Grade: 10 Lesson # 5

Is investing worth the risks?

SS.912.FL.5.10: Explain that people vary in their willingness to take risks because the willingness to take risks depends on factors such as personality, income, and family situation.

Correlated Literacy Standards:LAFS.910.RH.2.4: Determine the meaning of words and phrases as they are used in a text, including vocabulary describing political, social, or economic aspects of history/social science.LAFS.910.SL.1.1: Initiate and participate effectively in a range of collaborative discussions (one-on-one, in groups, and teacher-led) with diverse partners on grades 9–10 topics, texts, and issues, building on others’ ideas and expressing their own clearly and persuasively.

Image: In a Free Market, individuals invest in the stock market

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SS.912.FL.5.10: Explain that people vary in their willingness to take risks because the willingness to take risks depends on factors such as personality, income, and family situation.

Risky Business: Investment 101

Lesson Number (5):

Correlated Florida Standards (See Full Text on Cover Page) LAFS.910.RH.2.4 LAFS.910.SL.1.1

Essential Question What is investing? What are common investment risks? How does the rule of 72 for compound interest affect investments? Why invest? Why did Congress create the Securities and Exchange Commission?

Learning Goals/Objectives Understand why people invest Learn how to think about financial decisions Understand key concepts associated with investing Compare and contrast the short- and long-term consequences of investment decisions

Overview In this lesson, the teacher will introduce to students the concept of investing. The lesson provides

students with an understanding as to why people are willing to take risks because of behavior, income and household.

Materials Background Information [if necessary, the teacher can use these resources to build their background

knowledge] “Why Invest?” (included in lesson) “The Role of the SEC” (included in lesson) “The Top 10 Terms Every New Investor Should Know” (included in lesson)

Chart paper Handout # 1 “Low Vs. High-Risk Investments For Beginners” (included in lesson) Handout # 2“Risk And Outcome” (included in lesson) Bonds vs. Stocks [9:20]

https://www.youtube.com/watch?v=rs1md3e4aYU The rule of 72 for compound interest [9:10]

https://www.youtube.com/watch?v=mec-QpjQMXY Investing Basics: Mutual Funds [5:06]

https://www.youtube.com/watch?v=MNEKXrCUV_0 Traditional IRAs[13:23]

https://www.youtube.com/watch?v=UV8kgqk_DAYTime

50 minutesVOCABULARY■ Bonds■Compound Interest ■High Risks■ IRAs■Low Risks■ Mutual funds ■Opportunity Cost ■ Return ■ Stocks

Activity Sequence

INTRODUCTION/HOOK(5 minutes) Tell the students that today’s class will be devoted to discussing risks involved with investing. Ask

the students about their experiences in investing. Some students may have experience in investing, others may have minimum to no experience.

FLIPPED CLASSROOM [Technological pre-learning; This pre-learning strategy is often accomplished online, with the teacher posting instructional videos for students to watch at home.]Have students to view the following video clips:

Bonds vs. Stockshttps://www.youtube.com/watch?v=rs1md3e4aYU

The rule of 72 for compound interesthttps://www.youtube.com/watch?v=mec-QpjQMXY

Investing Basics: Mutual Fundshttps://www.youtube.com/watch?v=MNEKXrCUV_0

Traditional IRAshttps://www.youtube.com/watch?v=UV8kgqk_DAY

For each video clip, have students to write a brief summary in their journal on what it is, how it works, and what are the advantages?1. Bonds2. Compound Interest (Rule 72)3. IRA4. Mutual funds5. Stocks

ACTIVITY1. Introduction (5 minutes)

This lesson begins with the assumption that students have little to no background in finance or investing. If your students are already familiar with such topics, feel free to skip some of this introductory material.Open the lesson by asking students to list (in their journal or on a loose sheet of paper) all of the things that they think about when they hear the word investment. Students will usually focus primarily on the stock market but should be also familiar with IRA and rule 72. Encourage students to think as broadly as possible. Other than the stock market, what images or ideas go along with the word investment? If students are stuck, ask them what it means to invest in your future? This will usually spur thoughts of college, equity such as buying a house or possibly having children (a liability not investment). If possible, display students’ answers on a Promethean, SMART or dry-erase board.

