As you choose stocks to understand your risk tolerance, keep in mind that since you are young, you have time to recover if your stock price drops. But each individual has a different personal tolerance for worrying about risk. Stocks in corporations are risky investments since there is no guarantee on the return of your money. The company could go out of business, and then you lose it all, or the price of the stock drops and never recovers. However, you can make fabulous returns on your investment if you choose the right stocks to buy.
Step 1:
Refer back to your Personal Budget Project in Unit 1.
What is your career?
What is your annual salary?
According to your budget, are you able to live off of your salary? If you are not, how much do you need?
Step 2:
Calculating retirement needs: Most people need 75% of their salary during retirement. This is assuming that your house and long-term debts, such as cars and student loans, will be paid off by the time you retire. The following formula calculates your salary at your predicted high at age 50, times 75%, times the number of years of retirement at 20 years. This is assuming you work until the age of 70 and live to be 90.
Salary predicted at age 50 = X 0.75 X 20 = __
What is the total amount of money you will need to have saved and invested for retirement? This is the amount you calculated above, plus other money you think you might need or want. For example, say you want to buy a yacht and travel the world, or donate large sums of money to charity, or leave money to your children. Additionally, inflation will occur, which causes your current dollars to be worth less. We don’t know what the inflation rate will be over time, but you should consider this in your needs. The average inflation rate in the US is 3% per year and that means that in 20 years, prices will have doubled.
Step 3:
Brainstorming stock ideas: list the corporations behind the things you use every day, things you would like to use, and things of your dreams. Also, look at trends, future trends, what your friends are buying, what your parents are buying, hunches.
Start researching interesting corporations: What are the stock prices, the stock histories, and P/E ratios? Just a reminder: the P/E ratio is the Price to Earnings ratio. This tells you if the price of the stock is in line with the company’s earnings. A P/E ratio of “1” is ideal, as the price of the stock is in line with the company’s earnings. Yet, in current markets, a P/E ratio of 20 or 30 is still in the “ok” range. However, a P/E ratio towards a value of 100 should be cause for alarm, as this means the price of the stock is relatively high as compared to the earnings of the company. Use Google, Bloomberg, Motley Fool, or any other investment bank site to research this information. Some companies are owned by other companies. For example, Whole Foods Market is owned by Amazon. Some companies are private and have not issued shares of stock.
Decide the stocks you are going to buy and how you are going to allocate $10,000 that Aunt Sally left you. Remember, your goal is to meet your retirement needs. Include justifications for your choices, and why you left some out. Complete the chart.
Step 4:
Create a chart like the one below or download and print the PDF linked here Download download and print the PDF linked here. Enter into the chart the price of the stock, the number of shares, the market value, gain or loss, and the net gain or loss. Also, look up the NYSE during this time along with links to news.
Date Stock ticker symbol Price per share # of shares
Market value of your holdings of this stock this week
(# shares X price per share)
- / - News
(add rows as needed)
Step 5:
At the end of the simulation, reflect on your investment strategy. Answer the following questions:
Did your portfolio of stock investments increase or decrease overall?
Which stocks increased in value? Why?
Which stocks decreased in value? Why?
What happened to the NYSE during this period of time? Why?
What was your rate of return on your investment? Use the following formula to calculate: endingportfoliovalue−10,00010,000×100
Based upon the performance of your stock portfolio, are you on track to meet your retirement goals?
Based upon your experience and research, what role do investment banks play in the American economy?