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Take a Risk on Investor Island (Part 2)

Key Economic Concepts:

• Bond
• Business
• Decision Making
• Income
• Interest
• Investing
• Money
• Risk

Description:

Part II of a three-part series, this lesson provides students with an overview of popular investment options in terms of risk, return and liquidity. Students also take a trip to Investor Island on the imaginary Planet Orange where they are introduced to diversity and mutual funds as a means for spreading risk.

Lesson Objectives:

Students will:

• Identify distinguishing features of these investment options: collectibles, stocks, bonds, real estate, small businesses and mutual funds.
• Recognize diversification as a means to reduce investment risk.

Introduction:

Part 1

Part 2

Part 3

NOTE: Collectibles are one of the investment options discussed in this lesson. If you would like to cover this alternative in more detail, consider using the EconEdLink Lesson Collecting for Fun... or Profit before using this lesson.

On the board, write “Don’t put all your eggs in one basket.” Ask students:

• Have you heard this saying before?
• What does it mean? [Correct responses will center on the idea that when a person puts all of one's eggs in one basket and an accident occurs with that basket, all one's eggs could be broken. It is wiser to put one's eggs in several different baskets. If an accident occurs with one basket, the eggs in the other baskets are still safe.]
• How does this saying apply to life? [One should not pin all of one’s hopes on a specific event occurring. It is better to have several options in case one doesn'’t work out.]

Point out to students that this is an excellent rule to live by -- especially when investing money. Investments are risky. There is no guarantee an investor will make money. In some cases, investors lose money. If you put all of your money (the eggs) in one security (one basket) and the investment fails, you could lose a lot -- perhaps all your money. Wise investors put their money in several different securities and spread the risk. If one security does poorly, it is hoped other investments will help make up for it. Investors call this diversification.

Tell students they are going to investigate various investment options (the baskets) where people put money and how to reduce investment risk through diversification. Have students print the THINK ABOUT IT worksheet. Direct them to follow the instructions throughout the lesson and be prepared to answer the THINK ABOUT IT questions.

Resources:

Investment Options -
Investment Options.doc
A summary of popular investment options and their key features. You may want to provide print copies of this document to students as a tool to help them do their investment plans later in the lesson.

Investor Island - www.orangekids.com/amy/invest_ip_001.htm ^[3]
Students travel to Diversity Garden - www.orangekids.com/amy/invest_cv_002.htm ^[1]

Mutual Fund Estate - www.orangekids.com/amy/invest_cv_003.htm ^[2]

Worksheet -THINK ABOUT IT
The THINK ABOUT IT worksheet has questions for students to answer throughout the lesson that will help reinforce key concepts.

Process:

NOTE: Answers for questions in the THINK ABOUT IT sections are provided with the corresponding activity.

Activity 1: Investment Options

Students examine common investment options including collectibles, stocks, bonds, real estate and small businesses. For each, they are given an overview of three important investment features:

Activity 2: Risk, Return and Liquidity

1. Return: the money they expect to make on their investment and its type: income, growth or a combination of both.
2. Risk: the likelihood they will get this return as well as their original money back
3. Liquidity: the ease with which an investment can be converted into money quickly and without a loss.

For students who are not familiar with the final term -- liquidity, an explanation is given. Key features of each investment type are summarized in the chart (Investing Options).

• Have students answer the Risk, Return and Liquidity: THINK ABOUT IT questions.

1. What investments would you recommend to an investor who wants a steady income? [Bonds, rental property and possibly, a small business]
2. Which investments have the highest risk? [While there are exceptions, investments considered to have the highest risk are collectibles and junk bonds. Given the high number of small business failures, some may appropriately argue small businesses would also fit into this group]
3. The lowest risk? [Bonds -- particularly U.S. government bonds. An exception that would not fit is junk bonds.]
4. The highest potential return? [Stocks, real estate, small businesses and junk bonds]
5. The lowest potential return? [Collectibles and bonds -- with the exception of junk bonds]
6. What is the relationship between risk and return? [The potential return increases as risk increases.]

