Investing For Beginners: Complete Guide | Kanak Agrawal | Skillshare
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Investing For Beginners: Complete Guide

teacher avatar Kanak Agrawal, Passionate Educator

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Taught by industry leaders & working professionals
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Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

    • 1.

      Course Overview and What To Expect

      2:19

    • 2.

      The Importance of Investing

      2:02

    • 3.

      Why Saving Alone Is Not Enough

      2:08

    • 4.

      The Power of Compounding

      2:17

    • 5.

      Inflation Adjusted Returns: Explained

      1:22

    • 6.

      Risk and Return: Explained

      2:52

    • 7.

      Building an Emergency Fund

      2:15

    • 8.

      Stocks vs Bonds: Explained

      3:32

    • 9.

      Mutual Funds vs Index Funds vs ETFs: Explained

      5:49

    • 10.

      Why Index Funds Are Superior to Mutual Funds

      4:25

    • 11.

      Asset Allocation: Creating A Balanced Portfolio

      6:30

    • 12.

      Avoid Stock Trading: Benefits of Long Term Passive Index Investing

      3:27

    • 13.

      Key Takeaways and Summary

      3:38

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About This Class

Course Overview

Welcome to "Investing for Beginners: Complete Guide" This course is your easy-to-follow guide to starting with investing. If you're new to investing or want to improve your financial skills, this class will help you understand the basics and make smart right investment decision to create long-term wealth.

Who This Course Is For:

This course is perfect for beginners who want to gain a clear understanding of investing principles and develop a solid investment strategy. No prior financial knowledge is required—just a willingness to learn and take control of your financial future!

What You'll Learn:

Course Overview: What to Expect
Get a clear view of the what the course is about and learn about the instructor

The Importance of Investing
Understand why investing is essential for growing your wealth and achieving your financial goals.

Saving vs. Investing: Why Saving Alone Isn't Enough
Learn why just saving money isn’t enough and how investing helps you grow your wealth over time.

Harnessing the Power of Compounding
See how compound interest works and how it can significantly boost your investment growth.

Inflation-Adjusted Returns Explained
Discover how inflation affects your investments and how to adjust for it to protect your returns.

Risk and Return: What You Need to Know
Understand the balance between risk and return and how to align them with your investment strategy.

Building an Emergency Fund: How Much Cash is Enough?
Learn how to determine the right amount for an emergency fund before you start investing.

Bonds and Stocks: Key Differences
Explore the main differences between bonds and stocks and how each fits into your investment plan.

Mutual Funds vs. Index Funds vs ETFs: Explained
Compare mutual funds, index funds, and ETFs to find the best investment option for you.

Why Index Funds Are Superior to Mutual Funds
Discover why index funds often perform better than mutual funds and why they’re a smart choice.

Creating a Balanced Portfolio: Asset Allocation
Find out how to mix different types of investments to create a balanced and effective portfolio.

The Benefits of Long-Term Passive Index Investing
Learn why sticking with long-term passive index investing is a proven way to build wealth over time.

DISCLAIMER

Educational Content Only: The content provided in this Skillshare class on investing and finance is for educational purposes only and should not be construed as financial, investment, or legal advice. The information presented in this class reflects the instructor’s personal views and experiences and is intended to provide general guidance on financial concepts and strategies.

No Financial Advice: This class does not constitute financial or investment advice. The decisions you make regarding investments and financial matters should be based on your own research and judgment, and if necessary, you should seek advice from a qualified financial advisor or professional.

Risk Disclosure: Investing involves risks, including the risk of loss. The strategies and examples discussed in this class may not be suitable for all investors, and past performance is not indicative of future results. Always consider your own financial situation and risk tolerance before making investment decisions.

No Guarantees: The class does not guarantee any specific results or returns from implementing the strategies discussed. Financial markets are inherently unpredictable, and there is no assurance that any investment strategy will be successful.

Accuracy of Information: While the instructor strives to provide accurate and up-to-date information, the financial industry is constantly evolving. The content may become outdated or may not account for recent changes in regulations or market conditions.

