The Straightforward Guide to Investing | Pedro Catré | Skillshare

The Straightforward Guide to Investing

Pedro Catré, Full-Stack Software Engineer

The Straightforward Guide to Investing

Pedro Catré, Full-Stack Software Engineer

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8 Lessons (22m)
    • 1. Introduction

      2:05
    • 2. What Happens to Your Money Over Time?

      1:40
    • 3. Principles of a Simple Investment Portfolio

      2:57
    • 4. World Equity Index Funds

      4:49
    • 5. Low Risk Investment

      2:07
    • 6. Investment Split

      1:27
    • 7. Should you Invest All at Once?

      2:18
    • 8. How Time in The Market Beats Timing the Market

      4:44
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About This Class

Here is a course that might change some people's lives forever. We're all procrastinating on somethings that can make a huge difference in our quality of life and we know it.

If you don't learn to invest your default situation is to lose money. You'll let your money sit in the bank and lose value or you'll make bad investment decisions that will cost you.

It doesn't need to be that way. The principles of passive investing are super easy. You're not gambling, you're not trying to outsmart everyone else, you're not trying to beat the market, you're following a simple idea of investing in the whole market at a low cost.

In this course you'll learn:

  • what happens to your money over time
  • the principles of a passive investment portfolio
  • whether you'd be best served by investing all at once (lump-sum) or periodically (dollar-cost averaging)
  • whether timing the market is a good idea or not and why (hint: it's not a good idea)

Among many other things.

Let's get started!

Note: Don't take this as investment advice. I'm not a financial advisor.

Disclaimer: This information is for educational and entertainment purposes only. This does not represent, in any case, specific investment, legal nor tax advice nor recommendations to purchase a particular financial product.

The content does not represent, in any case, specific investment, legal, tax advice nor recommendations to purchase a particular financial product. They have been taken from publicly available sources to the best of our knowledge and belief. All information provided (all thoughts, comments, hints, etc.) are for educational and private entertainment purposes only.

Nevertheless, no liability can be assumed for the correctness in each individual case. Should visitors to this site make any of the offered contents their own or follow any advice, they explicitly act on their own responsibility.

