Saving and Investing
When it comes to saving and investing, which comes with more risk?
Who can probably afford more risk, a young person who is just entering the workforce or someone who is about to retire?
A young person- they are farther from retirement, and have more time to build their wealth back up if anything goes wrong.
Why would a business issue (sell) a bond?
To raise money.
Why is the stock market so important for retirement planning?
It has one of the highest rates of expected return and for many people is one of the only ways to earn a high enough return to have enough money for retirement
What is an advantage of employee retirement plans?
Convenience, intentionality, free money, tax benefits, etc.
What is liquidity?
What is diversification?
Spreading out your investments so you don't lose all your wealth if anything happens to one of them
If you are looking at two companies, one public and one private, which one can you buy shares of without approval?
The public company- anyone can buy shares in the stock market.
Why is the stock market so important for the economy?
When the stock market does poorly, companies struggle and the economy suffers.
What is one of the big challenges of retirement for many people?
Less (or no) income and they could live a long time after retirement.
Explain the tradeoff between risk and expected return.
Higher risk = higher expected return
How does compound growth help you build wealth?
Answers may vary, but should be something along the lines of "it helps you build wealth because you get returns not only on your original investment, but also on the returns you get from that initial investment
Rank the following types of investments from least risky to most risky: stocks, bonds, real estate
1. Bonds- low risk, they are a legal obligation that must be paid back unless the organization goes bankrupt
2. Real estate- lower risk than stock
3. Stock- the stock market is very volatile, there is a lot of potential risk
What is insider trading?
Illegally using information that the public does not have access to in order to make investment decisions
What is employer matching in a retirement plan?
This means that when you invest in a retirement plan, your employer will invest in it as well, up to a certain dollar value or percentage of your paycheck.
What is usually more liquid, savings or investments?
Savings- you can typically withdraw your savings as soon as you want.
Explain how the phrase "don't put all your eggs in one basket" relates to the concept of diversification.
It means that you can lower your risk by investing in more than one area, so if "one basket breaks" the others will still be okay.
Rank the following three types of investments in terms of expected reward from highest to lowest on average: stocks, bonds, real estate
2. Real estate- tend to have a higher expected return than bonds
3. Bonds- lowest expected return of these three types of investments
What is speculation and how does it impact the stock market?
Speculation is when people make guesses about what is going to happen or why something did happen. The stock market runs on speculation- expectations are what determine the prices of stock (direct and impact) and people's actions in the stock market (indirect impact).
Of a pension plan and a 401(k), which one gives you more control over your investments?
401(k)- you typically get to pick your investments in a 401(k), but not a pension
Which typically has a higher rate of return, investments or savings?
Investments- they come with higher risk
Give an example of how a person could diversify their investments- in other words, what is something that a person could do to spread their investments out and lower risk?
Many potential answers
Define each of the following types of investments: stock, bond, real estate, precious metals
Stock: ownership of a company
Bond: a loan an investor gives to an organization
Real estate: buying physical property like land and homes
Precious metals: metals that have value for investing
Why is it a better idea for most people to invest in a mutual fund than to try to "beat the market" themselves?
Most people do not have enough information to "beat the market"- this would require them to have a better understanding of the situation than the experts (which is unlikely) or information that others do not possess (which is called insider trading, and is illegal). Investing in mutual funds is a smarter way to let the experts make your decisions for you, since they are trained on risk management, diversification, and other specifics of investing, and have more time to do so.
Of a pension plan and a 401(k), which one is more likely to have guaranteed income for retirement?
Pension plans- 401(k) plans do not provide guaranteed income, but many pension plans do.