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Entrepreneurship

Entrepreneurship. Chapter 14 Investing for a Secure Future. Save 10% of Your Income. Pay yourself first. Save 10% of any money your earn, then pay bills and buy things. Invest your savings. This is how people build wealth. Inflation Affects Investments.

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Entrepreneurship

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  1. Entrepreneurship Chapter 14 Investing for a Secure Future Mariotti: Entrepreneurship

  2. Save 10% of Your Income • Pay yourself first. • Save 10% of any money your earn, then pay bills and buy things. • Invest your savings. • This is how people build wealth. Marriotti: Entrepreneurship

  3. Inflation Affects Investments • Inflation is an overall rise in the prices of products and services. • When prices rise, money buys less. If the price of bread rises from $1 a loaf to $1.50 a loaf, your dollar can no longer buy a loaf of bread. • Bonds offer no protection against inflation because a $100 bond bought today will only pay $100 when it matures. • Stocks offer some protection against inflation because stock prices tend to rise when overall prices rise. Marriotti: Entrepreneurship

  4. Future Value of an Annuity • An annuity is a sum of money that is paid or invested annually. • Use a future value table to calculate what an investment will be worth in the future. Marriotti: Entrepreneurship

  5. Risk-Reward Relationship 3 classes of financial investments: • Stocks • Bonds • Cash • All investments involve some risk that you could lose money. • The greater the potential return of an investment, the higher the risk. • The lower the return, the lower the risk. High Reward = High Risk Low Reward = Low Risk Marriotti: Entrepreneurship

  6. Time and Liquidity Affect Risk • Time: The longer someone has your investment, the greater the risk that money could be lost. The longer you have to wait for your return, the higher it should be. • Liquidity: How quickly can you get your money out of the investment and back into your hands as cash? The less liquid an investment is, the higher its return should be. Marriotti: Entrepreneurship

  7. What Is Your Risk Tolerance? • Everyone has a different tolerance for risk. • There is no “right” tolerance for risk. The level of risk that feels comfortable to you is the right one. • Some people prefer investments that offer lower rates of return because they are less risky. • Some people prefer riskier investments because they offer higher returns. Marriotti: Entrepreneurship

  8. Stocks, Bonds, or Cash? • A portfolio is a collection of investments. • Most people keep a mix of stocks, bonds and cash in their portfolios. Marriotti: Entrepreneurship

  9. Stocks, Bonds, or Cash? (cont.) • Stocks: equity shares of companies • Stocks pay dividends (share of company profits) • Stocks are bought and sold on the stock market • More risky than bonds or cash • Bonds: interest-bearing loans • Bonds pay interest • Bonds are traded on bond market • More risky than cash, less risky than stock • Cash: any investment that can be sold for cash within 24 hours • Savings account • Treasury bills • Less risky than stocks and bonds Marriotti: Entrepreneurship

  10. Keep an Emergency Fund • Before investing in stocks and bonds, save up enough money to cover your personal expenses for at least 3 months. • Food • Clothes • Rent • Transportation • This is your emergency fund. Keep it in cash investments. Marriotti: Entrepreneurship

  11. Diversification Protects Your Investments • Don’t put all your eggs in one basket! • Diversify: buy a variety of investments for your portfolio so that if one investment fails, you won’t lose all your money. • Own both stocks and bonds. • Economic conditions that make stock prices rise, such as inflation, tend to make bond prices fall. • Economic conditions that make stock prices fall, such as recession (a decline in prices plus unemployment), tend to make bond prices rise. Marriotti: Entrepreneurship

  12. Mutual Funds Offer Diversification • If you invest in stocks, you should own at least 25 different stocks to be well diversified. This can be very expensive. • Consider investing in shares of mutual funds. A mutual fund is a company that collects money from investors and uses it to buy hundreds of stocks (or bonds). • When you own a share of a mutual fund, you own a share of all its diversified investments. This is an affordable way to diversify your portfolio. Marriotti: Entrepreneurship

  13. Creating Your Portfolio • Choose investments for your portfolio based on your: • Investment goals • Risk tolerance • Amount of time to reach goals • Sample portfolio: Marriotti: Entrepreneurship

  14. Rebalance Portfolio Every Year • Choose to invest stocks, bonds, and cash in your portfolio according to percentages that are right for you. • Rebalance your portfolio once a year to keep those percentages in line. • If stocks grow more than bonds, sell some stocks and buy some bonds. • If bonds grow more than stocks, sell some bonds and buy some stocks. Marriotti: Entrepreneurship

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