Chapter 8 Student Textbook JJB
Chapter 8 Student Textbook JJB
Chapter 8 Student Textbook JJB
CHAPTER
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UNIT 3: CHAPTER 8
Investing and
Retirement
a good time to begin
investing and retirement planning, think back
to Ben and Arthur in Chapter 2. The fact is,
you want to start planning and preparing for
your financial future now! Daves friend and
best-selling author Zig Ziglar once said, If
you aim at nothing, you will hit it every time.
Remember, the sooner you start investing, the
sooner your money can begin to work for you!
The magic of compound interest works best
when given lots of time to do its thing.
AS YOU CONSIDER
44%
of teens would like
their parents to talk
more about how to
invest money.*
75%
of teens say that
learning more about
money management,
including budgeting,
saving and investing,
is one of their top
priorities.*
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INTRODUCTION
Key Terms
sell investments.
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tax treatments.
162
E
xplain how investing builds wealth and helps meet
financial goals.
BEFORE AFTER
Agree
Disagree
Agree
Disagree
List your initial thoughts about investing. What do you want to learn about investing?
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SECTION 1
+
THINGS TO CONSIDER
The smartest investment
you can make is in yourself.
As a young adult, you
should have two goals:
continue your education
and stay out of debt.
$
While 79% of American
millionaires use brokers
for guidance, they make
their own investment
decisions.
The Millionaire Next Door
CHAPTER
T H E F I F T H F O U N D AT I O N
VIDEO 1.1
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As a young adult, what is the most important thing you can invest in?
THROUGHOUT THE
STOCK MARKETS
HISTORY
100% of 15-year periods
made money.
VIDEO 1.2
.
If what you are investing in is primarily a tax deal, then
it is probably not a good investment. Your motivation
should be to make money, not save on taxes.
money. Never
borrow money, period. Borrowing money is a particularly
bad idea for an investment because it increases the
risk of the investment. And if you lose the money, you are
still left with payments on it.
3
Diversification
WA R R EN BUFFETT
$
People with a bachelors
degree or higher have
unemployment rates
that are about half the
unemployment rate of
people with just a high
school diploma.
Bureau of Labor Statistics
A bachelors degree on
average increases lifetime
income by $1.2 million
as compared with a high
school diploma.
DAV E R A M S E Y
Diversification is a
protection against
ignorance.
is a risk-management
technique that mixes a wide variety of investments within
a portfolio. The rationale behind this technique is that
having a variety of investments will yield higher returns
and lower risk.
4
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SECTIONS 1 & 2
$120K
Investor 1 invests:
$10,000 for 25 years at 7%
compounded annually
Investor 2 invests:
$2,000 and loses it all
$2,000 in his cookie jar
$2,000 at 5% return
$2,000 at 10% return
$2,000 at 15% return
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The
difference
is almost
$59,000!
Investor 2:
More than
$116,000
because of
diversification!
$110K
$100K
$90K
$80K
$70K
$60K
Investor 1:
Just
$57,254
without
diversification!
$50K
$40K
$30K
$20K
$10K
If you were giving advice to a friend, what would you say are the most
important things to know about investing?
Money Markets
A CD is a
-risk bank
savings account with check-writing privileges.
U.S. SECURITIES
AND EXCHANGE
COMMISSION (SEC):
The government agency
responsible for regulating
the stock market. It was
created in 1934 to increase
public trust after the 1929
stock market crash and
the years of the Great
Depression.
FEDERAL DEPOSIT
INSURANCE
CORPORATION (FDIC):
The U.S. federal agency
that insures deposits in
commercial banks. It was
created to restore public
trust in banks after the
1929 stock market crash.
FDIC replaced the former
Federal Savings and Loan
Insurance Corporation in
1989.
FEDERAL RESERVE: The
central (federal) banking
system of the United States
INTERNAL REVENUE
SERVICE (IRS): A U.S.
federal agency responsible
for collecting taxes and
for the interpretation and
enforcement of the Internal
Revenue Code (laws)
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SECTION 2
CASE STUDY
Harry, a bright young man,
was fresh out of college
when Bob approached
him with an investment
opportunity that sounded
too good to pass up.