2. Definitions (5-10 minutes)After this brief brainstorming session, give the students one to two minutes to create their own definitions of investing (i.e. What is investing?). Have students share their definitions with the class. A very general definition of an investment is: giving up something in the present in order to gain something more in the future. This definition has two key parts: 1) present sacrifice, and 2) future gain. As students share their individual definitions, try to reinforce these two ideas as much as possible. For example, if a student says, “An investment is a way to make money,” encourage the student to enhance this definition (an investment is giving up money/time in the present in order to make money in the future). For each student who shares his or her definition, try and repeat/reinforce the idea of present loss and future gain. Use this conversation to introduce the term return as a synonym for future gain.

3. Cooperative Group (5-10 minutes)Divide your students into four groups. Assign each group a topic: Bonds versus Stocks, Compound Interest (Rule 72), Mutual Funds, IRA. Have the students illustrate -draw an image, explaining their topic.

4. Whole Group Instruction (10 minutes)Using a read aloud strategy (choral, popcorn, etc…). Have students to read and discuss “Low Vs. High-Risk Investments For Beginners”.

5. Risk and Outcome Activity (5-10 minutes)After the cooperative group strategy, have the students in their small groups complete the Risk and Outcome activity. Provide each group with a copy of this handout. Give each group 5-10 minutes to work through the examples on the sheet. Use the handout examples to introduce students to the concept of risk. Which alternative did the students choose in the three example problems? Why did they make their choice? Define risk as the amount of uncertainty someone has about the future outcome. If an investment is a present sacrifice for a future gain, a risky investment is a present sacrifice for a very uncertain future gain.

CLOSURE(5 minutes) Encourage students to think of examples of risky investments; professional athletes provide a good

example. As young adults, they must invest a huge amount of time (and money) for a very uncertain (and unlikely) future reward. The lottery is another good example (although with less present sacrifice). Which is more risky? This is a discussion that will continue in the next lesson.

OPTIONAL EXTENSION SUGGESTION/HOME LEARNING Outside of the classroom, ask students to pay attention to TV commercials. Ask each student to pick

one particular commercial. What is the message of the commercial? Is the commercial asking you to make an investment? What is it asking you to give up? What are they offering you in return?

BACKGROUND INFORMATION

Why Invest?

A few people may stumble into financial security. But for most people, the only way to attain financial security is to save and invest over a long period of time. You just need to have your money work for you. That’s investing.

There are two ways your money can work for you:

• Your money earns money. Someone pays you to use your money for a period of time. You then get your money back plus “interest.” Or, if you buy stock in a company that pays “dividends” to shareholders, the company pays you a portion of its earnings on a regular basis. Now your money is making an “income.”

• You buy something with your money that could increase in value. You become an owner of something that you hope increases in value over time. When you need your money back, you sell it, hoping someone else will pay you more for it.

Compound interest is a key aspect of investing. With compound interest, you earn interest on the money you save and on the interest that money earns. Over time, even a small amount of savings can add up to big money and help you achieve your financial goals.

Sweet: If you buy a $1 candy bar every day, it adds up to $365 a year. Put that $365 into an investment that earns 5% a year, and it would grow to $465.84 by the end of five years. By the end of 30 years, you would have $1,577.50. That’s the power of “compounding.”

All investments involve some degree of risk. If you intend to purchase securities such as stocks, bonds, or mutual funds, it's important that you understand before you invest that you could lose some or all of your money.

Unlike deposits at FDIC-insured banks and NCUA-insured credit unions, the money you invest in securities is not federally insured. You could lose your principal, which is the amount you've invested. That’s true even if you purchase the securities through a bank.

The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long-term horizon, you may make more money by carefully investing in higher-risk assets, such as stocks or bonds. On the other hand, investing solely in cash investments may be appropriate for short-term financial goals. The principal concern for individuals investing in cash equivalents is inflation risk, which is the risk that inflation will outpace and erode returns.

Source: https://investor.gov/introduction-markets/why-invest

The Role of the SEC

Mission

The U. S. Securities and Exchange Commission (SEC) has a three-part mission:• Protect investors• Maintain fair, orderly, and efficient markets• Facilitate capital formation

Congress Created the SEC

When the stock market crashed in October 1929, so did public confidence in the U.S. markets. Congress held hearings to identify the problems and search for solutions. Based on its findings, Congress – in the peak year of the Depression – passed the Securities Act of 1933. The following year, it passed the Securities Exchange Act of 1934, which created the SEC.

