Investing: Risk and Reward

There are lots of other places to invest your money–but some of them can be risky. Learn the strategy that’s right for you in this issue of The Vault from Biz Kid$!

Risky Business

“Risk” just means “the possibility of something bad happening.” The big risk in investing is that you will lose some or all of your money. Here’s the catch: if they pan out, riskier investments can provide higher returns than safe investments. Otherwise, nobody would bother investing in anything risky. But remember the old saying: with the riskier investment types, only invest as much as you’re willing to lose.

Different Investments, Different Risks

Investments like FDIC- or NCUA-protected savings accounts are low-risk, because they make it almost impossible for you to lose your money. Stocks, on the other hand, are quite risky because you can easily lose some or all of what you put in.

Your Personal Risk Tolerance

Some people are okay with taking risks, while others like a sure thing. How much risk you’re willing to take on is your “risk tolerance.” Knowing your risk tolerance can help you think about which investments are right for you. Here’s a short quiz to get you started!

Would you rather…

For every answer you chose from column A, give yourself 1 point. For every answer you chose from column B, give yourself 2 points.

5 points: You like to play it safe.

6-7 points: You take a chance now and then.

8-10 points: You’re a real risk-taker!

Keep it up!

Investing is like any other financial discipline–the most important thing is to have a plan and stick to it. Saving early and often are more important than “striking it rich.”

If it Sounds Too Good…

One last thing: especially in the Internet age, there are lots of scams out there. If anybody promises you guaranteed riches for nothing, they’re probably trying to take you for a ride. And that’s definitely a bad investment!

A Field Guide to Investments

Ask John Paul

Q: I’d like to try investing.  How do I get started?

-Cece L., Indianapolis, Indiana

A: One way to try investing is by buying something tangible like silver. It’s relatively inexpensive and you don’t have to have a special account to buy it. Try buying just one ounce to start. Make a habit of checking the price and calculating how much you have gained or lost. Learn what affects the price and try to figure out if it will go up or down based on what you hear in the news. It’s a fun way to learn the basics of investing without risking too much–and while you keep putting money in your interest-earning savings account.

John Paul Pigéon is a 12-year-old financial guru from Fort Worth, Texas who helps kids learn about money and business. Click here to visit his Web site. Send your question to askjohnpaul@bizkids.com. It may be selected for our next newsletter!

Andy started investing early–at the age of 6! Even though he’s still not quite 18, he’s an active investor through the help of his dad. Andy shared his investing advice and experience with us.

How did you get your start?
I started out helping my dad when I was 6. Now I invest in stocks and money market funds–still with my dad’s help. He lets me manage most of my investments.

Tell us about an important moment in your investing history.
When I got my bar mitzvah money, I decided to invest it and build it instead of buying an asset that would just lose value like a car.

I heard you compare investing to golf. How so?
Well, one thing is that as you get closer to your goal, you use a smaller club and make more careful shots. The same goes for money–if you’re close to needing it, like retiring or having to pay for college, you put it in less risky investments and are more careful with it.

What’s the biggest investing mistake you’ve made?
Not protecting my investments. Sometimes, you make 15% or 20% and you get greedy and think it will always keep going up. It’s a good idea to sell some of your stock when you’ve made a healthy profit to make sure you get to keep some of it.

How do you learn about what to invest in?
The stock market revolves around what’s going on in the world. Watch the news and you’ll learn a lot. For instance, if there are problems in oil-producing regions, the price of oil usually goes up. That means consumers might start buying more fuel-efficient cars. All of that affects investment prices.

What’s your advice to younger investors?
Don’t be afraid to take risks–you have a long time before you’ll need the money, so if you make a mistake now, it’s not going to be a big deal.

Do you know a Biz Kid who should be featured in our newsletter? Send him or her our way at profiles@bizkids.com!

Warren Buffet, one of the world’s most successful investors, bought his first share of stock at age 11–and says he regrets starting too late!
http://findarticles.com/p/articles/mi_m0EIN/is_2008_July_2/ai_n27879089

Check out these sites with tons of info on investing for the youth:
http://library.thinkquest.org/3096/
http://www.younginvestor.com/index.asp
Here’s a great article to share with your parents about how they can help you get started with investing:
http://www.fool.com/money/investingforkids/investingforkids.htm
And make sure to visit Biz Kid$ to make sure you don’t miss out on new shows:
https://bizkids.com

Spending money is fun. Saving it can be even more fun–especially if you get to watch it grow. Pay yourself first, and put your money where your future is…it’s all in this issue of The Vault from Biz Kid$!