Personal Responsibility: By participating in this class, you acknowledge that you are solely responsible for your own financial decisions. The instructor, Skillshare, and any affiliated parties disclaim any responsibility for any financial losses or damages incurred as a result of using the information provided in this class.

No Endorsement: Mention of specific companies, products, or services in this class does not constitute an endorsement or recommendation.

If you have specific financial goals or need tailored advice, please consult a professional financial advisor to help you make informed decisions based on your unique circumstances.

Meet Your Teacher

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Kanak Agrawal

Passionate Educator

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Level: Beginner

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Transcripts

1. Course Overview and What To Expect: Hello and welcome. My name is Canuck and welcome to the Complete Guide to Investing for Beginners. Before we dive into the course, let me give you a brief overview of what this course is all about and a bit about my background. This course is specifically designed for those who are just starting their journey in the world of investing. With so much information available online, it can be overwhelming to know where to begin and what advice to follow. There's a lot of conflicting information out there. This course aims to cut through the noise and provide a simple and clear guide to investing. To benefit from this course, you don't need to be an expert in reading company financials or keeping up with the latest stock market trends. This course is not about getting rich quickly or picking stocks that will make you a millionaire overnight. Instead, we'll focus on building a simple yet effective investing strategy that will help you achieve financial independence and meet your financial goals sooner. Our approach will help your money grow while managing the risks involved. The information I'll share in this course is backed by data and supported by academic research. This means that the strategies we will discuss are not just my opinions, but are based on solid data and research findings, helping you maximize returns while minimizing risk. Now, let me tell you a little bit about myself. I graduated with a master's degree in finance from Duke University in 2019. In my masters, I studied courses related to investing such as financial risk management, portfolio management, derivatives, and fixed income securities. And after graduating, I spent the last five years working in the banking and finance industry. I've also been investing in the stock market for the last ten years. I bought my first stock in the Indian stock market in 2015, and now I live in the US, but I invest in both the US and Indian stock markets. Over the past decade, I've managed my own and my family's portfolio worth over $1 million. The lessons I'll be sharing in this course are based on both my academic studies and the real world investing experience. With that said, let us jump into our first lesson. 2. The Importance of Investing: All right. Before the start of each chapter, I'll ask you a question and provide four choices. Pause the video and note down your answer on a piece of paper. I will reveal the correct answer at the end of each chapter. Let us begin our first chapter with the question. Why should you invest money? Please pause the video and note down your answer. Let us answer the first and very important fundamental question. Why should you invest money? The fundamental purpose of investing is to beat inflation and increase the purchasing power of your money. This means you invest your money to be able to buy more things with the same amount at a later time in the future. Inflation is essentially a price increase, and as prices rise, you will not be able to buy the same amount of things with the same amount of money. Over the last 50 years, the average inflation rate in the United States has been around 3%. So your money's purchasing power decreased by 3% each year for the last 50 years. So at 3% inflation rate, if you have $100,000 in cash, it will be worth half the amount within 24 years. And if the average inflation rate continues to be about 3%, after 24 years, you will only be able to buy half of what you can buy today with the same $100,000. Here is an interesting fact. Over the last 50 years, the average rate of return of the S&P 500, which represents the US stock market has been about 11%, which is 8% higher than the average inflation rate of 3%. So by investing in the S&P 500 index, you would have beaten the inflation by 8%. Therefore, your goal in investing is not only to protect the purchasing power of your money, but also to increase it over time through investing. All right. The correct answer to the chapters question is B. Investing helps your money grow faster than inflation. 