Suggested Lesson Plan
for this Worksheet Before investing your money, you will have to
understand the important concept of risk and return. Risk and
return means that the returns you will get when investing your money will vary.
You may even lose money. However, no matter what you do with your money,
you are always taking some amount of risk. If you keep your money at home,
you risk that it could be lost or stolen. If you place your money in a
bank account, you risk that the returns that you get will not be high enough.
Risk and return also means that if you take
greater risks, you should expect to get greater returns. If you want the
possibility of getting greater returns, you need to invest your money in more
risky investments, for example bonds or stocks. Different bonds and stocks
even have different degrees of risk.
So how much risk should you take with your
money? That depends on many different factors including your age, risk
tolerance, and investment objectives. No matter where you invest your
money, you first should understand the investment's risks and potential rewards.
Additional thoughts on risk and return:
The risky investment in this exercise may be
stocks, or may be another type of investment. If you consider the risky
investment to be stocks, many people believe that stocks outperform safe
investments over the long-term, and therefore showing negative returns (as this
worksheet lesson does) may give a false impression that stocks are not good
investments.
Our thought is that while it has been true
that stocks and bonds have historically outperformed safe
investments over the long-term, in the short term you could lose
significantly with them. Also, you could lose significantly
if you own particular stocks, rather than a diversified basket of
stocks.
Also, even though stocks have outperformed in
the past, there is no guarantee that they will in the future -- that
is what makes them risky investments -- even over the long-term.
Many people thought stocks would always give positive returns at the
top of the market in March, 2000. No investment return is ever
guaranteed -- there is always a risk. We can look at
historical returns to get a sense of what we may get in the future,
however, the past is never a guarantee of the future.
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