personal management session 3 - boy scout troop...
TRANSCRIPT
1
Personal
Management
Session 3
Previously Covered
• Session 1
– Introduction to Personal Management
– Requirement 4 – Saving and Investing
– Requirement 5 – Stocks
• Session 2
– Requirement 3 – Money Concepts
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Session 3
• Today we will cover requirement 6 of Personal
Management
• Attendance is not required!
– If you miss a session, you can use this material to help you fill
out your worksheet
– Credit will be given when you complete your merit badge review
with your counselor
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Disclaimer
• I am not a formal financial advisor. Before making
any important decisions about money, please be
sure to talk to your parents or someone who has a
formal background in finance.
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Requirement 6
• You have $1,000 to invest; explain the advantages
and disadvantages of the following
– Common Stocks
– Mutual Funds
– Life Insurance
– A certificate of deposit (CD)
– A savings account or U.S. savings bond
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Common Stock
• What is it?
– A share of a publicly traded company
• How expensive is it?
– Price is based on an auction system (stock market)
• How can I buy / sell stock?
– Stocks used to be expensive to trade (buy or sell)
– Online brokers offer very inexpensive platforms for trading stocks
– Special investment programs for kids offer the ability to buy as
little as a single share of stock
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Common Stock (Continued)
• What can $1,000 buy?
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Video Games Symbol Current Price $1000 Buys… 52 Wk High 52 Wk Low
Activision / Blizzard ATVI 20.90$ 47 24.18$ 16.06$
Electronic Arts EA 35.70$ 28 38.64$ 20.47$
Microsoft MSFT 46.22$ 21 47.57$ 32.70$
Sony SNE 17.76$ 56 21.60$ 15.23$
Food
McDonalds MCD 94.56$ 10 103.78$ 90.53$
Taco Bell / KFC YUM 72.35$ 13 83.58$ 64.08$
PepsiCo PEP 92.80$ 10 94.21$ 77.01$
Shopping
Amazon AMZN 321.38$ 3 408.06$ 284.38$
Best Buy BBY 33.53$ 29 44.66$ 22.15$
Walmart WMT 75.79$ 13 81.37$ 71.51$
Entertainment
Walt Disney DIS 88.64$ 11 91.20$ 63.10$
Lions Gate LGF 32.43$ 30 37.49$ 24.54$
Amazon 1 Year Chart
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Amazon is primarily known as an online store. However they also make tablets, phones, and
provide cloud storage.
Walt Disney 1 Year Chart
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You probably know that Disney owns a number of theme parks.
However, they also own ESPN, ABC, Pixar, Marvel and even Star Wars.
Common Stock Pros and Cons
Pros
• Extremely fluid (easy to
buy or sell)
• Tons of data about
companies on the
Internet
• Online brokers make
trading inexpensive
Cons
• Could lose money
(stock prices go down)
• Can make bad choices
(companies can and do
go out of business)
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Why Buy Common Stocks?
• Capital appreciation
– This is what happens when a stock price goes up over time
– Historically over a long period of time stocks have averaged 8%
• Income
– Many stocks pay dividends (shares of profits) back to
shareholders
• Liquidity
– As long as the market is open you can buy or sell your stock very
quickly
– There is a three day delay before the trade is “settled” to your
account and you get your money
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Common Stock Risk Level
• Common stocks on average have higher risks than
other investments
• Some companies are far riskier than others!
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Common Stock Discussion
Questions
• Discuss: Would you buy common stock if you
needed the money next month?
• Discuss: When should you consider buying common
stocks in your investment portfolio?
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Mutual Funds
• In our first session we looked at this chart for three
different stock returns over time
• Which stock is the best individual investment?
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$800
$900
$1,000
$1,100
$1,200
$1,300
$1,400
1 2 3 4
A
B
C
Stock A is very stable Stock B is more aggressive
Stock C is highly volatile
Mutual Funds (Continued)
• Most people don’t have the time or interest to
thoroughly research individual stocks
• A Mutual Fund is a collection of stocks selected by a
fund manager
– Generally there is a theme to the selections
– One fund may focus on Growth
– Another fund may focus on Income (Dividends)
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Mutual Fund Performance
• Suppose we invest in all three stocks shown earlier
• The fund does not go up (or down) as steeply as
individual stocks
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$800
$900
$1,000
$1,100
$1,200
$1,300
$1,400
1 2 3 4
A
B
C
M
Stock A is very stable Stock B is more aggressive
Stock C is highly volatile Mutual Fund M benefits
from investing in all three
The is called “diversification” because you own more than
one investment.