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Pedro Catré

Full-Stack Software Engineer

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Transcripts

1. Introduction: Here's a course that might change in people's lives forever. We're all procrastinating on some things that can make a huge difference in our quality of life and we know it. If you don't learn to invest, your default situation is to lose money. You'll let your money sit in the bank and lose value, or you'll make bad investment decisions that will cost you. It doesn't need to be that way. The principles of passive investing are super easy. You're not gambling, you're not trying to outsmart everyone else. You're not trying to beat the market. You are following a simple idea of investing in the whole market at a low cost. If you have some savings and you'd like to get started with investing, but you're intimidated. This course will teach you the fundamentals that will increase your confidence. It will also tell you what to expect from the market crashes you are likely to experience at different points in your life. These can be gut wrenching experiences, but knowing that they are likely in natural to happen more than once in your lifetime can help prepare you for them. You must have cash reserves so that you aren't forced to sell assets during market turbulence, failing to prepare for this case is the same as preparing to fail. Passive investment isn't hard or time-consuming, but you probably don't know where to start. So you procrastinate. This happened to me as well once upon a time. It's really important to get over that and get started because your money is losing value due to inflation and holding investments for a long time reduces risk. So you want to get started as soon as possible. The time you stay in the market mix a huge financial difference in the long run. Jeff Bezos once asked Warren Buffett the following. Your investment thesis is so simple. You're the second richest guy in the world. And it's so simple. Why doesn't everyone just copy you? To which Warren Buffett reply? Because nobody wants to get rich slow. This is what you'll get in this course. You'll learn about passive investing and how to apply it, then will allow you to invest your savings with confidence and manageable risk. So let's get started. 2. What Happens to Your Money Over Time?: If you let your money sit in the bank, it loses value over time because of inflation. Inflation is a general increase in prices in fall in the purchasing value of money. Usually inflation is around two to 2.5% every year. That means usually things cost about 2% more every year. For example, you could buy a coffee in 1970 for twenty-five cents, and that same cup of coffee would cost you $1.59 in 2019. A lot of people have sizable amounts of savings every month that they don't know what to do with in procrastinate on investing. Guilty of this myself when I was younger. So let's say you have 10 thousand on you and you don't touch your money for 10 years, that money won't be worth the same because things got more expensive every single year. Effectively, the value of your money fell. You might think of putting our money in a savings account, but that's pretty terrible because the interest on savings accounts are usually extremely low. Commonly is 0.1 to 0.2% every year, which means every year your money goes up by 0.2%, which is slower than the rise of inflation. So you're still losing money. What do you want in the end is to match the rate of inflation worst and if possible, do better than that. So you make money. You can achieve this by investing. And that will be a topic I'll cover in a future video. Thank you for watching. 3. Principles of a Simple Investment Portfolio: People procrastinate on investing because they feel overwhelmed. This is natural because there are so many options. Another problem I personally faced when I started is that the content on this topic is overwhelmingly focused on US residents. In a lot of us domiciled funds are not available to the rest of the world. We can simplify this by focusing on the guiding principles, passive investment strategy that will help us get started. Once we're comfortable and implementing a good investment strategy, we can dig deeper or stop there. Good here is usually more than good enough and perfecting it can even backfire. The first principle is to embrace the returns of the whole market. We do this because it allows us to grow our savings at a good pace. It reduces risk because of diversification and it reduces the effort of investing. Also, it's unlikely someone can achieve investment returns consistently higher than the whole market. So this investment strategy is usually superior. Generally speaking, you have two tools that can be used to achieve this, active funds and index funds. The difference between an active fund and an index fund lies in the matter in which the fund is managed. In case of an active fund, the fund manager picks specific stocks to get the best returns possible in index funds, investment managers can choose how to implement the investment strategy. They have to follow an index. An index describes the performance of a group of assets with certain characteristics. For example, the performance of all stocks in the US or the performance of stocks in the information technology sector. Out of these two tools, the one best suited for our goals is the cheap index funds. Index funds are designed to give you the performance of the whole market at low costs. They're cheap because nobody is trying to be smart about beating the market. My contrast, active funds are expensive and have inconsistent performance, so they generally do worse in the long run. The final principle is to keep it simple. Your portfolio strategy should be simple to implement and maintain. You should do your research, implementer investment strategy, and move on. After that, maintaining your investment strategy should not cost you more than a couple of hours per year. A simple portfolio needs to investments, one in risky assets. This is where the cheap index fund, which tracks a world index comes in. And one and non-risky assets, for example, high-grade government bonds or similar alternatives like cash and savings accounts. The risky assets, grow your capital. The non-risky assets allowed to preserve your capital. They should be high-quality, liquid and in your own currency. To summarize, in a simple investment portfolio, we embrace a returns of the whole market by using cheap index funds that track a world index. And we keep our portfolio simple with two investments, 1 and risky and non-risky assets. 