1. WEALTH CARE KIT
SM
Investment Planning
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2. W E A LT H C A R E K I T: I n v e s t m e n t P l a n n i n g
Do you have Investing, on the other hand, worth of goods 20 years from now!
long-term goals
means putting money into assets, Looked at another way, a $12,000
such as stocks, bonds, mutual funds, new car today will cost $21,673 in
you’re uncertain
and real estate, that historically have 20 years. Under these circum-
earned a higher rate of return than stances, a savings account earning
how to finance?
common savings products. If you 3 percent will only break even in
deposited $2,000 in a savings ac- terms of purchasing power. Subtract
count at 3 percent annual interest, taxes on the earnings, and the
it would grow to $3,612 in 20 years savings account will actually lose
Are you a saver or an investor? Have (before taxes). The same $2,000 ground.
you been reluctant to invest money invested in a stock mutual fund
because you think the stock market earning an average 10 percent a year In addition to understanding
is too risky? Do you want to know would grow to $13,455 in 20 years the different types of risks, it’s
more about the fundamentals of (before taxes)! Investments are important to understand that the
developing a sound investment usually selected to achieve long- willingness and ability to withstand
program? term goals, such as paying for short-term price fluctuations
college education or funding generates greater long-term
This section contains information rewards. This relationship is
that will help you answer some retirement.
illustrated in the investment
of these questions. It will explain: INVESTMENT RISKS pyramid on page 5. Stocks fluctuate
• the difference between saving “But what about the risks?” you more than CDs, for example. With
and investing may ask. stocks, you can lose part or even all
• investment risks and how to of your investment in a short period
Yes, every investment involves
control them of time. Yet, over the long term,
risk. Anyone who claims otherwise
stocks on average have consistently
• the different types of investments is either naive or trying to sell a lie.
and substantially outperformed cash
available Even so-called low-risk or no-risk
and the thief of cash: inflation.
savings alternatives involve risk.
• how to match investments with Let’s look at two of the most HOW TO CONTROL
your goals important types of risk. INVESTMENT RISK
• ten keys to successful investing Market risk. The prices of stocks, If accepting greater risk is one of
bonds, mutual funds, real estate, the necessities of investing, then one
THE IMPORTANCE OF gold, and other investment assets of the keys to investing is controlling
INVESTING rise and fall due to the economy, risk. Three controls on investment
While people commonly use the risk are diversification, consistent
investor sentiment, political events,
words “saving” and “investing” investing, and time.
changing interest rates, changes in
interchangeably, there are
the fortunes of companies or Diversifying your investments
important distinctions.
industries, and other factors. All means never putting all of your eggs
Saving typically means putting
investment assets fluctuate to some into one basket. A well-balanced
aside money in “low-risk” passbook
extent. This is the type of risk people investment portfolio involves
savings accounts, money market
most associate with investing. spreading investment funds among
funds, or certificates of deposit
(CDs) for short-term goals, such as Inflation risk. Inflation basically different types of assets, which
buying a new car, taking a family means that receipt of a dollar might include stocks, bonds, real
vacation, or establishing an tomorrow is worth less than receipt estate, cash or cash equivalents,
emergency fund. It’s money you of a dollar today. Inflation is a silent and international investments, and
want to be able to get to quickly, thief that, over time, can rob your investing in different securities
easily, and with little or no risk that savings of significant buying power. within each type of asset. This
you’ll lose what you set aside. For example, even at a modest 3 reduces risk, because even though
percent annual inflation rate, one or more investments might
$1,000 today will buy only $554 falter, others will gain.
1 © 2001, 2005, 2009
National Endowment for Financial Education

