Basics of Saving and Investing
Debra Pankow
September 2003
Major Points
Difference between saving and investing Risk/rate of return trade-off
Time value of money
Level of risk tolerance Key factors in personal investment plan/asset mix
Savings vs Investment
Safe
Easily Accessible Low return
Risk
Volatile in short time frame
Short-term goals
Potential appreciation
Mid & Long-term goals
Comparing the Returns
Savings Account
Initial Investment
Stocks
$100
$100
$2 (dividend) $3 $5
Current Income $2 (interest) Capital Gain Total Return $0 $2
Rate of Return
2%
5%
Rule of 72
The Number 72 Interest Rate Years to Double
Average Annual Rates of Return, 925-2000
14 12 10 8 6 4 2 0 Lg Stock Sm Stock Gov Bnds T Bills Inflation
(Ibbotson Associates,2001)
Risk
Inflation Business Failure Changes in the Economy Interest Rate Changes
Risk/Rate of Return Relationship
Diversification
Savings/Certificates of Deposit Bonds Variety of Securities
Small Stocks Large Stocks Mutual funds
Personal Assessment
Time Line Risk Tolerance Personal Financial Goals
Working with Financial Professionals
Know yourself Know what professional you may need Know your professional Ask the right questions Keep lines of communication open
Basics of Saving and Investing