Diversification and Risk

Don't Put all your Eggs in One Basket

Diversification and Risk

Don't Put all your Eggs in One Basket

If you place all of your savings in a
single savings or investment
instrument, such as a single
company's stocks or bonds, and
that company fails, you could lose
everything, much like dropping the
basket that holds all of your eggs.
Diversification and Risk

Portfolio

a collection of financial investments held by an individual or

financial organization

Diversification

investing in various financial instruments in order to reduce risk

Diversification and Risk

Would you bet $100 on a coin flip if the deal were that you keep your
$100 and receive an additional $5.00 for heads, but lose $100 for tails?

Would you bet $100 on a coin flip if the deal were that you keep your
$100 and receive an additional $100 for heads, but lose $100 for tails?

Would you bet $100 on a coin flip if the deal were that you keep your
$100 and receive an additional $400 for heads, but lose $100 for tails?
Diversification and Risk

Forms of Saving and Investing: Some Benefits and Costs

·Checking accounts
·Savings accounts
·Certificates of Deposit
·U.S. Government Bonds
·Municipal Bonds and Special Purpose Bonds
·Corporate Bonds
·Mutual Funds
·Stocks
·Real Estate
·Collectibles
·Commodities
Diversification and Risk
The Pyramid of Risks and Reward

Highest Risk - Highest Potential Return or Loss

10. commodities
9. collectibles
8. real estate
7. stocks
6. mutual funds
5. corporate bonds
4. government bonds
3. certificates of deposit
2. savings accounts
1. cash and checking accounts

Lowest Risk - Lowest Potential Return or Loss

Diversification and Risk

Invest only what you can afford to lose.

Invest at your comfort level.

Invest according to your age.

Diversification and Risk
Mutual Funds

 A mutual fund pools investors' money.

 The fund puts its investors' money into the market on their
behalf.

 In effect, investors own small amounts of many different

assets.

 Mutual funds enable investors to avoid the risk that comes

from owning any one asset. In other words, mutual funds
make it easy to diversify.
Diversification and Risk

Investment Situations

You received $1,000 in gift money for your 8th-grade

graduation. You have no need for this money anytime soon.

You have $18,000 that you'll need for college next year.

You inherited $10,000 from your great aunt that you would
like to use as a down payment on a house you plan to buy
next year.
 savings account
vs.
U.S. government bond

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 checking account
vs.
certificate of deposit

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 certificate of deposit
vs.
U.S. government bond

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U.S. government bond
vs.
municipal bond

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 municipal bond
vs.
special purpose bond

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special purpose bond
vs.
corporate bond

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 corporate bond
vs.
growth mutual fund

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growth mutual fund
vs.
blue chip stock

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blue chip stock
vs.
real estate

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 real estate
vs.
gold and silver

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 art collection
vs.
income mutual fund

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stuffed animal collection
vs.
gold and silver

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 gold and silver
vs.
savings account

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income mutual fund
vs.
growth mutual fund

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 penny stock
vs.
blue chip stock

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