4. World Equity Index Funds: And a simple investment portfolio. We invest a risky part of our portfolio and funds that track a world index. We do this because it can bring good returns with manageable risk. A world index is extremely diversified. You're exposed to companies from different economies and sectors. This is important because different economies and sectors can experience prosperity in crisis at different times. We are not picking specific countries or sectors are companies with the strategy. The group of assets strike by this kind of index, are represented based on their value. So a more valuable company like Samsung will have a bigger representation than a less valuable company like Coca-Cola Corp. Investing in companies is risky. Our investment can temporarily or permanently lose value. This additional risk is what can bring the returns that allow us to grow our savings. We don't know the future. We only know that this type of strategy has good historical investment returns in the long run. Here's how often the market generates a positive return based on holding period. The more you tried to compress the investment period, the more you're relying on luck. These are long-term investments, horizons of more than a decade. Holding these assets for a long period of time allows us to reduce the investment risk. During such long periods, it's actually likely the market crashes more than once. If you can handle that, this investment strategy will not be a good fit for you. As Charlie Munger once said, If you're not willing to react with equanimity to a market price decline of 50 percent two or three times a century, you're not fit to be a common shareholder and you deserve the mediocre results, you're going to get. No one thinks they will buy shares high and sell when there are low. But many people do this. This is also why you need to have money in non-risky assets. Because having to access your risky investments under pressure and short notice can hurt you financially. Imagine losing your job during a market, the client, you need to be able to survive these incidents without accessing your investment money. And you do that by having savings and non-risky assets. Now you might think experiencing these market declines is awful and it can't be, and you might not know how you would handle it. Many of us don't because we've only had the investment experience of a stock market where the prices are rising. This is called a bull market. It helps them to keep in mind that market the clients during a long horizon are likely and that they can be beneficial for young working people. As William Bernstein said, if you're young and working, you should pray on your knees and beg for market declines. This is because during market declines, you can buy shares at lower prices. And it wouldn't matter that the market is declining because you weren't planning on accessing the money on that investment anyway. This is much easier said than done. You would need to keep your head when the world around you is losing theirs. There are situations when everyone around you is selling and then uses telling you this is a disaster we will never recover from. Prepare yourself mentally for this possibility. Don't think if this happens, but instead thing, when this happens. Now that you understand the nature of this type of investment, we can discuss expected returns. Historically, while equities have had average annual returns in the order of 5%, these are real returns, meaning they were adjusted for inflation. It would be a higher value if we were not taking into account inflation. But what we care about here is the purchasing power of money. So it helps to think this way. We are talking about long-term average annual real returns. And these are average returns. This is not something you should expect every year, But when you average it out over a long period of time. Note that past performance doesn't allow us to predict the future, nor does it guarantee we will have similar results. These are just expectations we make based on 100 years of historical data. The bottom line is that investing in world Equities exposes us to risk that can allow us to grow our savings. Thinking in this way is a choice to be optimistic, to believe that the market will continue to grow in the long run. I'm optimistic because we've always move towards progress and a better future for humanity. So I find the optimistic view to be more likely. That being said, we don't know the returns we will have and we will likely live through multiple market crashes that we need to be mentally, that we need to be mentally to handle. 5. Low Risk Investment: The low-risk part of your portfolio preserves your capital and minimizes risk. It's low-risk, so it's also low return. Here, you can invest in high-quality bonds denominated in your currency, or leave your money in cash, or leave it in a savings account or a certificate of deposit. A bond is an instrument that represents a loan made by an investor to a borrower, typically corporate or governmental. You're lending money and you receive interest for this. High-quality bonds are the most common tools to use for low risk investment. These are usually bonds of governments with a low likelihood of going bankrupt. You want to have this in your own currency, so you don't expose yourself to currency risk. Bond returns are low enough that changes in exchange rates between currencies can affect returns. Buying government bonds directly is often inconvenient and the process varies a lot between countries. The easiest way to get exposed to moms is to buy a bond index fund. Right now, bond yields are very low, almost everywhere. But if you don't have a better alternative, there are still a good tool. And Europe, however, we're going through an awkward situation where high-quality bonds have negative yields. That means if you buy them, you are expected to actually lose money. I don't see a good reason to buy bonds in this case, this won't last forever, so you can wait for it to get better. Some people go for bonds with better yield by sacrificing their quality and increasing risk. I personally don't do this because a big point of this part of the investment is to be low risk. I don't see a good reason to expose my investment to risk for such low returns. Savings accounts and certificates of deposit, on the other hand, have much lower returns than in the time of our parents. That's just the reality we live in. You can search for the highest yield savings account or certificate of deposit and put your money there. Honestly, it will barely be worth your time, but you might not have a better alternative. 6. Investment Split: Equities provide high returns, but their value fluctuates significantly and it can take years to recover after a serious declines. To mitigate this risk, investors often combine equities with low risk, low return investments. You need to adjust your investment portfolio split based on your circumstances and risk tolerance. A common split is 60 percent inequities and 40 percent on fixed income. That may or may not be right for you. The lower the amount you put in a world index fund, the lower your risk and returns will be. That being said, when your portfolio has abortion of low-risk assets, a serious market decline has a lower impact on your investment. Your investment portfolio split the bends on your own context. For example, I'm still young, so I have a large investment horizon. I'm a software engineer and there's a lot of the men in that area. So if I lose my job, I'm confident I can get another one fest. I'm healthy. I have no kids and I have family and friends that would help me if something bad happens. I believe I'm financially and mentally well equipped to deal well with the severe market crash. Because of these factors, I'm