The main purposes of these laws can be reduced to two common-sense notions:• Companies offering securities for sale to the public must tell the truth about their business, the securities they are selling, and the risks involved in investing in those securities.• Those who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly.

Source: https://investor.gov/introduction-markets/role-sec

The Top 10 Terms Every New Investor Should Know

Investing isn’t simple – it requires lots of decisions, from where to put your hard-earned money to how long you want to keep it tied up in any one investment. Even talking about investing can seem challenging, since financial experts use a language all their own to communicate their ideas.

Still, “It’s empowering to know how to take care of your money,” says Paula Hogan, a financial advisor in Milwaukee, Wisconsin “People who are smart about money matters have more options in life. It’s part of being an independent, competent adult.”

Becoming a savvy investor starts with looking, listening and building on what you already know. “What do you observe about how the people you know handle money? Whom do you want to emulate? Read the personal finance columns in your local newspapers and online. Understand the power of saving early, and develop a habit of saving a specific portion of every dollar you earn or receive as a gift, no matter what.”

To help with some basics, Knowledge@Wharton High School has come up with a Top 10 list of terms that every new investor should know. Learn these and you’ll be well on your way to navigating the investment landscape.

1. Return on Investment . Return on Investment, or ROI, refers to how much you’ll earn (or expect to earn) as a percentage of your investment. So if you’re investing $100, and you get back $110 (a $10 profit), your ROI is 10%. Generally, you hope to get a higher ROI on a riskier investment.

2. Cash . Everyone knows that cash refers to bills, coins and other kinds of currency. When financial advisors talk about moving some of your portfolio, or investments, into cash, they don’t mean you should hang on to a bunch of dollar bills or other type of currency. Instead, they are usually referring to liquid investments, or investment vehicles that are easily swapped for cash, like certificates of deposit (CDs), Treasury bills or money market accounts.

3. Portfolio . A portfolio is a collection of investments owned by the same person or company. An individual typically builds his or her portfolio with different kinds of company stocks or different types of investments, such as stocks, bonds and mutual funds. You will often hear the phrase “diversified portfolio” to refer to a portfolio that has spread its risk over different types of industries and/or investments.

4. Asset Allocation . This refers to your plan, or strategy for your investments. You could put all of your money in a single investment, like buying stock in one company — but you could lose out big-time if it doesn’t do well. Instead, you could try to balance your risk by investing among several companies. That way, if one goes down, another may still go up. Some financial advisors go even further by suggesting that you put your money in different classes, or types of investments, like cash, bonds or stocks. Check out the related stories in the toolbar to learn about the various types of investments.

5. Bonds and Stocks . Bonds are where you loan money to an entity – usually a company or a government body – in exchange for a promise that they will pay you interest on your money. Bonds are a little riskier than cash investments (what if the company goes bankrupt?), but will usually pay more interest than a banksavings account. Stocks are basically an ownership interest in a company. So, if a company does well, the price of the stock will probably rise, and the company may even pay dividends to stockholders. However, nothing is guaranteed, and you can lose part or all of your initial investment if a company doesn’t perform well.

6. Risk Tolerance . It’s important to remember as a new investor that all investments involve some degree of risk. The reward for taking on a riskier investment may be a higher return — or not, depending on the performance of that investment over time. As you invest, you need to understand your own tolerance for risk. Are you OK with the idea of potentially losing money to get better results? Then you have a high risk tolerance. If you would rather take a safer investing path, then your risk tolerance is lower. Sometimes, it depends on where you are in the investment lifecycle. Typically, the younger you are when you start investing, the higher your risk tolerance and your potential for greater long-term results since you have more time to realize that investment.

7. Mutual Fund . This is when a group of investors gets together to buy assets like stocks and bonds. But rather than calling your friends and family and getting them to pool their money – which would probably take you until the next century to pull off – a mutual fund does all the legwork of bringing investors together and diversifying assets. A mutual fund may hold hundreds or more of stocks or other financial instruments, reducing the possibility of loss from any one investment. Professional money managers typically make the investment and selling decisions.

8.  Securities and Equities . They are two different things! Securities refer to different types of investments, such as stocks, bonds and mutual funds. Equities refer specifically to stocks, or shares in a company.