Ive got some property on
a potential oil field, Bob
said. For only $750 you
can buy a share of the
land. Youd be crazy not to
get in on this investment.
Bob, an expert salesman,
promised Harry would
become rich and sealed
the deal with a simple
appeal: Harry, this is a
great way to diversify your
portfolio.
Thirty years later, after
all the oil was pumped
out, Harry still hadnt
seen any money from
his investment. It turns
out that Bob was offering
rights to land that he
didnt have the right to
sell, scamming people by
selling phantom shares.
Harrys risky attempt to
diversify cost him $750.
What would have
happened if he had put
that money in a mutual
fund with a 12% return
instead? He would now
have $22,469.
Single Stocks
12
in the company.
Bonds
A bond is a
purchases.
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11
rate paid.
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10
16
+
WAR BONDS (ALSO
KNOWN AS DEFENSE
BONDS): The last time the
United States issued war
bonds was during World
War II. Issued by the U.S.
government, they were
named war bonds after
the Japanese attack on
Pearl Harbor, Dec. 7, 1941.
The purpose of war bonds
was to finance military
operations during war
time. The bonds yielded a
mere 2.9% return after a
10-year maturity.
DIVIDEND: Distribution of
a portion of a companys
earnings, decided by the
board of directors, to a
class of its shareholders;
generally distributed in the
form of cash or stock
VIDEO 2.2
Mutual Funds
pool of
collected from many investors for
17
the purpose of investing in securities such as stocks,
bonds, money market instruments and similar assets.
18
Your
is increased.
American author
19
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SECTION 2
THE STANDARD
DIVERSIFICATION PLAN
25% Growth Stock Mutual
Fund (Mid-Cap): Fund that
buys stock in mediumsized companies that have
experienced some growth
and are still expanding
25% Growth and Income
Stock Mutual Fund (LargeCap): Fund comprised of
large, well-established
companies
25% Aggressive Growth
Stock Mutual Fund
(Small-Cap): Fund that
seeks to provide maximum
long-term capital growth
from stocks of primarily
smaller companies; the
most volatile fund
25% International Stock
Mutual Fund: Fund that
contains international or
overseas companies
20
-term investments.
Mid-Cap
25%
25%
SmallCap
LargeCap
25%
International
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VIDEO 2.3
Qualified Plans
A qualified plan is a
investment
21
(which means it has special tax treatment).
Examples of qualified plans include:
Individual Retirement Arrangement (IRA)
When it comes to IRAs, everyone with an
is eligible.
22
+
THE ROTH IRA is named
for Sen. William Roth of
Delaware, who authored
this section of the Taxpayer
Relief Act of 1997.
, penalty24
free withdrawals of earnings under these conditions:
1. Over 59 and a half years old
2. Because of death or disability
3. First-time home purchase
contribution phase-out limits. As an adult, you should invest 15% of your household income into
Roth IRAs and pretax retirement plans.
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SECTION 2
Annuities
EDUCATION SAVINGS
PLAN (529 PLAN): A savings
plan operated by a state
or educational institution
designed to help families set
aside funds for future college
costs. It is named after
Section 529 of the Internal
Revenue Code, which created
these types of savings plans
in 1996.
TAX-DEFERRED: The
key advantage of stashing
money in a tax-deferred
retirement account isnt
just that youll pay less to
the government this year,
but that your investments
will compound faster than
in a taxable account. The
result is usually a larger
retirement nest egg even
after the funds are taxed
upon withdrawal.
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An annuity is a
account sold by an
company, designed to provide
26
payments to the holder at specified intervals, usually
after retirement.
