the madoff affair

Introduction to Investing

Lesson Objectives:

Students will:

What is meant by diversifying a portfolio and asset allocation
How to look at financial information for characteristics that make for good investments
How to be confident in their own abilities rather than looking to “financial gurus” who might not have the investors’ best interests in mind

Materials Needed: the madoff affair DVD or Internet access to watch video online; Using Mutual Funds to Build a Diversified Portfolio and Analyzing Companies and Picking Your Own Stocks handouts

Time Needed: The lesson overview of how to build financial literacy should take about 20 minutes. Watching the video clip and the discussion questions takes about an hour. Add another hour if you use the entire film. The subsequent student activities should take a class period to complete. Participation in a stock simulation is a long-term project that can be used over an entire unit.

Procedure:

Review the following summary of the processes involved with building investing literacy:

Develop pay-yourself-first budgeting practices that enable you to save money that you can invest.
Diversifying your investments is important to reduce risk. This was learned by some employees of Enron who had their life savings in retirement accounts that were invested only in the stock of that single company.
It is also important to be diversified in terms of the different asset classes. An asset class is a group of investments that are very similar, such as cash, large-company stock, small-company stock, bonds, real estate, commodities such as gold, and even collectibles such as art.
A study in AAII Journal, published by the American Association of Individual Investors, shows that a properly diversified stock portfolio is one that holds shares of 400 companies, which is why most investors prefer to have money in different mutual funds. A mutual fund brings together money from many people and invests it on their behalf according to the strategy the fund follows. The investor does not own shares of the asset; rather, he or she owns shares in the fund that owns the asset. For more information, click on http://www.sec.gov/investor/tools/mfcc/mutual-fund-help.htm.
Another form of diversification is not trusting the same investment adviser to control all of your investments on your behalf, as many did with Bernie Madoff.

Ask the class: “Why would people take the chance on investing a large part if not all of their money with a single financial firm or in a single investment?” (Possible answers: hear about incredible “market-beating” returns; not sure how to do it themselves or read their financial statements, so they trust others before they trust themselves)
As a class, if time permits, watch the entire video of The Madoff Affair. If time does not permit, watch the first three and a half minutes and use the Discussion Questions to guide a classroom conversation. Explain to students that because of what happened to those who invested with Madoff, it is especially important to understand how investments work.
Start a discussion by having each student name a company and writing the name on the board in order to connect students to what they already know.
Review the directions and distribute the Using Mutual Funds to Build a Diversified Portfolio handout to students.
It is also recommended that students participate in an in-class stock competition as a continuation of this lesson. There are many sources that support this activity. One Web site that is easy to use is www.investopedia.com.
The teacher can click the link for simulator, register on the site and create a game. A name and password can be created for the game and can be distributed to students so they can join the group. Students should be urged to invest in at least five to 10 companies of different sizes and from different industries. Industries include health care, energy, food, retail and technology. You can find a list of industries and top-performing companies within the industries by following this link: http://biz.yahoo.com/ic/.

Students should also determine how much money to invest in each stock. For example, if you start the game with $100,000 for each student and they invest in 10 companies, they should buy $10,000 worth of shares for each investment. Many will start by just buying one or two shares. It is recommended that the students be required to invest at least 70 percent of the cash in their account.
In order to provide students with some background on reading basic financial information as a basis for selecting stocks, it is recommended that the teacher distribute and review the Analyzing Companies and Picking Your Own Stocks handout. It is important to review the overview lesson on the front of this handout with the students for understanding.

Additional Resources:

It is important to understand who you are investing your money with. For online reviews of brokerages, you can visit the following Web sites:
http://www.smartmoney.com/investing/economy/smartmoneys-annual-broker-survey-23119/
http://onlinebrokerreview.blogspot.com/

Method of Assessment:

Class participation
Completion of investment assignments
Creation of online simulated stock portfolio