Investment risk: How much can you handle?

Transcription

1 Investment risk: How much can you handle? GRADE 12 In this lesson, students compare levels of risk in various saving and investment vehicles and self-reflect on their own risk tolerance. Subject Suggested timing Financial literacy objectives HIP4O Personal Life Management 70 minutes At the end of this lesson, students will: describe government regulations and policies for saving and investments (e.g., CDIC); compare advantages and disadvantages of various savings and investment vehicles and strategies; analyze the relationship between risk and reward as it relates to savings and investments; identify age-appropriate, short-term savings goals. Curriculum expectations Social Science and Humanities, grades 9 to 12 (2013) Personal Life Management (HIP40) Daily living skills C2.2 Demonstrate the use of effective money management strategies Economics and personal finances E1.3 Identify and describe strategies they can use to plan for and manage unexpected financial crises E2.1 Identify various types of financial institutions in the community Assessment Collect: Investment breakdown activity (Appendix E). PAGE 1

2 What you need Chalk/chalkboard Masking tape Projector Appendices A-F Minds on Draw a large representation of a pyramid on the blackboard. Title it, The Risk Pyramid. Divide the pyramid into three horizontal segments from top to bottom. Label the top third High Risk, the middle third Medium Risk and the bottom third Low Risk. (See Appendix G for an example.) Tape the images of various extreme sports included in Appendix A in random order to the left of the pyramid. Tape or write the various investment options (e.g., cash, savings, stocks) in random order to the right side of the pyramid (Appendix B). Draw students attention to the images of individuals participating in extreme sports. Point out the image of the free solo climber and explain that this is a type of rock climbing in which individuals climb alone and without ropes of any kind. Discuss the reasons why a person would or would not want to participate in this kind of sport (risk and reward) and ask students what people do to prepare for high-risk activities. Stick the Free Solo Climb photo (Appendix A) near the top of the pyramid and emphasize that this is one of the riskiest activities a person could undertake. Encourage a similar discussion about the other sports photos and discuss the level of risk that students think is associated with each. According to class agreement, place the images of each sport in descending order of risk on the left side of the pyramid. Explain that there are some people who are comfortable taking on high levels of risk and that they are willing to tolerate this kind of uncertainty for a perceived payoff. Others are more moderate and feel more comfortable in situations in which the risk is lower. The same is true of investing money. There are those who are comfortable taking on higher levels of risk while others prefer or require the comfort of investments that have low levels of risk. Explain that today s lesson will help students understand the range of risks across the spectrum of investments available in Canada. Context for learning Bill Fold is a character who is constantly getting himself into financial scrapes. Use the scenario below to provide students with a context for learning. Bill Fold has been working part-time and has saved $5,000 for school. To optimize his savings, should he invest the money? If so, in which savings or investment vehicle and at what level of risk? PAGE 2

3 Action Hand out the How risky am I? quiz (Appendix C). Have each student fill it out and write down their Risk profile number. Ask students whether or not they see themselves as similar to their risk profile numbers. Pair students according to similar Risk profile numbers. Provide each student with an Investment breakdown worksheet (Appendix E). Review the first example (Cash) and tape the Cash label near the bottom of the pyramid (on the opposite side of the sports images). Debate whether or not keeping hard cash at home is actually a risk-free endeavour. Have students record the level of risk in the first row and final column of the Investment breakdown worksheet. Next, help students understand collectible items and then saving accounts. Distribute the How are savings and investments protected? handout (Appendix D) and familiarize students with the features of Canadian deposit insurance coverage. As a class, decide the level of risk of a savings account (low, medium, high). Have students record their responses on the Investment breakdown worksheet and stick the Savings Account label to the appropriate spot on the pyramid. Move through the other investment vehicles listed in Appendix D, describing each investment in clear and simple terms, and by highlighting and recording the level of risk for each. Take time to explain diversification and the importance of this tactic in mitigating investment risk. As each investment type is discussed, have a student come to the front and stick the investment label at the appropriate level of risk on the pyramid. (Note: It will be important to teach students what the term liquidity means in advance of using Appendix D. See Appendix F for suggested answers for levels of risk.) Consolidation/ debrief After completing the investment pyramid with the class, remove all of the investment labels and have students put their Investment breakdown worksheet away (Appendix D). Distribute the Risk pyramid worksheet (Appendix G). Have students review the various investment types taught in the lesson by recording the investment types listed at the bottom of the page on the appropriate area of the risk pyramid. Encourage students to describe and quiz their partner on the pros and cons of each investment type. As a class, discuss the following: 1. How does the CDIC protect Canadian investors? 2. What are the potential benefits of high-risk investments; low-risk investments? 3. What kinds of investments are right for you at this stage in your life? Why? 4. What can you do to lessen investment risk? Homework Ask students to research an additional investment vehicle and add the information to their Investment Breakdown worksheet. PAGE 3