3. Why Saving Alone Is Not Enough: Now, let us begin our next chapter with the question. Why is saving money not enough? Please pause the video and note down your answer. Many people assume that when they save, they have done their part. But in this lesson, we will understand why saving money alone is not enough. The habit of saving money is just the first step towards a good financial future. But the most important second step is investing. Saving money will help you generate capital, whereas investing will help you to multiply that saved capital. If you're not focusing on investing your money, you will lose hundreds of thousands or even millions of dollars over your lifetime. Let us understand this through a simple example. Imagine two people, Dave and Sam. Dave saves about $1,500 each month, but does not invest his money. Instead, he keeps it in his savings account, which gives him a 3% interest rate. By saving $1,500 each month at 3% interest rate, Dave is able to generate about $800,000 in 30 years. In contrast, Sam saves only about $100 each month, which is $500 less than Dave. However, Sam invest that $100 in the stock market, which gives him a long term return of 10%. Over 30 years by investing $100 each month in the stock market, Sam is able to generate $2,000,000. As you can see, Sam saved less than Dave. But because he invested consistently in the stock market, he was able to generate 1.2 million dollar or almost 2.5 times more money than Dave over the 30 year period. So don't just save money, rather, invest in assets that generate higher returns over a long period of time. All right. The correct answer to this chapters question is C. Investing helps multiply your money over time, while saving alone does not. 4. The Power of Compounding: Now, let us begin our chapter with the question. Can a 2% higher returns impact wealth creation over 30 years? Please pall the video and note down your answer. The most important concept that every investor must understand is the power of compounding. Einstein even called compounding the eighth wonder of the world. Compounding means that over time, not only does the money you invest earns returns, but those returns also generate earnings if you stay invested for a long period of time. Let us understand this through a simple example. Suppose you invest $100,000 in investment A, which generates a 10% rate of return for 30 years. You also invest $100,000 in investment B, which generates a 12% rate of return over 30 years. The difference in returns between A and B is only 2%. But over 30 years, your $100,000 in investment A will grow to 1.7 $4,000,000, while your investment in B will grow to $3 million. This is a huge difference of 1.2 $6,000,000 for just a 2% difference in the rate of return. So if you stay invested and give your money a long time to compound, it can generate big returns for you. Now, there is a handy rule called the rule of 72, which helps you easily calculate how many years it will take for your money to double at a given rate of return. And here is how it works. Let us say your investment generates a 10% rate of return. Divide 72 by ten, and you get the number seven. This means your investment will double in value in about seven years, at 10% rate of return. If your money doubles every seven years, then in 35 years, your money will double five times. So your money will multiply 32 times. This means your $100,000 investment will turn into 3.2 million dollar in 35 years at a 10% rate of return. All right. The correct answer to this chapter question is B. A 2% higher return could result in millions of dollars in additional wealth. 5. Inflation Adjusted Returns: Explained: Let us begin our next chapter with the question. What is the true measure of an increase in your wealth purchasing power? Please poll the video and note down your answer. One of the most important concepts for investors to understand is inflation adjusted returns, which measures the increase in the purchasing power of your money. Simply put, inflation adjusted returns are your absolute returns minus the inflation rate. For example, imagine a $100 investment grew by 10%, $210. But inflation during the year was 20%. Now, although your money grew by 10% in absolute terms, due to inflation, your money's purchasing power actually decreased by 10%. This means that with a $110, you will be able to buy less than what you could have bought with $100 a year earlier. Whenever you invest in any asset such as cash, bonds, stocks, or real estate, you need to consider the real returns. Your absolute returns minus the inflation rate, because this reflects the true increase in the purchasing power of your money. All right. The correct answer to this chapter question is C. Real returns, that is inflation adjusted returns. 6. Risk and Return: Explained: Now, let us begin our next chapter with the question. What is the relationship between risk and return? Please pause the video and note down your answer. Every investing activity involves risk. For instance, investing in stocks carries the risk of business going bankrupt, potentially resulting in loss of invested funds. Similarly, keeping cash in a bank account poses the risk of the bank running out of funds, affecting your ability to withdraw the money. Therefore, effectively managing these risks is crucial in financial management. The objective is not only to reduce your risk, but also to optimize returns with the aim to maximize the risk adjusted returns of your investment portfolio. The risk of an investment is typically measured by its price fluctuation, known as volatility. Investments with higher price fluctuation are considered riskier. For