Lesson 1: What is Investing?

1. The Difference Between Saving and Investing

Learning Objective:
Understand the key differences between saving and investing, and why investing can be a more powerful tool for long-term wealth building.

What is Saving?

Saving typically involves setting aside money in a safe, easily accessible place like a savings account or money market fund. The primary goal is to keep your money secure while earning a small amount of interest.

·         Characteristics of Saving:

• Safety: Your money is not at risk, especially in FDIC-insured accounts.

• Liquidity: Savings are easily accessible for emergencies or short-term needs.

• Low Returns: Interest rates on savings accounts are usually low, often lower than inflation.

·         When to Save:

• For short-term goals (e.g., vacations, emergency funds, down payments).

• To maintain liquidity for unexpected expenses.

What is Investing?

Investing involves purchasing assets (e.g., stocks, bonds, real estate) with the goal of generating a return. Unlike saving, investing carries risk, but it offers the potential for significantly higher returns over time.

·         Characteristics of Investing:

• Risk: Investments can go up or down in value, and you may lose money in the short term.

• Growth Potential: Investments have the potential to grow your wealth over time, especially through compound returns.

• Longer Time Horizons: Investing is generally suited for longer-term goals, like retirement or funding a child’s education.

·         When to Invest:

• For long-term financial goals (e.g., retirement, wealth-building).

• When you have money you won’t need in the near future and are willing to accept short-term volatility for the potential of long-term growth.

Content Outline:

• Video Explanation (7 minutes):

• A breakdown of saving vs. investing, including examples of when it’s appropriate to save and when it’s better to invest.

• Interactive Exercise (8 minutes):

• Participants categorize different financial goals into saving or investing to practice decision-making based on time horizon and risk tolerance.

• Quiz (5 minutes):

• A quiz where participants decide if a specific scenario (e.g., buying a car, planning for retirement) should involve saving or investing.

2. Risk vs. Reward in Investing (20 minutes)

Learning Objective:
Understand the trade-off between risk and reward in investing, and how different types of investments carry varying levels of risk.

What is Risk in Investing?

Investment risk refers to the chance that an investment’s actual return will differ from its expected return. This includes the possibility of losing some or all of your initial investment.

• Types of Risk:

• Market Risk: The risk that the value of your investments will decrease due to changes in the overall market (e.g., a stock market downturn).

• Inflation Risk: The risk that your investment returns won’t keep up with inflation, reducing the purchasing power of your money.

• Liquidity Risk: The risk that you won’t be able to sell an investment quickly without losing value.

What is Reward in Investing?

Reward refers to the potential return you can earn on an investment. Generally, investments that carry more risk also have the potential for higher returns.

·         High-Risk, High-Reward Investments:

• Stocks: Represent ownership in a company. Stock prices can fluctuate significantly, but they also offer the potential for high returns over the long term.

• Real Estate: Real estate can be risky due to market fluctuations, but it also offers the potential for significant appreciation.

·         Low-Risk, Low-Reward Investments:

• Bonds: Bonds are loans made to corporations or governments. They provide regular interest payments and are less risky than stocks, but they also offer lower returns.

• Savings Accounts: While savings accounts are extremely safe, they offer the lowest returns, often below inflation rates.

Risk-Reward Trade-Off:

Investors must balance their desire for higher returns with their tolerance for risk. Generally, the more risk you’re willing to take, the greater the potential reward—but also the greater the potential for loss.

Content Outline:

• Video (7 minutes):

• Explanation of the risk-reward spectrum in investing, using examples of different asset classes (e.g., stocks, bonds, real estate).

• Interactive Risk Tolerance Quiz (8 minutes):

• Participants take a quiz to assess their personal risk tolerance based on age, financial situation, and comfort with market volatility.

• Discussion (5 minutes):

• Group discussion on how risk tolerance can change over time and how different life stages may require different investment approaches.

3. Time Horizon and Its Role in Investment Decisions

Learning Objective:
Learn how your investment time horizon affects your risk tolerance and choice of investments.

What is an Investment Time Horizon?

Time horizon refers to the length of time you expect to hold an investment before needing to access the money. Your time horizon has a major impact on your investment strategy and the level of risk you should take on.

·         Short-Term Time Horizon (0-3 years):

• Low Risk: For short-term goals, it’s important to prioritize safety and liquidity over growth. Cash equivalents like savings accounts or short-term bonds are ideal for short-term horizons.

·         Medium-Term Time Horizon (3-10 years):

• Moderate Risk: For medium-term goals (e.g., buying a house, funding a child’s education), a balance between risk and reward is key. A mix of stocks and bonds is typically appropriate.

·         Long-Term Time Horizon (10+ years):

• High Risk: For long-term goals like retirement, you can afford to take on more risk in pursuit of higher returns. Stocks and real estate, which have more volatility but higher growth potential, are typically suitable for long-term horizons.

The Power of Time in Investing:

Time can reduce the risk of volatile investments like stocks because market downturns tend to be smoothed out over longer periods. This is why long-term investors can afford to take on more risk.

• Compounding Growth:
  The longer you keep your money invested, the more you benefit from compounding returns—where your investment earnings generate additional earnings.

Content Outline:

• Video (5 minutes):

• Explanation of how time horizon affects risk tolerance, with examples of different financial goals and appropriate investment strategies for each time horizon.

• Case Study (7 minutes):

• Participants review case studies of different investors with varying time horizons (e.g., a young professional saving for retirement vs. a couple saving for a home) and discuss the appropriate investment strategies for each.

• Discussion (3 minutes):

• Group discussion on how their own time horizon affects their current and future investment decisions.

4. Next Steps

Learning Objective:
Summarize key takeaways and provide actionable steps for starting or improving your investment strategy.

Content Outline:

• Recap (3 minutes):

• Differences between saving and investing, understanding risk vs. reward, and the importance of time horizon in investment decisions.

• Actionable Next Steps (2 minutes):

• Set personal financial goals and determine whether saving or investing is appropriate for each.

• Assess your risk tolerance and time horizon to develop a personalized investment strategy.

• Research investment vehicles like stocks, bonds, and mutual funds to start building your portfolio.

Additional Resources:

• Articles on different types of investment accounts (e.g., brokerage accounts, retirement accounts).

• Risk tolerance questionnaires and investment strategy guides.

• Links to investment calculators to project future returns based on different time horizons and risk levels.