Mutual Funds Pros and Cons
Pros
• Diversification
• Investment choices are
made by a professional
money manager
– You pick a “theme” or style
of investment you are
comfortable with
Cons
• Could lose money
(stock prices go down)
• Fund managers take
some of your money
each year
– Even if the fund goes
down!
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Why Buy Mutual Funds?
• Capital appreciation
– This is what happens when a stock price goes up over time
• Income
– Many stocks pay dividends (shares of profits) back to
shareholders
• Liquidity
– Mutual fund trades occur each day after the market is closed
• Diversification
– Buying 10 shares of a mutual fund is generally less risky than
buying 1 share of 10 different companies… and it’s cheaper too
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Mutual Fund Risk Level
• Mutual funds can be less risky than stocks…
• … but aggressive funds are still quite risky
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Mutual Fund Discussion Questions
• Discuss: Would you buy a mutual fund if you needed
the money next month?
• Discuss: When should you consider buying mutual
funds in your investment portfolio?
• Discuss: One advantage of mutual funds is
diversification… that must mean buying lots of
mutual funds is even better, right?
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Life Insurance
• What is it?
– Income replacement in case you die
• How expensive is it?
– Price is based your age and health factors
– For example people who smoke pay more
– Also depends on type of insurance (term versus whole life)
• How can I buy life insurance?
– Through an insurance company broker
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Term Versus Whole Life Insurance
Term Life
• Protection for a specific
period of time
• 10 year, 20 year or 30
year terms are common
• Most affordable
• You only collect if you
die before the term is
up
Whole Life
• Lasts your entire life
• Builds cash value
• Premiums (cost) is
generally higher than
term
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Life Insurance Pros and Cons
Pros
• Helps your family cover
financial obligations in
case you die
• Low risk
Cons
• Term insurance – you
can outlive the
coverage
• Lower return on
investment (ROI)
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Why Buy Life Insurance?
• Income Protection
– If you die your family will not struggle for lack of funds
• Capital Appreciation
– Whole life can build cash value
• Tax Deferred Savings
– There is generally no tax on life insurance payouts
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Life Insurance Risk Level
• Life insurance is considered very low risk
• With term life the primary risk is you outlive your
policy term
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Life Insurance Discussion
Questions
• Discuss: If you don’t make much money do you still
need life insurance?
• Discuss: Do kids need life insurance?
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Certificate of Deposit (CD)
• What is it?
– A certificate of deposit is a record that you put a certain amount
of money into a bank
– The money earns interest but must be left for a specific amount
of time
• How expensive is it?
– There are generally no costs related to investing in a CD unless
you take your money out early
• How can I buy a CD?
– Banks or other financial institutions such as brokerages can sell
CDs
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Term Versus Interest Rate
• To receive higher interest you have to leave your
money in the CD longer
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Term Range National Average
3 month CD 0.03% APY - 0.45% APY 0.10% APY
1 Year CD 0.60% APY - 1.12% APY 0.25% APY
3 Year CD 0.60% APY - 1.51% APY 0.51% APY
5 Year CD 0.90% APY - 2.52% APY 0.82% APY
CD Pros and Cons
Pros
• Safe – funds are
insured by Federal
Deposit Insurance
Corporation (FDIC)
• Typically fixed interest
rate
• No costs unless closed
early
Cons
• If you take money out
early you can lose most
of your interest
• Higher interest rates
require longer
investment terms
• Low liquidity – you
have to wait for your
funds to mature
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Why Buy CDs?
• Safety
– The overwhelming advantage of CDs is the fact that they are
insured against loss
– If you put $1000 into a CD you will get $1000 back plus interest
– Unlike common stocks a CD will never lose value
• Income
– CDs pay interest based on the principle (invested) amount
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Certificate of Deposit Risk Level
• CDs are extremely low risk
• In order to lose money the entire country would have
to go bankrupt
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CD Discussion Questions
• Discuss: Why would you choose a CD over common
stock or other investment option discussed so far?
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Savings Account
• What is it?
– A bank account
• How expensive is it?
– Fees may vary but most banks offer very low (or zero) cost
options for kids
– Credit Union of Texas offers a student account (ages 13 to 18)
with a minimum opening balance of only $0.01
• How can I open an account?
– Simply take some money to a bank and ask to open a savings
account
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Savings Account Pros and Cons
Pros
• Safe / FDIC insured
• Can easily go to the
bank to deposit or
withdraw funds
• Unlike CDs there is no
minimum time
requirement for a
deposit
Cons
• Typically very low
interest rates
• Credit Union of Texas
currently pays 0.10% on
student savings
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Why Have A Savings Account?