9. Price-to-earnings Ratio . The P/E ratio, as it’s often called, refers to a company’s stock price as a percentage of its per-share earnings. A low P/E is usually 0 to 10 (a company that earns $1 a share and has a $10 per share stock price has a P/E ratio of 10), and might be a signal that the company isn’t doing too well. A high P/E ratio, above 25, could mean that investors expect the company to do really well in the future. It’s important to note that a low P/E could also mean that investors haven’t realized the company’s potential for growth, while a high P/E could mean that people are over-valuing the company because they think it’s worth more than it actually is. In times like that, a stock price might be in danger of plummeting, and thus causing investors to lose money. Considering the P/E ratio might be a good starting point as you go about picking stocks for your portfolio, but financial advisors suggest that you still need to research a firm more deeply before investing in it. What’s behind those numbers?

10. Prospectus . When it comes to investing, research is really important. Want to find out about a company or fund before you invest in it? Get the company prospectus, a legal document, filed with the Securities and Exchange Commission (SEC), which provides details about the expenses, finances and other important company info. But remember, a prospectus is a description and should be considered one tool in stock picking — it is not a guarantee of results, even if the prospectus has been approved by the SEC.

That’s it for our Top 10. Financial advisor Hogan also recommends that new investors familiarize themselves with the following terms:

A fiduciary is someone who has a legal obligation to act in your best interest. A sales person has a legal obligation to offer suitable investments to you. An employer matching contribution is the amount of money your employer will add to your 401(k)

[retirement] account for every dollar that you contribute of your own funds. Capital gains tax is the tax the government levies – and you must pay — when you cash in on an

investment gain. Compound interest is the interest added to the principal of a deposit or loan so that the added interest

also earns interest from then on. One example is a bank account, which may have its interest compounded every year. For instance, an account with $1,000 initial principal and 20% interest per

year would have a balance of $1,200 at the end of the first year, $1,440 at the end of the second year, and so on.

Learning the language of money and the stock market will put you that much closer to becoming a wise – and successful – investor.

Conversation Starters

Have you heard any of the top-ten terms listed in this article before? If so, which ones? Choose one of these terms to discuss with a partner. Teach that person what the term means and why it is important.

What is the true purpose of asset allocation?

What additional terms should be included in our top 10? Add three words or phrases to our investing basics and discuss them with a partner.

Source: http://kwhs.wharton.upenn.edu/2015/12/the-top-10-terms-every-new-investor-should-know/

Handout #1 Low Vs. High-Risk Investments For Beginners

Risk is absolutely fundamental to investing; no discussion of returns or performance is meaningful without at least some mention of the risk involved. The trouble for new investors, though, is figuring out just where risk really lies and what the differences are between low risk and high risk.

What Is Risk?Given how fundamental risk is to investments, many new investors assume that it is a well-defined and quantifiable idea. Unfortunately, it is not. Bizarre as it may sound, there is still no real agreement on what "risk" means or how it should be measured.

Academics have often tried to use volatility as a proxy for risk. To a certain extent, this makes perfect sense. Volatility is a measure of how much a given number can vary over time and the wider the range of possibilities, the more likely some of those possibilities will be bad. Better yet, volatility is relatively easy to measure.

Unfortunately, volatility is flawed as a measure of risk. While it is true that a more volatile stock or bond exposes the owner to a wider range of possible outcomes, it doesn't necessarily impact the likelihood of those outcomes. In many respects, volatility is more like the turbulence a passenger experiences on an airplane – unpleasant, perhaps, but not really bearing much relationship to the likelihood of a crash.

A better way to think of risk is as the possibility or probability of an asset experiencing a permanent loss of value or below-expectation performance. If an investor buys an asset expecting a 10% return, the likelihood that the return will be below 10% is the risk of that investment. What this also means is that underperformance relative to an index is not necessarily risk - if an investor buys an asset with the expectation that it will return 7% and it returns 8%, the fact that the S&P 500 returned 10% is largely irrelevant.

What Is a Low or High-Risk Investment? If investors accept the notion that investment risk is defined by a loss of capital and/or underperformance relative to expectations, it makes defining low risk and high-risk investments substantially easier.

A high-risk investment is one where there is either a large percentage chance of loss of capital or underperformance, or a relatively small chance of a devastating loss. The first of these is intuitive, if subjective - if you were told there's a 50/50 chance that your investment will earn your expected return, you may find that quite risky. If you were told that there is a 95% chance that the investment will not earn your expected return, almost everybody will agree that that is risky.