25
27
28
29
Real Estate
30
32
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SECTION 2
Horrible Investments
SPECULATIVE:
Purchasing risky
investments that present
the possibility of large
profits, but also post a
higher-than-average
possibility of loss
Commodities:
are agricultural
or mining products. All commodities are traded, but since
no one really wants to transport all those heavy materials,
what is actually traded are commodities futures contracts
an agreement to buy or sell a commodity at a specific date
in the future at a specific price. Both commodities and
futures are bad investments because they result in price
distortions and are highly volatile.
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174
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TIPS ON BUYING AND
SELLING INVESTMENTS
1. Set your investment
goals and consider a
time frame (ie: getting
married and buying a
house, five years; having
kids and buying a bigger
house, 10 years; college
tuition for kids, 18 years;
retirement, 40 years).
2. Learn the different
types of investments.
3. Choose an investment
broker. Remember,
they work for you!
We recommend one
with the heart of a
teacher. NEVER invest
in something you dont
completely understand.
4. Understand basic
investment strategies
and identify ones
that will help you
reach your goals.
5. Build your portfolio and
be sure to diversify so
that all your eggs are
not in one basket!
6. Stick to your investment
strategy. Remember:
100% of the 15-year
periods in the stock
markets history
have made money.
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SECTION 3
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WHATS THE DIFFERENCE
BETWEEN SAVING
AND INVESTING?
Any money set aside
for five years or less is
considered saving.
Money set aside for
more than five years is
considered investing.
VIDEO 3.1
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403(b) is found in
37
+
WHERE DOES THE TERM
401(K) COME FROM?
401(k) refers to the
section of the tax code
that discusses this sort
of retirement plan, as do
403(b) and 457.
organizations such as
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SECTION 3
Rollovers
+
WINNING THE LOTTERY
does not guarantee peace
of mind when it comes to
your financial future.
In fact, Ellen Goodstein of
bankrate.com reported
that just the opposite
happened to some lottery
winnersthey went broke.
Saving and investing have
nothing to do with the
amount of money you make
or get. It is about making it
a priority and being smart
with your money.
Retirement Loans
Never borrow on your
. Never!
39
Even though you pay yourself back some interest, it is
nowhere close to what you would have earned if you had left
the money in the investment.
178
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Budget
Builder
So youre ready to invest?
Your investment dollars
will need to be part of
your monthly budget. Go
to foundationsU.com/8 to
update your budget!
179
Chapter Summary
Check for Understanding
Now its time to check your learning! Go back to the Before You Begin section for this chapter. Place a
checkmark next to the learning outcomes youve mastered and complete the after column of the Measure
Your Progress section.
1.
2.
3.
4.
5.
Big Ideas
The following Big Ideas are intended to provide clear focus and purpose to the lessons. Read each statement
and think about how what youve learned will affect your current and future decisions. Then, in the space
provided, write an I believe statement for each of the Big Ideas.
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The risk return ratio applies to any type of investment. Any time you invest money into something
there is a risk, whether large or small, that you might not get your money back. In turn, you expect a
return, which compensates you for bearing this risk. In theory, the higher the risk, the more you should
receive for holding the investment, and the lower the risk, the less you should receive.
Directions
Plot the following investments on the risk return continuum below. If youve forgotten the level
of risk for any of the investment types, refer to earlier in the chapter for review.
a
Money Market Accounts
d
Mutual Funds
Single Stocks
b
e
Fixed Annuities
c
Bonds
f
Real Estate
ANNUAL RETURN
RISK RETURN RATIO CONTINUUM: The relationship between risk and return on investment
2
High risk,
high growth
potential
Low risk,
low growth
potential
RISK AMOUNT
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Money in Review
Matching
d
Liquidity
g
Risk
Investment
b
Mutual Fund
e
Share
h
c
IRA
f
Portfolio
Illustration
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Stock
Multiple Choice
Short Answer
a
True
b
False
10. Diversification lowers risk with investing.
a
True
b
False
a
Gold
Viaticals
b
c
Futures
Mutual funds
d
13. Which statement is true about liquidity?
a
The less liquid the investment,
the less return
The more liquid an investment,
b
the more return
c
The more liquid an investment,
the less return
d
Both a and b
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