Grade: 11 Lesson # 11
What is diversification and how does it affect saving and investing?
SS.912.FL5.6 Describe how diversifying investments in different types of financial assets can lower your investment risks.
LAFS.1112.W.3.7 Conduct short as well as more sustained research projects to answer a question (including a self-generated question) or solve a problem; narrow or broaden the inquiry when appropriate; synthesize multiple sources on the subject, demonstrating understanding of the subject under investigation.
SS. 912.FL5.6 Describe how diversifying investments in different types of financial assets can lower your investment risks.
Financial Investing: You can’t have your cake and eat it too. Why “putting all of your eggs” in one basket is risky in the financial market
Lesson Number 11:
Correlated Florida Standards (See Full Text on Cover Page)
· LAFS.1112.W.3.7
Essential Question
· What is diversification and how does it affect saving and investing?
· What is risk and what is the relationship between risk and reward?
Learning Goals/Objectives
· Describe the relationship between investment risk and investment reward.
· Describe the characteristics of several investments including savings accounts, U.S. government savings bonds, stocks, bonds and mutual funds.
· Analyze the pyramid of risk and reward.
· Compare and contrast the risks and rewards of several types of investments.
Overview
· In this lesson, students will learn about the relationship between risk and reward and the importance of diversifying investments. Risk is inherent in all investments. Some risks are ones investors cannot control. Other risks can be managed. Given that relationship, there is no free lunch in investing.
Materials
· Scholastic, “Talking About Money” Video, http://www.scholastic.com/nextgeneration/videos.htm
· Financial Planning Pyramid Handout, College for Financial Planning (Included in lesson file)
· Investment Risk Pyramid, Investopedia, http://www.investopedia.com/articles/basics/03/050203.asp
· Federal Reserve Bank of St. Louis, No- Frills Money Skills Video, Episode 3, https://www.stlouisfed.org/education/no-frills-money-skills-video-series
· Risk Scale Handout (Included)
Time
· 50 minutes
Activity Sequence
INTRODUCTION/HOOK
· Ask students to share their financial hopes – buying a new car, paying for college, traveling around the world. Tell students to imagine buying their first home, saving for retirement or having enough money for an emergency. Ask if they know where to put their savings to make dreams like that a reality. Explain to students that this lesson will help them decide where to put their money and how to evaluate the risk. (5 minutes)
ACTIVITY
1. Have students watch and discuss “Talking About Money,” an introduction to Financial Planning. http://www.scholastic.com/nextgeneration/videos.htm (5 minutes)
2. Distribute the Financial Planning Pyramid Handout and discuss the basic concept of building their financial life with a strong foundation and then moving up the pyramid. Discuss some of the basic investments shown on the Financial Planning Pyramid. (Note to teacher: see also Investopedia’s Investment Risk Pyramid, http://www.investopedia.com/articles/basics/03/050203.asp (10 minutes)
3. Have students watch and discuss the Federal Reserve Bank of St. Louis, No- Frills Money Skills Video, Episode 3, https://www.stlouisfed.org/education/no-frills-money-skills-video-series, which also includes a discussion of the Financial Planning Pyramid. (10 minutes)
4. Break students into small groups of 3 or 4 and distribute the Risk Scale handout.
5. Tell students to read through each scenario and discuss the degree of acceptable risk for each of the examples. (10 minutes for steps 4 and 5)
6. Review the scenarios with students and summarize that the younger people are, the more risk they are able to take because they have a longer time frame to wait for the “markets” to recover. As people get older, they should take less risk, especially when they have reached retirement age and will not have the same earning potential. (5 minutes)
CLOSURE
· Summarize that risk comes from the uncertainty about the promised return on an investment. The greater the risk, the higher the potential rate of return. Unfortunately, with more risk, it is also more likely to lose money. Remind students to educate themselves as much as possible about investing and that if something sounds too good to be true, it probably is. Show them how to access additional St. Louis Federal Reserve No-Frills Money Skills videos on bonds, mutual funds and retirement funds and to always remember the importance of diversification and following the basics of the financial planning pyramid. (5 minutes).
OPTIONAL EXTENSION SUGGESTION/HOME LEARNING
· Students will watch additional videos in the St. Louis Federal Reserve No-Frills Money Skills series including mutual funds, IRA’s and bonds and decide which investment would be best for them. The student will create a chart with the level of risk for each investment.
· Additional home learning: Students may also research one article about investments in the financial section of the newspaper and discuss the risks of that investment.
Sources/Bibliographic Information that contributed to this lesson:
http://www.econedlink.org/lessons/economic-lesson-search.php
North Carolina Department of Public Instruction 2006, Financial Literacy, Savings and Investment, http://www.ncpublicschools.org/docs/curriculum/socialstudies/secondary/personalfinancialliteracy/section4.pdf
Federal Reserve Bank of St. Louis, No- Frills Money Skills Videos, https://www.stlouisfed.org/education/no-frills-money-skills-video-series
https://www.treasury.gov/resource-center/fin-mkts/Pages/default.aspx
http://www.investopedia.com/articles/economics/09/financial-regulatory-body.asp
http://www.in.gov/sos/securities/files/Basics_2020_IPT.pdf
Risk Scale: “Some Risk,” “High Risk,” or “Extreme Risk.”
Directions: Using the scale above, plot what you think would be acceptable risk to take in the following times in your life. Remember at each time your responsibilities change and so might your goals. In the space below explain why you chose that risk level.
______1. You are 21 years old, not married, recent college graduate with an entry-level job with a very well known company and a bright future.
______2. You are 35 years old, married with a son that is ten years old and a daughter six. You anticipate that both of them will be going to college. You have been with your company for nine years and are in middle management.
______3. You are 55 years old. Your children are out of the house in “good” jobs. You are thinking of retirement, wanting to continue your present life style and enjoy your life after work.
______4. You are 67 years old and in excellent health. You have retired and are looking at a very long and happy life of traveling and good works.
The above scenarios were downloaded fromthe North Carolina Department of Public Instruction, Secondary Education Division, Financial Literacy Unit on Savings and Investment.
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