The second half, though, is the one that many investors neglect to consider. To illustrate it, take for example car and airplane crashes. The odds of any driver experiencing a car crash in their lifetime is quite high (25%),

but the odds of death are relatively low (less than 1%). By comparison, the odds of experiencing a plane crash are quite low (one-hundredth of 1%), but the odds of dying in a plane crash are quite high (about 67%).

What this means for investors is that they must consider both the likelihood and the magnitude of bad outcomes. Low-risk investing not only means protecting against the chance of any loss, but it also means making sure that none of the potential losses will be devastating.

A Few ExamplesLet us consider a few examples to further illustrate the difference between high risk and low-risk investments.

Biotechnology stocks are notoriously risky. Between 85 and 90% of all new experimental drugs will fail, and not surprisingly most biotech stocks will also, eventually, fail. In the case of biotech stocks, there is both a high percentage chance of underperformance (most will fail), AND a large amount of potential underperformance (when biotech stocks fail, they usually lose 95% or more of their value).

In comparison, a United States Treasury bond offers a very different risk profile. There is almost no chance that an investor holding a Treasury bond will fail to receive the stated interest and principal payments, and even if there were delays in payment (extremely rare in the history of the U.S.), investors would likely recoup a large portion of the investment.

It is also important to consider the impact that diversification can have on the risk of an investment portfolio. Generally speaking, the dividend-paying stocks of major Fortune 100 corporations are quite safe, and investors can expect to earn mid-to-high single-digit returns over the course of many years.

That said, there is always a risk that an individual company will fail; companies like Eastman Kodak and Woolworth's are famous examples of one-time success stories that eventually failed. What's more, a randomly chosen stock held for a decade has about a 20% chance of losing money. If an investor holds all of their money in one stock, the odds of a bad event happening may still be relatively low, but the potential severity is quite high. Hold a portfolio of 10 such stocks, though, and not only does the risk of portfolio underperformance decline, but so too does the magnitude of the potential overall portfolio decline.

A Few More Thoughts on RiskInvestors need to be willing to look at risk in comprehensive and flexible ways. For instance, diversification is an important part of risk. Holding a portfolio of investments that all have low risk, but all have the same risk, can be quite dangerous. Going back to the airplane example, the odds of an individual plane crashing are low, but virtually every large airline has (or will) experience a crash. Holding a portfolio of low-risk Treasury bonds may seem like very low-risk investing, but they all share the same risks and the occurrence of a very low probability event (like a U.S. government default) would be devastating.

Investors also have to include factors like time horizon, expected returns and knowledge when thinking about risk. On the whole, the longer an investor can wait for their returns, the more likely they are to achieve their expected returns. There is certainly some correlation between risk and return, and investors expecting huge returns are going to have to accept a much larger risk of underperformance. Knowledge is also important, not only in identifying those investments most likely to achieve their expected return (or better), but also in correctly identifying the likelihood and magnitude of what can go wrong.

The Bottom LineThere are no perfect definitions or measurements of risk, but inexperienced investors would do well to think of risk in terms of the odds that a given investment (or portfolio of investments) will fail to achieve the

expected return, and the magnitude by which it will miss that target. By better understanding what risk is, and where it can come from, investors can work to build portfolios that not only have a lower probability of loss, but a lower maximum potential loss as well.

If you are looking for more information about low risk investing, Investopedia's Advisor Insights tackles the topic by answering one of our user questions.

Source: http://www.investopedia.com/financial-edge/0512/low-vs.-high-risk-

investments-for-beginners.aspx

Handout #2 RISK AND OUTCOME ACTIVITY

Instructions: Place these labels on baskets, boxes, or cups. Using tape, create five different distances away from the labeled items. The closest distance label, “Ultraconservative”, the next distance “Conservative”, next “Moderate”, next “Risky, and finally “Speculative Risk”. Have the students make a goal of what they will get prior to them throwing the ball. After they throw the ball, discuss what their goal was and the risk associated with it. Did the end result benefit them? Was it worth the “risk” or would it have been better for them to choose a more conservative level of risk and throw from that distance?

6 % Return 1 % Return7 % Return 2 % Return8 % Return 3 % Return18% Return 16% ReturnDOUBLE

YOUR MONEY

LOSE EVERYTHING

-1% Return -5% Return-2% Return -8% Return

-3% Return -12% Return

Ultraconservative

Conservative

Moderate

Risky

Speculative Risk