example, stocks can experience significant price swings, whereas, cash in a bank account remains stable. Thus, stocks are perceived as riskier. Now, despite stocks being more riskier than cash, stocks have historically offered higher returns over the long term. And have outpaced inflation by a huge margin. This concept is known as the risk premium, where investors are rewarded more for taking greater risks. Different asset classes, such as stocks, bonds, real estate, commodities, and cash differ in their riskiness and offer different long term returns. Diversification across these asset classes is a widely adopted strategy to manage risks effectively. By spreading investments across different assets, losses in one can be offset by gains in others, ensuring overall portfolio stability and performance, even if some investments underperform. What you see on the screen is the price fluctuation and long term returns of stocks versus bonds and cash. Stocks exhibited the highest price fluctuation in a given year, ranging from -43% to plus 52%. Yet they also delivered the highest long term returns at 9.8%. Bonds had the second highest price fluctuation among the three, ranging from -17% to plus 32%. And they also delivered the second highest long term returns at 4.6%. Finally, although cash did not fluctuate much, it offered the lowest returns. Ultimately, the goal of investing is to construct a well diversified portfolio that delivers healthy returns while mitigating the risk of capital loss. All right. The correct answer to this chapter question is C. Higher risk assets like stocks tend to generate higher returns over the long term. 7. Building an Emergency Fund: Now, let us start our chapter with the question. How much of your living expenses should you hold in cash as an emergency fund, if you are of a working age. Please pause the video and note down your answer. One of the most important things that every investor needs to build to be successful in investing is an emergency fund. Investments such as stocks beat inflation by a significant margin, but they tend to provide returns only over the long term, typically over a period of five to ten years. However, in the short term, the stock market can decline, such as during the COVID 19 pandemic in 2020, the financial crisis of 2008 or the.com bubble in 2000. During such times, it is crucial to stay invested and wait for the market to recover. If you sell your investments when the market has crashed, it will result in a permanent loss. So by having an emergency fund, you prevent incurring a permanent loss. Secondly, life is unpredictable. There will be times when you lose your job or face major personal emergencies, such as medical bills, home repairs, or car repairs. In such situations, it is important to have an emergency fund that covers about three to six months of your living expenses. If you are closer to retirement or already retired, you might want to hold more cash, about 12 to 18 months of your living expenses. If you don't have an emergency fund, you might have to borrow through your credit card or a personal loan at a very high interest rate, or you might have to sell your investments potentially at a loss if the stock market is in decline. So having an emergency fund protects you from taking expensive loans or selling your investments at a loss. However, one important balancing act you need to be aware of is not holding too much cash. As cash in savings or money market account does not beat inflation over the long term. Therefore, you need to hold only enough cash that will protect your investments from unexpected life events. All right. The correct answer to this chapters question is C six to eight months. 8. Stocks vs Bonds: Explained: H. Let us start our next chapter with the question. What do stocks represent in an investment portfolio? Please poll the video and note down your answer. Let us understand the difference between stocks and bonds. Firstly, when you buy bonds, you are lending money to the issuer of the bond for a fixed interest rate, known as coupon payment. For example, if you invest $100 in a ten year bond with a 5% interest rate, you will receive $50 each year in interest payment for the next ten years and get back $1,000 at the end of ten years. Bonds can be issued by both the government and private companies. Government bonds are considered safer because governments are less likely to default on their loan compared to private companies. However, this does not mean that the government bonds are completely risk free. Governments of certain countries have gone bankrupt in the past. Nevertheless, relative to corporate bonds, government bonds are generally less risky. On the other hand, corporate bonds are riskier because there is a chance the company could go bankrupt and be unable to repay. Now, corporate bonds are graded based on their risk. The higher the risk, the higher the interest payment to compensate for that risk. This is also true for government bonds. If a country's economy is unstable, its bond will offer a higher interest rate to compensate for the increased risk. Now, let us understand stocks. When you buy a stock, you're buying fractional ownership in a business. Stocks are not just stickers that move up and down in price. They reflect the worth of the underlying business that investors are willing to pay for at a given time. The rise or fall of a stock is tied to the performance of the business. If the business fails and goes bankrupt, the stock price will fall to zero. But if the business grows, the stock price will also grow because investors are willing to pay more for a successful business. As a shareholder, you also get voting rights in the company's decision. However, stocks are considered riskier than bonds because their price can fluctuate more, a phenomenon called volatility. Over a long period, stocks typically generate higher returns than bonds. 