3. “
W E A LT H C A R E K I T: I n v e s t m e n t P l a n n i n g
For example, if you have all of Owning stocks has disadvantages,
your investment money in a single as well:
asset, such as your company stock • Capital loss. As an owner, you’re
purchased through a retirement
plan, and the value of that asset
DIVERSIFYING not guaranteed that you’ll get back
all or part of your investment.
plunges 50 percent, you’ve lost half YOUR INVESTMENTS
of your total investment. However, if
the company stock makes up only 10
percent of your portfolio, the total
value of the portfolio would decline
by only 5 percent. Meanwhile, other
investments in the portfolio may be
MEANS NEVER
PUTTING ALL OF
YOUR EGGS INTO
ONE BASKET.
“ • Volatility. In the short term, stocks
tend to fluctuate in value much
more than do bonds and cash
equivalents.
When you invest in a bond, you are
lending money to a company, or the
rising, so that overall the portfolio government, that promises (though
grows in value. not necessarily guarantees) that it
Another way to control risk is TYPES OF INVESTMENTS will pay back your principal with
to invest consistently. One popular interest. Bonds include Treasury
There are many types of invest-
method is known as dollar-cost bonds, municipal bonds, and
ments, but the most common are
averaging. Each month, for example, corporate bonds.
stocks, bonds, mutual funds and
you invest a specific amount of cash equivalents. Advantages include:
money, regardless of whether the • You receive a fixed stream of
market is up or down. You’ll buy If you buy stock, you are buying
income.
some shares when it’s high, and a share of ownership in a company.
some shares when it’s low, but since Advantages include: • Government and high-grade
markets generally rise over time, • Capital appreciation. If you sell an corporate bonds have relatively little
you’ll come out ahead. This is a good asset for more than you paid for it, risk of default.
strategy because predicting the best you make what’s called a capital
gain. The gain, potentially, could be • Yields usually are higher than with
time for making an investment
many times your investment and CDs and money market accounts.
is so difficult.
there may be tax advantages.
• Some types of bonds, called
Research also has shown that
• Dividends. Many stock invest- municipal bonds, pay interest that is
time reduces the risk of investing.
ments provide a quarterly stream free from federal (and, in some
The price of a given investment—
of dividends, or income, from the cases, state and local) tax.
particularly one in a more volatile
category such as stocks—may rise company’s profits. Research has
Disadvantages include:
and fall within a short period of shown that unless you need current
• Bond holders cannot share in the
time. But over the long run, many income, it’s best to reinvest any
growth of the company.
investments gain back any losses in dividends to grow your investments.
value…and then some. That’s why • Bonds can lose purchasing power
Capital appreciation plus dividends
investing is a long-term strategy for if interest payments are lower than
equals the total return on your
long-term goals (typically five years the combination of the inflation
investment in common stocks.
or longer) and why many invest- rate and your tax rate.
Studies indicate that, over longer
ment experts recommend that periods of time, common stocks • You can lose money on your
investors buy and hold investments provide significantly higher total investment if you sell the bond
instead of trying to guess whether to returns than bonds or cash before it reaches its maturity date
buy or sell based on current market equivalents. (when principal is repaid) and
indicators (known as market interest rates have risen since you
timing). bought the bond. (When interest
rates go up, bond prices fall.)
2 © 2001, 2005, 2009
National Endowment for Financial Education

4. “
W E A LT H C A R E K I T: I n v e s t m e n t P l a n n i n g
Cash equivalents are short-term, Many people invest through
interest-bearing securities such as their company retirement or savings
CDs, money market accounts, and plan, such as a 401(k) or profit-
Treasury bills. They fluctuate little, sharing plan. In these “qualified
if at all, and you can convert them plans,” the investment earnings are
to cash quickly and easily. However, A POPULAR WAY FOR tax deferred. Each plan typically
their interest rates generally are
close to the inflation rate, so cash
equivalents serve best for short-
term needs or as a temporary
“parking place” until you move the
money into more attractive
MANY PEOPLE TO
INVEST IS THROUGH
MUTUAL FUNDS.
“ offers a choice of investments, such
as mutual funds, guaranteed invest-
ment contracts, money market
funds, and so on. Similar investment
options can be found in individual
retirement accounts, annuities, and
investments. cash-value life insurance.
Other types of investments include A GAME PLAN
real estate (your home, commercial
you learn through a fund’s prospec- Once you understand the
property, etc.), precious metals fundamentals of investing, you
tus exactly what objectives and
(such as gold and silver), and energy can develop an investment plan or
strategies the fund uses.
(oil and gas). strategy. This involves first clarify-
For the small investor with limited
INVESTMENT PRODUCTS capital to invest, mutual funds ing your goals, such as early
You can invest in a variety of ways. offer the advantages of diversifica- retirement, current income, or
Stocks and bonds, for example, tion (each fund may hold from 25 saving for college education. How
can be bought and sold individually to over 100 different securities), much money will you need to
or through mutual funds. Real estate small initial investment (typically achieve these goals and how much
can be bought directly or through $2,000), and professional manage- time do you have? Be as specific
limited partnerships, which are ment. Trying to diversify by buying as possible.
groups of individuals who gather for individual stocks, bonds, or other
Next, define your investment
the purpose of investing, or through securities usually requires more
objectives. What types of invest-
real estate investment trusts, which money, time, expertise and risk
ments and what investment
invest in real estate properties or tolerance, but the potential
products will help you reach your
mortgages and whose shares are reward can be greater.
goals? If you have 30 years to
traded like stocks.
Another popular way to invest retirement, you may want to
A popular way for many people is through Exchange Traded Funds consider investing the majority
to invest is through mutual funds. (ETFs). ETFs are similar to mutual of your funds in aggressive growth
Mutual funds pool money from funds with a few key differences. mutual funds through your 401(k)
many shareholders to buy securities. An ETF mirrors the performance plan because they offer capital
Mutual funds have different and diversification of a stock or appreciation and you’ll have time to
objectives: some buy the stocks of bond index. Just as mutual funds ride out the ups and downs of the
new or emerging companies that pool money from many investors to market. If you’re approaching
may offer no dividends, but have buy securities, ETFs do the same. retirement, you may want to
strong potential for capital apprecia- But while most mutual funds can consider less volatile investments
tion; some funds invest in bonds only be bought or sold once a day at that will provide high current
and dividend-paying stocks to market closings, ETFs can be bought income; but you’ll still need some
provide current income for their and sold any time the markets are growth funds in your portfolio to
shareholders; other funds focus on open, just like individual stocks or stay ahead of inflation during your
overseas investments or on certain bonds. ETFs tend to have lower retirement years.
industries or sectors of the operating costs than mutual funds, Whether you’re trying to reach one
economy. There are countless and they are usually more tax goal or several, the combination
variations, and it’s important that efficient.
3 © 2001, 2005, 2009
National Endowment for Financial Education

