Lesson 11: Investing 101

Hi Teachers! Welcome to another Teach the Teacher podcast episode for The 21st Century Student’s Guide to Financial Literacy: Getting Personal. This podcast covers Lesson 11: Investing 101 which is within our Unit 2 theme of Building Wealth. My name is Susan Mulcaire and I wrote this program and it’s companion program The 21st Century Student’s Guide to Financial Literacy — Going Global.

As we discussed in one of the earlier podcasts, according to a survey by Price Waterhouse Cooper, there are a couple of reasons why financial literacy hasn’t been taught in schools. The first is that the overwhelming number of teachers are uncomfortable teaching the subject — they don’t feel qualified. The other reason cited is that there’s a lack of curriculum. I hope that, through this program and these podcasts, we’re able to resolve both of those issues. As a reminder, any questions or comments can be submitted to me at financialliteracylessons@gmail.com

The lesson begins on page 190, so let’s turn to it now.

The instructional resource for this lesson is yet another calculator. During instruction you will demonstrate for students how diferent rates of return impact long term financial goals. For this, you will need an investment calculator. Any investment calculator will do, but bankrate.com has a good one that’s easy to use. We’ve turned to bankrate.com’s resources before.

The online resource to turn your students loose on is learningmarkets.com. This is a commercial site but there’s a lot of free information on it and I just love this site. It is, essentially, a pay-for investment course. But if you have any students interested in delving more deeply into investment concepts or learning how securities and securities markets work it’s just an A+ site because there’s a lot of free stuf that the guys put into the site. For example, short videos explain things like the discount rate or the Federal Reserve or how bonds work. It’s a good site for students to explore if they are interested in exploring a career in the financial services industry.

Not included in the Instructor’s Guide but worth mentioning here is that your students can also learn a lot just from exploring websites of financial services companies like Merrill Lynch, Charles Schwab, Edward Jones, AmeriTrade. All financial services companies publish a ton of good content on their website dealing with basic to complex financial and investment issues. After all they are trying to attract clients! Your students should be encouraged to read as much as possible about investing and these sites provide great educational easy-to-understand information.

Learning about investing can initially be a struggle because it kind of requires learning a new language — and it’s a big language with lots of terms. Some of the more important but basic terms are included in What Does That Mean? the vocabulary list for this lesson. I guarantee though, that bit by bit, if your students keep at it, they will pick up quite a bit of the language of investing, investments, and financial instruments if they just keep reading about it or watching the financial news.

As you’ll recall, one of the recurring themes throughout this course is that, not only must students get educated for a career that will enable them to earn an income, they must prepare for what I call “their second job” which is using a portion of their income to build wealth. The skills and knowledge they need in be able to do that second job requires a level of knowledge about investing. Hence this lesson which targets some of the basics.

Let’s turn to Gaining Attention. The opening example of the Apple Computer stock investment is an extreme case of the diferences between investing and saving. Don’t get me wrong — we love saving and savings accounts. But nobody ever built much wealth from keeping their money is a savings account. We want students to understand that depositing money in savings accounts is ideal for that requisite emergency cash reserves and for short term financial goals. But a financially literate person should understand that for long term goals, investing has the potential to build wealth and to meet those goals much faster.

Under Presentation of Content on page 192, there’s a little advice for students. When the time comes — when they are investors — they don’t have to go it alone — and they shouldn’t go it alone. There are plenty of good investment advisers who will understand the market and investing and will be able to advise them. Nevertheless, even if they hire the greatest investment adviser in the world, they must have a basic understanding of what is involved in investing because, after all, it’s their money.

Let’s turn to Page 192, which is a good place to stop and engage students in a discussion about their long term financial goals. What are they? What are their goal timelines? Like any goal, the more specific a person is about it and the time within which they want to reach it, the more likely it is that the goal be achieved. So, encourage them to start moving from the financial dream stage to actually writing down their financial goals and time lines and then building their investment skills and strategies to reach those goals — when they finally have some income.

Let’s look at page 192, Getting Started. This is a good place to pull up financial services company websites and do a little exploration. Most investments are made through a brokerage account. You, Regular Person, can’t just walk into the New York Stock Exchange and buy shares of stock. Securities markets are heavily regulated. Purchases are made through a brokerage account. So one of the first steps you’d make as an investor is to open a brokerage account. And you can read about those on page 192.

Let’s look at page 193. These are four basic terms and concepts that are key to understanding and investing. Return on Investment or “ROI” is an easy concept to grasp. If students start to following the stock market or the financial news they will hear the words Return on Investment or ROI, a lot! Simply put, it’s a means of assessing the performance of an investment or comparing and diferent types of investments.

Alignment is somewhat more difcult concept but I’ve included a simplified explanation. It involves coordinating investments with your financial goals, timelines, and risk tolerance. Remind students that this is where you don’t have to go it alone. The benefit of an investment professionals is helpful because it’s their job to identify products to invest in which align with your financial goals, timelines, and risk tolerance. So again, students should not feel that they have to become investment experts like investment product experts but it helps to have a basic understanding of the process because as I said, it’s their money.

Beginning on page 193, we learn about the diferent types of asset classes. These are equities, debt, real estate, and cash. We’ve already learned about cash. It’s money and savings and it’s of course, very liquid. Equities are stock — shares in a corporation. Stock is a very common investments. Stocks are purchased through the stock market. Remember I said you can’t just walk into a stock market and buy stock. Purchases have to be made through a brokerage firm because the stock market is all licensed and regulated. One of the services provided by a brokerage firm is that they carry out your purchase order using the money in your brokerage account. And yes, most get a small commission for doing this. Equities represent ownership. When you buy, say a hundred shares of Netflix or General Motors, you are indeed, an owner of the corporation. But don’t count on a key to the executive washroom because there are millions of shares outstanding.