1928-2023, the average annual return for stocks was 9.8%. Compared to 4.6% for bonds. Lastly, if you keep your cash in a banks savings account, the average return over the last 95 years has been about 3.3%. Now, if you subtract the average inflation rate of 3% from returns of each of these asset classes, we see that stocks generated 6.8% inflation adjusted returns. Bonds generated 1.6% inflation adjusted returns, and savings account generated only 0.3% inflation adjusted returns. So by keeping money in a savings account, you will not increase its purchasing power. Bonds will only slightly increase the purchasing power of your money. But by investing in stocks, you will be able to increase the purchasing power of your money by more than 6%. So even though stocks fluctuate more, they generate higher real returns compared to bonds. So the goal of investment management is to balance between risk and returns. All right. The correct answer to this chapter question is B, ownership in a business. 9. Mutual Funds vs Index Funds vs ETFs: Explained: Let us start the next chapter with the question. How do ETS differ from index funds? Please pat the video and note down your answer. In this section, we will understand the difference between mutual funds, index funds, and ETFs. Let's start by understanding mutual funds. Mutual funds are investment vehicles managed by a fund manager who selects and manages a portfolio of assets such as stocks, bonds, gold, or real estate on your behalf. When you buy a mutual fund, you're essentially giving money to the fund manager to invest in these assets and manage your portfolio. There are different types of mutual funds, including stock only mutual funds, bond only mutual funds, and real estate mutual funds. Within each asset class, there are also various investing strategies based on factors, such as size, industry, or a specific investing style. It is essential to read the mutual funds description to understand what it invests in and its investment strategy. Now, every mutual fund charges you a fee to manage your money, which is a percentage of the money under management. For example, if the mutual funds management fee is 1%, the fund will charge you 1% of the amount you invested. So if you invest at $10,000, the fund would charge you an annual fee of $100 to manage your investment. Some mutual funds might also have a minimum investment amount. Before we talk about index funds, let us first understand what an index is. You might have often heard in the news that the S&P 500 has crashed by 5%, or if you're based in India, you might have heard that the Nifty 50 rose by 10%. The SNP 500 in the US and the NIFTI 50 in India are examples of what are called indexes. Now, what do these indexes actually mean? You can think of the S&P 500 in the US as a basket of 500 larger stocks listed on the US stock exchange. This index is a market cap ted index, which means that if a company has a larger valuation, it will have a larger representation in the index. On the other hand, smaller companies will have a smaller representation in the index. As you can see, top companies such as Apple, Microsoft, NVDA, and so on, have a larger share of the index. The SMP 500 index rebalances itself every quarter, which simply means every quarter the index will adjust the weights of the stocks in the index based on the valuation at the time. Similarly, in India, the NFT 50 index represents the 50 largest companies listed on the Indian stock market. The NIFT 50 is also a market cap weighted index. The SNP 500 in the US and the NIFT 50 in India are large cap indexes, because they include large companies in their respective countries. Similarly, there are small Cp and midcap indexes, such as the Russell 2000 in the US, which is an index of 2000 smallest companies listed on the US Stock Exchange. And the Nifty MidCap 150 and NIFT Small Cp 250 indexes in India, which represents mid size and small size companies in India. Let us now understand what our index funds. Index funds are special type of mutual funds where there is no fund manager actively managing your money. Instead, the fund simply follows an index, such as the SMP 500 or NASDAQ hundred in the US, or the Nifty 50 index in India. These indexes have predefined trie area, and the index fund simply follows the index. There is no fund manager deciding which stocks to pick, when to pick them, or in what quantity. Now, because there is no fund manager actively managing the money in an index fund, the fees for index funds are much lower than those for actively managed mutual funds. In the US, index funds will charge you as low as 0.05%, which means they will charge you only $5 for every $10,000 that you invest. With