5. W E A LT H C A R E K I T: I n v e s t m e n t P l a n n i n g
of investments you make is called A well-thought-out investment
a portfolio. Your plan should state plan is critical, because you will use
what percentage of the total it to monitor your progress. It also
portfolio will consist of stocks, keeps you steady through good
bonds, cash or cash equivalents, times and bad and helps you avoid
international investments, precious those tempting “hot” investments
metals, real estate, or other types of that really don’t fit your needs.
investments you choose. How much
you allocate to each category will Finally, if you work with an
depend on your goals, risk investment adviser, make sure the
tolerance, time horizon, age, and adviser helps you develop a written
amount of funds to invest. A investment policy statement.
diversified portfolio is more likely It specifies your investment goals,
to reduce risk and stabilize return. risk tolerance, acceptable asset
classes, and investment perform-
ance measurement criteria.
Ten Keys to
Investment Success
1. Develop a plan and link 7. Take full advantage of tax-
it to your financial goals. deferred retirement programs.
2. Diversify by owning different 8. Avoid buying any investment
types of assets and securities. that claims you can earn a great
return for little risk. If an invest-
3. Invest for the long term.
ment looks too good to be true, it
4. Have realistic expectations. probably is.
It’s rare to increase return
9. Take control of your investments.
without increasing risk,
Stay informed. Even if you work
or vice versa.
with financial professionals,
5. Never invest in anything you you must be the one ultimately
can’t “sleep on.” responsible for your decisions.
6. Monitor the performance of your 10. Don’t invest in something you
investment portfolio at least don’t understand.
annually.
4 © 2001, 2005, 2009
National Endowment for Financial Education

6. W E A LT H C A R E K I T: I n v e s t m e n t P l a n n i n g
INVESTMENT VEHICLE PYRAMID: RISK/RETURN TRADE-OFF
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In
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Speculative Gold
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common stocks and
f lo rinci
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and bonds collectibles
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partnerships investment and calls
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properties (options)
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Inc
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High-grade Growth
common stock mutual funds
Balanced High-grade High-grade
mutual funds preferred convertible
stock securities
High-grade High-grade Money market
municipal bonds corporate bonds accounts
U.S.-insured Treasury Life insurance EE and HH U.S.-insured
checking and securities* cash values bonds certificates
savings accounts of deposit
* If held to maturity. Otherwise, they are subject to volatility due to interest rate risk as with any other type of bond.
• Investment products at the top of the pyramid tend to be non-liquid and speculative in nature.
• Investment products at the top of the pyramid offer a greater potential reward through capital appreciation, but also
have a greater potential for the loss of principal.
• Investment products at the bottom of the pyramid tend to be liquid (easily converted to cash with little principal
fluctuation) and offer a stable, but lower rate of return. While investment products at the bottom of the pyramid pose little
risk of loss of principal, there is little or no potential for capital appreciation. Because of this, if the rate of return is less
than the rate of inflation, there is a risk that purchasing power may be lost over time.
• Investment products in the middle of the pyramid offer a combination of moderate risk and return.
5 © 2001, 2005, 2009
National Endowment for Financial Education

7. W E A LT H C A R E K I T: I n v e s t m e n t P l a n n i n g
Growth in the U.S Stock Market
A $100 INVESTMENT
IN STOCKS IN 1979,
WOULD TODAY BE WORTH
OVER $2,300.
Source: Lipper, as of June 30, 2005. Hypothetical gains (or profits) on stocks are based on returns of the S&P 500.
It is important to remember that there are many ways to invest, and diversifying your investments can reduce risk.
R a n k i n g Yo u r I n v e s t m e n t O b j e c t i v e s
Before you can select an appropriate investment portfolio, you must first identify and rank your investment objectives.
Several investment objectives are listed below. Rank these objectives from 1 (most important) to 10 (least important).
After completing this ranking exercise, you will have a clearer idea of your investment priorities. Use this information
when choosing investment products or when working with a financial professional.
______ Minimize the risk of loss of principal.
______ Maximize the potential for large short-term gains.
______ Ensure slow, stable growth to fund long-term future needs, such as retirement or a child’s education.
______ Maximize liquidity in the event funds are needed in a hurry.
______ Maximize current income to provide for current needs.
______ Reduce income taxes.
______ Build savings toward short- or mid-term major purchases, such as a down payment on the purchase of a home.
______ Maximize the value of your estate for your heirs.
______ Minimize the amount of estate taxes owed upon your death.
______ Protect assets from the claims of creditors or others.
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6 © 2001, 2005, 2009
National Endowment for Financial Education