comfortable with some risk. That being said, I still have a rainy day fund in low risk assets because I like to play it safe. This is my current perspective. As I grow older and my perspective changes, I expect that gradually decrease my exposure to the stock market. So I'm even less exposed to risk. 7. Should you Invest All at Once?: When I first got started in index investing, already had a sizable amount of savings and was conflicted on whether to invest it all at once. This is called lump-sum investing, or if I should instead spread it over time, which is known as dollar cost averaging. You might have the same question. So I thought I'd share what I looked. Let's take an example to illustrate this concept. Rob has $50 thousand to invest. If you invested all at once, That's lump-sum investment. If he even said the size to invest only one hundred, ten hundred week because he thinks it will lower his cost basis over time. That is, dollar cost averaging. Let's take another example. Johnny has no savings, but he can afford to set aside one hundred, ten hundred dollars per month of his salary to invest. This is not dollar cost averaging. This is a lump-sum investment because he has investing all that it can afford at once. So which is best lump-sum, more dollar cost averaging. In most cases, investing all at once, we'll have the highest returns. This happens because the market is typically growing more than it's declining. So investing all at once allows you to buy shares at lower prices. That being said, if you're new to investing, you might be frightened to invest your savings all at once. If you procrastinate on starting your investment journey because you want to do it perfectly. That could lead you to wait longer to invest your capital, which generally leads you worst off. There's nothing wrong with going slowly. So you get comfortable if that's what you need to do to get started. In my case, and you will lump sum investing was the right strategy for maximizing my returns. But I also wanted to start smaller and ramp up my investment because investing was new to me. This worked out well because I was technically limited by the amount I could periodically transfer from my bank to my broker. So I invested all the money I could technically invest, but I also did gradually, which increased my comfort. By the end of this, I was very comfortable making these stock purchases. I invested all the savings I wanted to invest, and now I invest a portion of my salary every month. The bottom line is that it's almost always better to invest all your money now rather than over time. 8. How Time in The Market Beats Timing the Market: Timing the market is an investment strategy where investors buy and sell stocks based on expected price fluctuations. If investors can correctly guess when the market will go up and down, they can make corresponding investments to turn that market move into profit. It's usually based on gut feeling and hope. Then careful analysis. But even when it's based on analysis, it's an elusive concept. You can get it right sometimes, but the odds of getting it right in the long run are vanishingly small. In my experience, what happens is that a person will make a prediction based on gut feeling. For example, the market will continue to decline because many merchants are going out of business. If it turns out to be true, you'll reinforce your belief that you have a special talent to predict the market. And it will appear inevitable in retrospect. If the prediction turns out to fail, most people conveniently forget when they looked back at their predictions, looking for successes, they'll experience confirmation bias that gives them an unearned sense of confidence in their ability. Everyone is vulnerable to this bias, even you and I, and even when we're sure we're not. And this example, the market actually recovered fast in the predominant theory is that the merchants who are going out of business or small contributors to the overall economy. At the same time, we should realize that the stock market is not the economy. Even the people I've seen who predicted or recovery of the market, well, merchants are going out of business and people are losing their jobs. Didn't expect it to be this fast. During the recent US presidential elections of 2020, I saw the same behavior. Some friends, we're predicting that regardless of the outcome, the week of the election would be disruptive to the world market since the US is such a big part of it and we would experience a decline. They delay their investments. In preparation for this, we saw the opposite of what they predicted. The market went up even with all the public unrest. Consider as well that people have been seeing a market decline is imminent for years. And what do we got was the biggest bull period ever. As the legendary investor, Peter Lynch said, far more money has been lost by investors preparing for corrections are trying to anticipate corrections and it has been lost in corrections themselves. The bottom line is, market timing is incredibly hard, and if you think you can pull it off, you're probably wrong. It's overall not the strategy we should be using as Javier Estrada shown in his paper, black swans and market timing for the period of 1900, 2006, missing the 10 best days could lead to a portfolio 50 percent less valid. And missing the ten worst days could lead to a portfolio a 150% more valuable. Notice it's nearly impossible to hit that window of time. It's too short given the total time of the study. And you don't know when it happens. It's a needle in a haystack. It's almost impossible. The behavior of the market, even if you're successful, sometimes you're more likely to fail. In the long run. Some investors tried to predict the market based on the Emotional investing behaviour of others. Like how many average investors tend to buy when the stock price is high in overreacting to bad news, if you search, you'll find instances of this where it appears to work. In instances of this where it fails, I tend to put more weight on the cautionary tales around this because the risk is so big and the benefits are questionable. Even Warren Buffett doesn't think it's a good idea to time the market you consider as the structure. Tried to avoid the human tendency to speculate. This trusted, it usually doesn't work. It's also a stressful in time-consuming. Most people will do much better with a good specimen investment strategy where they're not looking at the stock market every day. Usually, a superior strategy is to continuously buy and hold diversified assets for a long period of time. Thank more than a decade. Investment is going to be risky regardless, this strategy reduces the risk. If you're still not convinced. I link to an article in the description from Nick moduli that dives deeper in the topic. Remember that time in the market beats timing the market. And that most of us tend to have an irrational tendency to go for the best strategy. One of the most important skills of a good investor is to avoid bad strategies, such as market timing. And think how great that is to do a good job. You have to do. Less speculating, less following the market on a day to day, less obsessive analysis unless bank.