lower fees, you as an investor will keep more of your returns rather than paying a portion to the fund manager. Remember that index funds are not restricted to stocks, but can also target different asset classes, such as bond index funds, real estate index funds, international stock index funds, and so on. There are indexes that track various factors such as value based index funds, growth index funds, size based index funds, and so on. These indexes specifically choose investments depending upon their defined objective. Now, let us discuss ETF and how they differ from the index funds. The key difference between ETF and index funds lies in their operation. Index funds and mutual funds are settled at the end of the trading day, which means you can only buy and sell them once a day. In contrast, ETFs, as the name suggests, exchange traded funds can be easily bought and sold multiple times throughout the day on the stock exchange. Secondly, ETFs are more tax efficient due to their operating structure, which often results in lower tax cost compared to index funds. Thirdly, similar to index funds, most ETFs track an index. Meaning they are passively managed and replicate indexes, such as the SMP 500 without a fund manager making investment decisions. So similar to index funds, ETFs are also low cost and offer a wide variety of options, tracking various indexes, such as large cap, small cap, bond, international stocks, and real estate indexes. In summary, ETFs are similar to index funds as an investment product, but offer the advantage of being easily bought and sold throughout the day on the stock exchange, and typically incur lower tax costs for investors. All right. The correct answer to this chapter question is B. ETS can be bought and sold throughout the day, while index funds cannot. 10. Why Index Funds Are Superior to Mutual Funds: Now, let us begin our next chapter with the question. Which of the following statements is true? Please poll the video and note down your answer. This is the most important chapter. Here, I'll explain to you why you should invest your money in an index fund instead of trying to either buy and sell stocks or invest in an actively managed mutual fund. This straightforward advice will help you generate more money than stock packers and mutual fund managers, and will also reduce your risk. Firstly, numerous academic studies over multiple decades have shown that over long periods, such as ten or 20 years, it is very difficult to generate more returns than the index. Individual investors cannot consistently generate higher returns than the market index by buying and selling stocks. A study named trading is hazardst for your wealth, published in the year 2000 found that individual stock traders were unable to beat the index after accounting for cost such as taxes and commissions. The study also found that returns were inversely correlated to trading, which simply meant the more an account traded, the lower var its returns. Not only that, but data also shows that professional money managers who manage mutual funds tend to underperform compared to their respective indexes. As you can see the results of the data on your screen, over a period of ten years, almost 90% of funds across US LargeCap, US Small CAP and international funds have underperformed their respective indexes. Now when we increase the time frame to 20 years, 95% of actively managed mutual funds have underperformed their respective indexes. If you're investing for retirement or planning to purchase a house ten years down the line, you will generate more returns and pay fewer fees by investing in index funds instead of mutual funds. Now you might buy some stocks and generate higher returns than the index, but that does not necessarily mean you will be able to generate more returns than the index over the long term. A short term outperformance to the index can be attributed to pure luck, and it cannot be considered a well balanced and safe investing strategy. By investing all your money in few stocks, you're taking the risk of losing all your money. If your stock portfolio does not outperform over the long term. By investing in an index fund, you're reducing the risk by investing in a well diversified portfolio stocks that will statistically outperform most stock traders and most mutual fund managers who are trying to generate more returns than the market. Additionally, you will save on fees and save your time, energy, and mental worry associated with investing in individual stocks. Despite all the data, many people spend a lot of time asking which stocks to buy or sell, wasting enormous amounts of time and energy into thinking and worrying about their investments. And they usually end up doing poorly than the total stock market. If you're a long term investor planning to invest for ten or 20 years, you should simply buy the total stock market index fund and stay invested for the long term. Remember, even a 1% lower returns can compound into big amount over a long period. Now the next important question is, which index fund should you buy? In the US, you can choose SMP 500 index funds like U or SPY, which represent the top 500 companies listed on the US Stock Exchange. Alternatively, you can buy the total stock market index ETS like VTI, which represents almost