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Grade 9-12
,
Lesson

The Five Stages of Investing

Time: 45 mins,
Updated: March 5 2019,
Author: Kim SosinMelissa Smith

Objective

Students will be able to:

  • Apply risk and return information using the five stages of investing to life situations.
  • Understand the risk and return rankings of a variety of financial investments.
  • Analyze and make financial decisions based on risk and return.

In this personal finance lesson, students learn to apply the investing stages to life situations.

Procedure

Warm-up

Explain to students that the practice of saving and investing is important to financial success, but there are many ways to save and invest. As you think about the options, you should consider the degree of risk involved and the potential for return. Usually, the higher the risk, the higher the potential return. The key to success is to work up to the riskier investments where you can expect the highest return, but only after you’ve successfully established some safer holdings. We will now walk through the stages of investing, and you will see why that order from least risk to more risk is important. At the end of the lesson, you will be ready to serve as financial advisors and give advice to potential investors at different stages of the investment ladder.

Sometimes the order in which you do things is so important it can make or break the process. You wouldn’t apply to be the head chef of a gourmet restaurant before you had learned to cook noodles, right? The same is true of saving and investing money: there are lots of potential good ideas, but if you try to use them in the wrong order you might find yourself in over your head (or worse, out of money for groceries!). In this lesson you’ll learn about the five stages of saving and investing, what happens at each stage, and why it’s important for investors to use the stages in a specific order. You’ll learn that lower risk, on average, yields lower returns while higher risk yields higher returns. You’ll also learn why lower income new investors should not be tempted to buy assets that promise “get rich quick” investments, which are always highly risky. Then you’ll use that information to provide advice to prospective investors at different points along the way in their financial journeys. Happy investing!

Ask students to think about various financial investments in terms of their riskiness.  Give this situation: Your friend’s parents just inherited a little extra money to invest but they have no experience.  They want to find reasonably safe investments but hope to receive a return better than paid by checking accounts.  Your friend asks you for advice. The following video will help explain the risk-return concept YouTube Video: Introduction to Risk and Return (3 minute and 3 second video).  But what are the types of financial instruments in that safest category?

Display the video to students. Tell students that you will help them understand the importance of risk and return. Use a ranking activity to match the types of financial investments to their categories according to  safety/risky level. Open the PowerPoint Slides.  Use the slides throughout the class period. Display PowerPoint slide 2 – Table 1.  Ask students to use a matching activity to connect the types of financial investments in the bottom of the table to their risk categories in the top of the table.  Ask students to use their results to complete this sentence on a piece of paper to save.

Modeling

Using Table 2, model the concepts of risk and return by leading a discussion of a range of assets in each category of risk. Table 2 is found on slide 3 in the PowerPoint. Show students Table 2, the correct results to the warm up activity, and summarize the various types of investment in terms of their riskiness. Note that the category names are not firm definitions, so there could be room for some differences of opinion.  Also see and use, if convenient, the Investment Risk Pyramid in Investopedia for another visual example. The asset list is similar, but not identical. Tell students that the asset rankings are the same, but the names of categories vary by author.

Group Activity

Explain to students that sometimes the order in which you do things is so important it can make or break the process. You wouldn’t apply to be the head chef of a gourmet restaurant before you had learned to cook noodles, right? The same is true of saving and investing money: there are lots of potential good ideas, but if you try to use them in the wrong order you might find yourself in over your head (or worse, out of money for groceries!). In this activity, you’ll learn about the five stages of saving and investing, what happens at each stage, and why it’s important for investors to use the stages in a specific order. You’ll learn that lower risk, on average, yields lower returns while higher risk yields higher returns. You’ll also learn why lower income new investors should not be tempted to buy assets that promise “get rich quick” investments, which are always highly risky. Then you’ll use that information to provide advice to prospective investors at different points along the way in their financial journeys. Happy investing!

Use slides 5 to 9  in the PowerPoint and distribute copies of the Five Stages of Saving Investing document. Discuss each of the stages in turn, and have students brainstorm about what each stage adds and why investors should act in this order of stages.

Individual Activity

Have students play Kahoot! Game individually, not in groups, to assess their learning. Review the quiz results with the students. End the discussion by stating:

“As you start to earn money, it’s important to remember that there’s a smart way to invest that money and a smart sequential order to follow. Of course, you don’t want to gamble with money you can’t afford to lose, and you also don’t want to jump into very complicated investments when you don’t have any experience as an investor. It’s important to start investing in low-risk choices to protect your asset value  and also to help you learn about what investing is all about. The best way to cause your assets to grow and thus earn enough to reach your life financial goals  is to follow the five stages of saving and investing.”

Assessment

Revisit the warm-up activity. Ask the students to check their recommendation statement for their friend’s parents.  Did you make the appropriate recommendation given what we now know about the five stages?  Was it wise to stick with the safest investments?  Why or why not?  Which do you now recommend as the safest investments that provide a better return than a checking account? (saving accounts, money market accounts/funds, CDs, and they can consider some treasury bills, government bonds, and mutual funds.) As you are making your final remarks emphasize how and why various types of investments they recommended fit into the five stages. It’s especially important to talk about what might happen to the investor’s portfolio value if investors go out of order or try to tackle all the steps at once. You might help your students determine what stage they’re in right now (most high school students will be in stage one; some may be in stage two).

Next, have them complete the open-ended assessment. Distribute the Sound Financial Advice to each student. The instructions of the assignment can be found on slide 9 of the PowerPoint. Use the Sound Financial Advice Answers for assessment answers.

Extension

Activity 1

Have students make a timeline of their expected lives from now until age 80, mapping out prospective dates of milestones like retirement, job promotions, having kids, etc. Students then could split the time-line into the five stages of saving and investing. Of course, they can’t know for sure when they’re going to buy their first house, switch jobs, etc., but it’s still worthwhile for them to think about a timeline for their goals. In addition, you might remind the students that most investors do not get to stage five, and it’s not necessarily a good thing to try to do so. Stage five investing makes sense only for people who are, financially and psychologically, comfortable with high levels of risk.