• Safety
– Like CDs a savings account is FDIC insured up to $250,000
– Unlike stocks a savings account will never lose value
– Unlike CDs there is no requirement to invest for a set amount of
time
• Interest Income
– Savings accounts typically pay lower interest that CDs
• Liquidity
– Savings accounts are more liquid than CDs
– You can get your money out the next day the bank is open
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Savings Account Risk Level
• Savings accounts are insured by the Federal Deposit
Insurance Corporation (FDIC)
• Accounts up to $250,000 are protected by law
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Savings Account Discussion
Questions
• Discuss: What is the primary use you might have for
a savings account?
• Ask your bank if they offer a “Christmas” account
– Account designed to take monthly deposits from January to
November
– Funds are available to buy Christmas presents in December
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United States Savings Bonds (EE)
• What is it?
– Pays a fixed interest rate for 30
– Owning the bond means you get regular interest payments
• How expensive is it?
– A $50 US Savings Bond is purchased for $25
– After 20 years of interest payments it can be redeemed for $50
• How can I buy bonds?
– Through a bank or brokerage
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Bonds Pros and Cons
Pros
• Extremely safe –
backed by the US
Government
• Low cost – bonds can
be purchased for as
little as $25
Cons
• Principle is paid on
bond maturity
• US Bonds cannot be
transferred to another
person
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Why Buy Bonds?
• Capital Appreciation
– Bonds build value over time
• Income
– Bonds pay interest
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United States Bonds Risk Level
• Extremely low risk
• Bonds are backed by the government and therefore
quite safe
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US Bonds Discussion Questions
• Discuss: Bonds cannot be transferred to another
person. What impact does that have on your
decision to buy one?
• Discuss: What is the primary advantage of bonds?
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Comparing Investment Choices
• Primary factors include
– Return on Investment
• How much am I going to make
– Volatility and Risk
• How likely am I expecting to see a return
– Liquidity
• How easily can I buy or sell the asset
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Comparing Investment Choices
• Number these in order of highest to lowest risk, 1 is least risky and 3 is most risky – ______ Mutual Fund
– ______ Common Stock
– ______ Savings Account or Certificate of Deposit
– ______ US Savings Bond
• Number these in order of potential Return on Investment (ROI), 1 is least return and 3 is most – ______ Mutual Fund
– ______ Common Stock
– ______ Savings Account or Certificate of Deposit
– ______ US Savings Bond
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Tracking Investments
October 2013 to September 2014
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Stock returns were from October 2013 to September
2014
S&P 500 was used to simulate a mutual fund
investment; it’s actually an ETF or Exchange Traded
Fund
CD and Savings Account rates were both 0.10%
AMZN Stock DIS Stock S&P 500 1 Year CD Savings Acct
Investment 2.75 Shares 14.75 Shares 5.8 Shares $1,000.00 $1,000.00
October $1,001.08 $999.31 $1,000.15 $1,000.21 $1,000.08
November $1,082.46 $1,027.78 $1,029.79 $1,000.42 $1,000.17
December $1,096.67 $1,126.90 $1,056.47 $1,000.63 $1,000.25
January $986.40 $1,071.00 $1,019.23 $1,000.83 $1,000.33
February $995.78 $1,191.95 $1,065.63 $1,001.04 $1,000.42
March $925.02 $1,181.03 $1,074.45 $1,001.25 $1,000.50
April $836.36 $1,170.27 $1,081.93 $1,001.46 $1,000.58
May $859.51 $1,239.15 $1,107.05 $1,001.67 $1,000.67
June $893.15 $1,264.67 $1,129.90 $1,001.88 $1,000.75
July $860.72 $1,266.73 $1,114.70 $1,002.09 $1,000.83
August $932.36 $1,325.73 $1,158.72 $1,002.29 $1,000.92
September $888.83 $1,308.92 $1,147.82 $1,002.50 $1,001.00
Dividends $12.69 $15.90
Ending Value $888.83 $1,321.60 $1,163.72 $1,002.50 $1,001.00
ROI -11.12% 32.16% 16.37% 0.25% 0.10%
$800.00
$900.00
$1,000.00
$1,100.00
$1,200.00
$1,300.00
$1,400.00
AMZN Stock DIS Stock S&P 500 Savings Acct 1 Year CD
Return on $1,000 Investment (ROI)
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Amazon -11.12%
Disney 32.16%
S&P 500 16.37%
CD 0.25%
Savings Account 0.10%
What’s Next?
• Continue your financial record (Requirement 2)
• Prior to next meeting complete requirement 7
• For those that have completed requirement 2 work
on requirement 8
• Any questions? Contact me at [email protected] or
see me at any troop meeting.
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