TEACHING AND LEARNING BASIC INVESTING

RISK AND RETURN LESSON PLAN

Before investing your money, you will have to understand the important concept of risk and return. Risk and return means that the returns you will get when investing your money will vary. You may even lose money. However, no matter what you do with your money, you are always taking some amount of risk. If you keep your money at home, you risk that it could be lost or stolen. If you place your money in a bank account, you risk that the returns that you get will not be high enough.
Risk and return also means that if you take greater risks, you should expect to get greater returns. If you want the possibility of getting greater returns, you need to invest your money in more risky investments, for example bonds or stocks. Different bonds and stocks even have different degrees of risk.
So how much risk should you take with your money? That depends on many different factors including your age, risk tolerance, and investment objectives. No matter where you invest your money, you first should understand the investment's risks and potential rewards.

Additional thoughts on risk and return:
The risky investment in this exercise may be stocks, or may be another type of investment. If you consider the risky investment to be stocks, many people believe that stocks outperform safe investments over the long-term, and therefore showing negative returns (as this worksheet lesson does) may give a false impression that stocks are not good investments.
Our thought is that while it has been true that stocks and bonds have historically outperformed safe investments over the long-term, in the short term you could lose significantly with them. Also, you could lose significantly if you own particular stocks, rather than a diversified basket of stocks.
Also, even though stocks have outperformed in the past, there is no guarantee that they will in the future -- that is what makes them risky investments -- even over the long-term. Many people thought stocks would always give positive returns at the top of the market in March, 2000. No investment return is ever guaranteed -- there is always a risk. We can look at historical returns to get a sense of what we may get in the future, however, the past is never a guarantee of the future.