Personal
Management
Session 3
1
Previously Covered
• Session 1
– Introduction to Personal Management
– Requirement 4 – Saving and Investing
– Requirement 5 – Stocks
• Session 2
– Requirement 3 – Money Concepts
2
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
3
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.
4
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
5
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
6
Common Stock (Continued)
• What can $1,000 buy?
Video Games
Activision / Blizzard
Electronic Arts
Microsoft
Sony
Symbol
ATVI
EA
MSFT
SNE
Current Price $1000 Buys…
$
20.90
47
$
35.70
28
$
46.22
21
$
17.76
56
52 Wk High
$ 24.18
$ 38.64
$ 47.57
$ 21.60
52 Wk Low
$ 16.06
$ 20.47
$ 32.70
$ 15.23
Food
McDonalds
Taco Bell / KFC
PepsiCo
MCD
YUM
PEP
$
$
$
94.56
72.35
92.80
10
13
10
$ 103.78 $
$ 83.58 $
$ 94.21 $
Shopping
Amazon
Best Buy
Walmart
AMZN
BBY
WMT
$
$
$
321.38
33.53
75.79
3
29
13
$ 408.06 $ 284.38
$ 44.66 $ 22.15
$ 81.37 $ 71.51
Entertainment
Walt Disney
Lions Gate
DIS
LGF
$
$
88.64
32.43
11
30
$
$
91.20 $
37.49 $
90.53
64.08
77.01
63.10
24.54
7
Amazon 1 Year Chart
Amazon is primarily known as
an online store. However they
also make tablets, phones, and
provide cloud storage.
8
Walt Disney 1 Year Chart
You probably know that Disney
owns a number of theme parks.
However, they also own ESPN, ABC,
Pixar, Marvel and even Star Wars.
9
Common Stock Pros and Cons
Pros
Cons
• Extremely fluid (easy to
buy or sell)
• Tons of data about
companies on the
Internet
• Online brokers make
trading inexpensive
• Could lose money
(stock prices go down)
• Can make bad choices
(companies can and do
go out of business)
10
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
11
Common Stock Risk Level
• Common stocks on average have higher risks than
other investments
• Some companies are far riskier than others!
12
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?
13
Mutual Funds
• In our first session we looked at this chart for three
different stock returns over time
$1,400
Stock A is very stable
Stock B is more aggressive
Stock C is highly volatile
$1,300
$1,200
A
$1,100
B
C
$1,000
$900
$800
1
2
3
4
• Which stock is the best individual investment?
14
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)
15
Mutual Fund Performance
• Suppose we invest in all three stocks shown earlier
$1,400
Stock A is very stable
Stock B is more aggressive
Stock C is highly volatile
Mutual Fund M benefits
from investing in all three
$1,300
$1,200
A
B
$1,100
C
$1,000
M
$900
The is called “diversification”
because you own more than
one investment.
$800
1
2
3
4
• The fund does not go up (or down) as steeply as
individual stocks
16
Mutual Funds Pros and Cons
Pros
Cons
• Diversification
• Investment choices are
made by a professional
money manager
• Could lose money
(stock prices go down)
• Fund managers take
some of your money
each year
– You pick a “theme” or style
of investment you are
comfortable with
– Even if the fund goes
down!
17
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
18
Mutual Fund Risk Level
• Mutual funds can be less risky than stocks…
• … but aggressive funds are still quite risky
19
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?
20
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
21
Term Versus Whole Life Insurance
Term Life
Whole 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
• Lasts your entire life
• Builds cash value
• Premiums (cost) is
generally higher than
term
22
Life Insurance Pros and Cons
Pros
Cons
• Helps your family cover
financial obligations in
case you die
• Low risk
• Term insurance – you
can outlive the
coverage
• Lower return on
investment (ROI)
23
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
24
Life Insurance Risk Level
• Life insurance is considered very low risk
• With term life the primary risk is you outlive your
policy term
25
Life Insurance Discussion
Questions
• Discuss: If you don’t make much money do you still
need life insurance?
• Discuss: Do kids need life insurance?
26
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
27
Term Versus Interest Rate
• To receive higher interest you have to leave your
money in the CD longer
Term
3 month CD
1 Year CD
3 Year CD
5 Year CD
Range
0.03% APY - 0.45% APY
0.60% APY - 1.12% APY
0.60% APY - 1.51% APY
0.90% APY - 2.52% APY
National Average
0.10% APY
0.25% APY
0.51% APY
0.82% APY
28
CD Pros and Cons
Pros
Cons
• Safe – funds are
insured by Federal
Deposit Insurance
Corporation (FDIC)
• Typically fixed interest
rate
• No costs unless closed
early
• 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
29
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
30
Certificate of Deposit Risk Level
• CDs are extremely low risk
• In order to lose money the entire country would have
to go bankrupt
31
CD Discussion Questions
• Discuss: Why would you choose a CD over common
stock or other investment option discussed so far?
32
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
33
Savings Account Pros and Cons
Pros
Cons
• 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
• Typically very low
interest rates
• Credit Union of Texas
currently pays 0.10% on
student savings
34
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
35
Savings Account Risk Level
• Savings accounts are insured by the Federal Deposit
Insurance Corporation (FDIC)
• Accounts up to $250,000 are protected by law
36
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
37
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
38
Bonds Pros and Cons
Pros
Cons
• Extremely safe –
backed by the US
Government
• Low cost – bonds can
be purchased for as
little as $25
• Principle is paid on
bond maturity
• US Bonds cannot be
transferred to another
person
39
Why Buy Bonds?
• Capital Appreciation
– Bonds build value over time
• Income
– Bonds pay interest
40
United States Bonds Risk Level
• Extremely low risk
• Bonds are backed by the government and therefore
quite safe
41
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?
42
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
43
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
44
Tracking Investments
October 2013 to September 2014
Investment
October
November
December
January
February
March
April
May
June
July
August
September
Dividends
Ending Value
ROI
AMZN Stock
DIS Stock
2.75 Shares 14.75 Shares
$1,001.08
$999.31
$1,082.46
$1,027.78
$1,096.67
$1,126.90
$986.40
$1,071.00
$995.78
$1,191.95
$925.02
$1,181.03
$836.36
$1,170.27
$859.51
$1,239.15
$893.15
$1,264.67
$860.72
$1,266.73
$932.36
$1,325.73
$888.83
$1,308.92
$12.69
$888.83
$1,321.60
-11.12%
32.16%
S&P 500
5.8 Shares
$1,000.15
$1,029.79
$1,056.47
$1,019.23
$1,065.63
$1,074.45
$1,081.93
$1,107.05
$1,129.90
$1,114.70
$1,158.72
$1,147.82
$15.90
$1,163.72
16.37%
1 Year CD Savings Acct
$1,000.00
$1,000.00
$1,000.21
$1,000.08
$1,000.42
$1,000.17
$1,000.63
$1,000.25
$1,000.83
$1,000.33
$1,001.04
$1,000.42
$1,001.25
$1,000.50
$1,001.46
$1,000.58
$1,001.67
$1,000.67
$1,001.88
$1,000.75
$1,002.09
$1,000.83
$1,002.29
$1,000.92
$1,002.50
$1,001.00
$1,002.50
0.25%
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%
$1,001.00
0.10%
45
Return on $1,000 Investment (ROI)
$1,400.00
$1,300.00
Amazon
Disney
S&P 500
CD
Savings Account
-11.12%
32.16%
16.37%
0.25%
0.10%
$1,200.00
$1,100.00
$1,000.00
$900.00
$800.00
AMZN Stock
DIS Stock
S&P 500
Savings Acct
1 Year CD
46
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.
47