4 APPENDIX A Risk spectrum photos # Free Solo climb Surfing Walking to school Skydiving PAGE 4

5 APPENDIX B Investment options labels Cash Gold TFSA Savings account GIC / Term deposit Government bonds Stocks Real estate Collectible items Registered Education Savings Plan (RESP) PAGE 5

6 APPENDIX C How risky am I? Choose the answers that best describe you. Then, add up your answers based on the following values: a = 1, b = 2, c = 3, d = 4 1. You are on a TV game show and can choose only one of the following options. Which would you take? a. $1,000 in cash. b. A 50% chance at $5,000. c. A 25% chance at $10,000. d. A 5% chance at $100, You have just finished saving for a once-in-a-lifetime vacation. Two weeks before you plan to leave, you lose your job. You would: a. Cancel the vacation. b. Take a more modest vacation. c. Proceed as scheduled, reasoning that you need the time to prepare for a job search. d. Extend your vacation, reasoning that it may be your last chance to do anything like this. 3. Think of the word risk. Which one of the following words first comes to mind? a. Threat b. Loss c. Uncertainty d. Opportunity 4. Given the best- and worst-case scenarios of the 4 investment choices below, which would you prefer? a. $250 gain best case; $0 gain/loss worst case b. $750 gain best case; $200 loss worst case c. $2,800 gain best case; $800 loss worst case d. $5,000 gain best case; $2,500 loss worst case 5. Your trusted friend has invented something top secret. If his invention can pass safety inspection next week, any money invested now will earn 100 times the investment. If it does not pass, the entire investment is worthless. Your friend estimates a 20% chance of success. If you had the money, how much would you invest? a. Nothing b. One month s salary c. Two month s salary d. Six month s salary Total score: Risk profile number (5 9 = low risk, = medium risk, = high risk) PAGE 6

7 APPENDIX D How are savings and investments protected? What is the CDIC? The Canadian Deposit Insurance Corporation (CDIC) protects the money you deposit or invest with Canadian financial institutions in the event that the institution were to go bankrupt. The CDIC is not a bank or a private insurance company. If your financial institution is a CDIC member and it does go bankrupt, you can receive up to $100,000 of your principal and interest on any investments. If the institution is not a CDIC member, you may lose everything! Are all accounts with member institutions covered? NO! Accounts and products covered by the CDIC (only in Canadian $): Savings and chequing accounts GICs/Term deposits with an original term to maturity of 5 years or less Money orders, certified cheques, traveller s cheques and bank drafts issued by CDIC members Accounts and products not covered by the CDIC: Stocks and mutual funds GICs/Term deposits with an original term to maturity of more than 5 years Bonds Treasury bills What is the CIPF? The Canadian Investor Protection Fund (CIPF) was established by the investment industry to ensure that client assets are protected if they were to go bankrupt. CIPF is not a government organization. If your investment dealer is a CIPF member and it does go bankrupt, you would be eligible for up to $1,000,000 in coverage. CIPF does not cover losses from: Market fluctuations The bankruptcy of an issuer of a security or deposit instrument held in your account, no matter how drastic or unfortunate PAGE 7