There are two main reasons to save your money:

• To buy things that cost more than one paycheck will cover.

• To create a “safety net” for yourself in case your source of money dries up.

Saving gets easier when you make a habit of it. That’s why, to be a Biz Kid, you should always…

Pay Yourself First!

If you spend every penny, everybody but you is getting paid. So pay yourself first–every time you get money, sock some away in your savings. And be generous–you earned it.

Set a Goal

There are two kinds of savings goals. You can set a target percentage: 10% of every paycheck, for example. Or, you can set a target amount–say, the price of something you want to buy, or three month’s worth of expenses. Either way, having a plan makes it easier to save.

Fast Fact

Which would you rather have–a million dollars today or a penny that doubles every day for a month? Click here to find out the surprising answer!

When you deposit money in a savings account, the bank or credit union loans it to other people. Interest is what the bank or credit union pays you for allowing them to use your money. (Don’t worry, they’ll give you your money back when you ask for it.)

•  Interest you earn usually is compounded–you earn interest on your interest.

•  Time is your friend with interest rates. The longer you leave your money in a savings account, the more interest it earns. It can really add up!

The chart above compares how $1,000 grows over ten years in two different savings accounts–one with a compound interest rate of 3.25% and the other with a compound interest rate of 0.25%. As you can see, just a few percentage points make a big difference over time!

Dear John Paul,

What’s the best way to make my money grow?

– Sanjit S., Plano, TX

Hi Sanjit,

There are three ways to make your money grow. You can:

•  Buy stocks (like your favorite doughnut company) or other investments. But, investments don’t always grow–sometimes they shrink to nothing!

•  Give it to a charity and make it grow into something good for the world.

•  Save it in the bank and let it grow via interest.

The last one is sure to benefit you in the long run. Shop around for the best interest rate, put in your money, and watch it grow. Compound interest is the way to go!

John Paul Pigéon is a 12-year-old financial guru from Fort Worth, Texas who helps kids learn about money and business. Click here to visit his Web site. Send your question to askjohnpaul@bizkids.com. It may be selected for our next newsletter!

Biz Kid of the Month

He’s not a kid anymore, but he’s definitely got a head for business. Ramit Sethi writes the blog I Will Teach You To Be Rich with more than 175,000 readers per month. He co-founded PBwiki, an online service that hosts millions of users per month.

What advice do you have for young people just starting to save?

There’s a lot of hype and nonsense out there. Just start with a trustworthy bank that pays a good interest rate and shovel as much money as you can in there.

What’s the best way to make sure you save enough?

Set up an automatic withdrawal from your checking to your savings account–it will save you so much time.

What resources do kids have to get involved in entrepreneurship and finance?

When you’re a kid, your biggest resource is time–you’ll never have that much free time again. Plus you have people around you who want to help you out. Most parents are willing to help out if you’re serious about saving, investing, or starting a business.

How do you save money with so many temptations to spend it?

Most people have no idea where their money goes. Just by becoming conscious of what you spend, I bet you can save 10% of what you make.

How did you get started with finance?

When I was going to college, I applied for dozens of scholarships. The first one I got sent me a check for $2,000 in my own name–big mistake. I invested it in the stock market and lost half of it right away!

Do you know a Biz Kid who should be profiled in our newsletter? Tell us at profiles@bizkids.com!

• Click here to visit Junior Achievement for lots of information about saving and investing, including some handy calculators.

•  Find a cool place to stash your change until you’re ready to put it in an interest-bearing savings account.

•  Learn lots more about how to save your money from the National Credit Union Administration.

•  And, of course, click here get the latest from Biz Kid$!

What else can you do with the money you save besides put it in a savings account? Lots of things! Next month, we’ll start our two-part series on investing. Don’t miss it!

Forward The Vault by clicking on the button in the upper right-hand corner.