Activity 3: Reducing Risk Through Diversification

Students visit Diversity Garden (www.orangekids.com/amy/invest_cv_002.htm ^[1] ) on Planet Orange to find out what Gardener Jeff has to say about how and why investors use diversification. They then travel to the planet’s Mutual Fund Estate (www.orangekids.com/amy/invest_cv_003.htm ^[2] ) for a brief explanation of how mutual funds work.

Additional text in the lesson provides more information on mutual funds and their features. Similar to mutual funds, money market funds and real estate investment trusts are noted as other options for diversification.

• Have students answer the Reducing Risk Through Diversification: THINK IT ABOUT IT questions.

1. What are the advantages of mutual funds?
   [Advantages include:
   • Reduction of risk through diversification
   • Professional management of money
   • Relatively low cost shares]
2. Are there any disadvantages?
   [Disadvantages include:
   • Fees are charged for professional management reducing return to the investor
   • The investor is dependent on the success of the manager.]

Conclusion:

If you have not already done so, discuss student responses to the THINK ABOUT IT questions throughout the lesson. Ask students to identify the three factors identified in this lesson that influence investment decisions:

• Desired Return
  How much money an investor can expect to make on the money they have invested. And whether the investor is seeking current income, future growth or a combination of both.
• Risk Tolerance
  A person’s ability to ride out the ups and downs of the market without panicking when the value of investments goes down. People who don't sleep well at night when the value of their investment goes down should select savings and investments with less risk.
• Liquidity Preference
  How quickly and easily an investor wants to be able to access money invested -- without incurring a loss.

Assessment Activity:

Responses to questions in the THINK ABOUT IT sections reflect student understanding throughout the lesson. These may be oral responses or written responses using the worksheet provided.

The extension activities offer several additional opportunities for assessment.

Rubrics (Risk-Rubrics) are provided for assessing student contribution to the class discussion and the essay -- adjust and weight the rubrics to fit your specific needs.

Extension Activity:

Have students:

1. Return to the Investor Islands ( www.orangekids.com/amy/invest_intro.htm ^[4] ) on Planet Orange and take the Investing quiz. Can you get all the answers correct?
2. Consider the pros and cons of starting a private versus public company on Planet Orange using the Worksheet -- Public Companies (www.orangekids.com/pdf/po_worksheet_inv003.pdf ^[5] ). Source: ING Direct.
   
   For answers teachers will have to register by following this link:
   [www.orangekids.com/TRC_login.asp?f=home ^[6] ].
   
   Questions:
   
   1. Materials, employees, equipment, advertising, office buildings, factories, shipping, lawyers, product testing, and more.
   2. The price of the shares of stock you decide to buy.
      
      Scenarios
      1. Stock in a public company: Private companies are legally responsible for damages. That means that if your company is found guilty in a lawsuit, you'll owe a lot of money to make up for the damages your sneakers have done. With stock, you only lose the money you've spent on the stock you've bought.
      2. Private company: If you own stock in a public company, you own a small portion of the company, but you can't dictate how the company runs its business. If you own your own company, you decide which designs your company will produce.
      3. Either: If you own stock in a public company, your shares will be worth more than before. If you own a private company, you can profit a lot from the sale of each pair of sneakers, but you also have to pay money to meet the public's demand for sneakers.
      4. Stock in a public company: If you decide that sneakers aren't for you, it's much easier to sell several shares of stock than to sell off an entire company.
      5. Stock in a public company: If you only have $100, building a sneaker empire will be nearly impossible. Your safest bet is to buy shares in a public company and wait until you have collected a lot in profits before thinking about starting your own business.

Links Used:

1. ^{^ ^} "www.orangekids.com/amy/invest_cv_002.htm" - (www.orangekids.com)
2. ^{^ ^} "www.orangekids.com/amy/invest_cv_003.htm" - (www.orangekids.com)
3. ^{^} "www.orangekids.com/amy/invest_ip_001.htm" - (www.orangekids.com)
4. ^{^} "www.orangekids.com/amy/invest_intro.htm" - (www.orangekids.com)
5. ^{^} "www.orangekids.com/pdf/po_worksheet_inv003.pdf" - (www.orangekids.com)
6. ^{^} "www.orangekids.com/TRC_login.asp?f=home" - (www.orangekids.com)

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