Students should understand that equities build wealth by appreciating in value over time, hopefully! Some also pay dividends periodically which we’ll explore on page 194. It would be great if you have instructional time to watch a few minutes of the business news with your students or the stock market report because when students learn the terms related to equities they’re will be able to translate the stock news and make sense of what they hear. For example, the terms that you see on page 194 such as common, preferred, equities, buy, hold, sell, outperform, underperform have actual real world relevance. So it’s pretty cool for students to be able to translate what they are seeing in the stock report and it’s also a very empowering feeling. In The 21st Century Student’s Guide to Financial Literacy: Going Global, I go into much more detail about stock markets because stock and securities markets are really at the heart of global economy.

The next asset class your students will explore is debt. So how can debt be an investment? Well, corporations, counties, states, federal government all borrow money and when they do, they issue bonds. And bonds are a form of debt. They’re like IOUs. Bonds can be pretty complex financial instruments. But for our purposes, we’re focusing only on basic bond features. Bonds are a really popular investment vehicle or “financial instrument” and the bond market is a huge global machine. Bonds pay the bondholder a coupon rate which is like an interest rate. How do bonds build wealth, or potentially build wealth? Say you buy a bond — you usually get a quarterly or annual payment on your original investment. But, in addition to this income stream, the underlying instrument has the potential to increase in value. It’s sort of like if you bought a rental property — you get the income from the tenants, but the property itself could also increase or decrease in value. Bonds and the bond market can be very complex, but if your students understand what bonds are, who issues them and why, how they build wealth and that some are riskier than others which risk is designated through the bond ratings, they’ll have the basics covered.

On pages 195 and 196, we explore the asset class: real estate. This is a popular investment class. In our lesson about homeownership, we learned how appreciation and amortization of a real property builds wealth. Many people set their financial goals to own a portfolio of real estate. For example, their goal is to own a couple of apartment buildings or a couple of rental units. Wealth can build in real estate by an increase in the property’s value but real estate also provide a long term income stream. That makes a real estate a popular investment. You can read about real estate and, also, collectibles on page 196.

Moving over to page 197, there is a brief paragraph about commodities. I very much doubt you’ll find commodities in any financial literacy standards. But since commodities are so frequently mentioned in the financial news and because the basics are not hard to understand I included a paragraph about them. I think knowing a little bit about these is better than knowing nothing at all and I think those little nuggets of information make students feel special.

A word about mutual funds, Roman Numeral 3, on page 197. It’s quite likely that you, yourself are invested in a mutual fund if you happened to be in a teacher’s retirement plan or if you have a brokerage account or an IRA. These are very common investments that provide diversification of your portfolio and they are also professionally managed. If you have the time for guest speaker to come into your classroom I recommend calling someone at a local investment firm or money management firm to come in and talk to your students about mutual funds. They’re kind of interesting. For example, some mutual funds that are designed by theme such as investing in green or renewable resources or investing in an emerging markets. These are common investment vehicles that your students might enjoy more learning about.

A final comment about all of the asset classes: you might mention to students that in addition to these being asset classes and potential investments, there are career opportunities within each asset class such as learning how to be real estate property manager or broker, or a commodities trader, fund manager or a bond broker. There’s a whole world of career opportunities within each of these asset classes.

On pages 197 and 198, you will read about capital gains. A word of caution, again, for students. If you have an investment and you’re selling it, it’s no time to go it alone! Consult an expert like an accountant or tax attorney because, although basics are stated here, capital gain calculations can be complex. To be financially literate students should understand is that (a) profits from investments are taxed by the US government; and (b), depending on how long you owned the investment, that profit is taxed at diferent rates. The federal tax code is always undergoing amendments and changes which is something that students should be aware of, so they should consult an expert.

The Big Picture restates key concepts in this lesson. There are a lot of them in this lesson, so you might want to read through it a couple of times with your students.

Under Let’s Practice, we have our friends, Gunner and Eloise from prior lessons, who are now investors. This is a 20 question review of basics of investing.

Activity B is the Investment Grid. Just really highlighting and comparing some of the features of the diferent asset classes.

The Debate-Persuade-Inform activity deals with an issue that is always a political hot topic: Wall Street Reform! This can be a complex subject, but to be financially literate, students of all ability levels should understand a little about this issue. It will take some research, but there’s plenty of information online. This is a controversy that will stay with our country for many years. It epitomizes the battle between private industry and government regulation and, because there are probably no 100% right answers, this exercise lends itself well to a podcast panel discussion format where a panel of students weigh in what they learned and discuss the pros and cons of Wall Street reform. For that reason the curated text for this lesson are podcasting websites, AudioBoom, Audacity, PodBean or if you have a podcast website that you’d like to use, that’s fine too.

Our next lesson’s Ponder and Predict has students thinking about owning their own business. Can this be a way to both earn an income and build wealth?

The Blog Q asks students to weigh in on collections. Do they collect anything? If so, what do they collect? Do they consider their collection an investment?

That wraps up this Lesson 11 podcast. I’ll see you next time for Lesson 12 when we explore Small Biz Whiz. Thank you for joining me and for teaching this important subject.