8 APPENDIX E Investment breakdown Investment Description Liquidity* Cash Savings Account Collectible items GIC (Guaranteed Investment Certificate) / TD (Term Deposit) Gold Government bonds (Canada Savings Bonds) Cold hard cash. Not in any bank. In a safe, under your mattress, etc. (hi-med-low) High Benefits Drawbacks Risk No risk of bank failure. Likely to retain value. Money being kept in a bank account. High Insured up to $100,000 by CDIC. Sports cards, postage stamps, comic books, etc. Both investments offer guaranteed returns to investors, although investors cannot touch their money until the agreed-upon date. GICs typically offer a longer time period than TDs, as well as larger returns. In the form of gold bars or gold coins. Depends on the supply/demand of gold markets. When you buy a government bond, you are basically lending money to the government. The government, in turn, guarantees to pay interest while you hold the bond and pay back the principal at a later date ( maturity ). Medium Depends on item Medium Depends on length of investment and penalties for early withdrawal. High High Government bonds are typically cashable before maturity without penalty. Items can appreciate greatly in value. Guaranteed return on investment (rates of return likely less than riskier investments). Insured by CDIC. Can greatly appreciate in value. Safe return on investment (though rates of return likely less than some riskier investments). Guaranteed by government. Can get stolen. Investment income from interest is taxed. Comparatively low interest. Items can depreciate. Items can get damaged or stolen (may need insurance). Depends entirely on market supply/ demand for specific items. May need to take out money earlier than agreement states; you can face severe penalties for this. Gold market can drop. No protection from effects of inflation. (hi-med-low) PAGE 8

9 APPENDIX E Investment breakdown (cont d) Investment Description Liquidity* Real estate Houses, condos, etc. The value of these investments depends entirely on the supply/demand of the real estate market in the area where the properties are located. (hi-med-low) Low It takes time to convert a house into cash. Benefits Drawbacks Risk Property can greatly appreciate in value in a hot real estate market. Can earn revenue from renting out properties. Real estate market can drop. Potential damage caused by renters. Carrying costs (property tax, mortgage, etc.). (hi-med-low) Stocks Shares of publicly-owned companies. Investors can make money by selling shares at a profit and, in some cases, receiving dividends (sharing of company s profit) from their stock. The value of stocks is entirely dependent on supply/demand by other investors. The stock market is possibly the most volatile (up and down) market there is. High Can be less liquid if it s a failing company, poor investment, etc. Potential to make a lot of money very quickly. Stock market can drop. Registered Education Savings Plan** (RESP) Can contain various kinds of investments (stocks, mutual funds, GICs, etc.) up to $50,000 per student. Depends on assets within RESP. Tax-deferred income while money grows in the RESP. Federal government pays 20% on every dollar contributed up to $2,500/year. Tax paid when the student withdraws money from the plan. Registered Retirement Savings Plan** (RRSP) Can contain various kinds of investments (stocks, mutual funds, GICs, etc.) for which investment earnings are untaxed. There is an annual limit as to how much you can contribute to your RRSP. Depends on assets within RRSP. Tax-deferred income. Taxed when money is withdrawn from the plan. Tax-Free Savings Account** (TFSA) Can contain various kinds of investments (stocks, mutual funds, GICs, etc.) for which investment earnings are untaxed. There is an annual limit as to how much you can deposit in your TFSA. Depends on assets within TFSA. Tax shelter (tax-free investment income). Comparatively low interest. *Liquidity is an asset s ability to be sold without causing a significant movement in the price and with minimum loss of value. **Vehicles that can hold cash and other investments. Homework Assignment: Add one more type of investment and fill out the chart with the appropriate information. PAGE 9

10 APPENDIX F Teacher s notes Collectible items high risk (no guarantee that market will pay as much as you did) GIC low risk Gold medium to high risk (depending on the market cycle) Government bonds low risk Real estate medium risk RRSP depends on assets within RRSP RESP depends on assets within RESP Savings account low risk TFSA depends on assets within TFSA Stocks medium-high risk (depending on investments and market cycle) PAGE 10

11 APPENDIX G The Risk pyramid High risk Medium risk Low risk Cash Gold Savings account Collectibles Real estate Stocks RRSP Government bonds GIC/Term deposit TFSA PAGE 11