following after completing this lesson.
• Explain why all investments come with some level of risk
• Demonstrate how risk tolerance can be different for each investor
• Identify the relationship between risk and return
• Discuss the relationship between age and risk tolerance
• List the factors determining the overall risk of an investment
• Review hidden investment costs
• Define the different levels of risk
• Describe how investments are classified as to risk
• Define risk and other key terms introduced in this lesson
July 2011
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3. 9.2.1 – Investment Risk • What investment risk is
In this section, you will learn:
• What investment risk is
• Why risk is an integral part of investing
• The direct relationship between risk and return
• High-risk investments generally produce higher returns than low-risk investments
• The terms used to describe the different levels and types of risk
• The common risk classifications
July 2011
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4. 9.2.2 – The Risk of Inflation • What inflation is
In this section, you will learn
• What inflation is
• How inflation affects investments
• How inflation affects the purchasing power of money
• What the inflation adjusted return is
• How some investments protect the investor against the affects of inflation
You will run the following Interactive Example
• Inflation Risk Example
July 2011
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5. 9.2.3 – Hidden Investment Costs
In this section, you will learn
• The factors that can reduce the expected return for an investment
• What hidden investment costs are
• When hidden investment costs typically appear
• What early withdrawal fees are and when they apply
• What management fees are
• Why most people considered a home as an investment
July 2011
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6. 9.2.4 – Assessing Risk • Why Risk is a natural part of investing
In this section, you will learn
• Why Risk is a natural part of investing
• Why each investor must determine the level of risk they are comfortable with
• Why the most viable assessment of risk is an active investment market
• The relationship between risk and an individual’s time horizon
• What timed investments are
• About the risk and return for timed investments
July 2011
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7. 9.2.5 – Real Estate Investment Risk
In this section, you will learn
• Why most people consider a home as a long-term investment with a low to moderate level of risk
• Why many experts believe the risk associated with buying a home has increased in recent years
• How a home can decrease in value
• The median cost to buy a home has increased significantly over the years
• What exotic mortgages are and how they came about
• What caused the increase in risk associated with buying a home
July 2011
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8. 9.2.6 – Historical Market Risk
In this section, you will learn
• Who or what determines the historical risk of an investment
• The common levels of investment risk
• What determines risk
• How risk affects the typical return for an investment
July 2011
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9. 9.2.7 – Other Risks • The 3 common mistakes many investors make
In this section, you will learn:
• The 3 common mistakes many investors make
• How making one of the common mistakes will increase the risk of investing
• How to avoid the 3 common mistakes
• Why most investments can be classified in 3 ways
• How to treat each type of investment
July 2011
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10. Copyright © 2007-2011 … REMTECH, inc … All Rights Reserved
Discussion Questions
The typical student will spend 12 to 16 years completing their education before they officially enter the work force. What is the harm in waiting 4 or 5 years to begin investing for the future so they can enjoy some of the finer things in life?
What happens if you get close to retirement and suddenly realize your investments haven’t produced enough money for you to live on during retirement?
July 2011
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