all the stocks listed on the US Stock Exchange, including large, medium and small cap companies. If you are investing in the Indian stock market, you can invest in the NIFT 50 index funds, which represents the 50 largest companies listed on the Indian Stock Exchange. As India does not have a single total market index fund, you can diversify your investment into NIFTI MD CAP 150 and NIFT small CA 50 index funds. In India, these index funds are offered by various asset management companies. The important lesson from this chapter is that the simplest, most cost effective and highest return generating way to invest in the stock market is to buy an index fund and hold it for the long term. All right. The correct answer to this chapters question is C. Index funds generate more returns than most active mutual funds over the long term. 11. Asset Allocation: Creating A Balanced Portfolio: Now, let us begin our next chapter with the question. What is the primary objective of a balanced portfolio? Please pause the video and note down your answer. In this chapter, we will discuss how to create a balanced portfolio by selecting the appropriate investment balance between bonds, cash, and stocks. As we discussed earlier, there is an inverse correlation between risk and returns. This means riskier assets such as stocks, which fluctuate more in price, tend to give higher returns. On the other hand, safer assets like bonds, which fluctuate less in price tend to give lower returns compared to riskier assets. The goal of asset allocation is to find the right balance of different asset classes, such as cash, bonds, and stocks, to maintain a healthy return on your investment while minimizing risk. There is no one size fits all rule for asset allocation. Instead, the right balance depends on individual factors such as your risk tolerance, age, current financial situation, and financial goal. For example, if you're in your 20s or 30s, your risk tolerance would likely be higher compared to someone in their 50s or 60s, who is either approaching retirement or already retired. So as a general rule of thumb, as you approach retirement, your allocation should become more conservative, meaning your bond allocation should increase relative to your stock allocation. Now the first step in asset allocation is understanding how much cash you should hold. For someone of working age, holding about six months of living expenses in cash is recommended. For someone in their 50s or 60s who is closer to retirement or already retired, holding 12 to 18 months of living expenses in cash is more appropriate. Remember, you do not want to hold too much cash as cash does not grow the purchasing power of your money over time. Holding too much cash will reduce the purchasing power of your money over time. Now the second step in asset allocation is determining the optimal distribution of investments between bonds and stocks. Let us create three risk profiles for asset allocation. Conservative, moderate, and aggressive. An aggressive allocation means 7,200% of your investment is in stocks with the remainder in bonds. A moderate allocation means 40 to 70% of your investment is in stocks with the remainder in bonds. A conservative allocation means zero to 40% of your investment is in stocks with the remainder in bonds. As you can see on the screen, in the US, investing 100% in stocks has historically given the highest long term returns of 10.2%. Whereas investing 100% in bonds has given the lowest long term returns of 5.1%. A 50% bond and 50% stock allocation has provided a return of about 8.1%. What we can see is as you increase your stock allocation, your portfolios returns will increase. But the price fluctuation of your portfolio will also increase. Now, depending on individual factors such as age, risk tolerance, and financial goals, your allocation will vary. If you're young and of working age, such as in your 20s, 30s or even 40s, you have multiple decades ahead of you for your money to grow, and you can withstand the short term price fluctuation. So you should choose an aggressive portfolio allocation. However, if you're in your 50s or 60s, where you have already retired or close to retirement, you may opt for a moderate or a conservative allocation, depending on your financial situation at that particular time. As mentioned earlier, your asset allocation should depend on your individual life circumstances and your risk tolerance. Now the next important question is, what funds should you choose to invest in stocks, and what funds should you choose when investing in bonds? For US based investors, you can choose to invest in total stock market index funds such as VTI. By investing in VTI, you're essentially investing in almost every stock on the US stock market. For investing in bonds, consider total bond market index funds, such as VBT LX. By investing in VBT LX, you're essentially investing in the complete US bond market. If you are an investor based in India, you can choose to invest in index funds, such as NIFT 50, Nifty MidCap 150, NIFT Small CCAP 250 index funds for stocks. Unlike in the US, India does not have a total stock market index fund. You will need to spread your investments across large cap, mid cap, and small cap stock index funds. Similarly for bonds, you can choose to invest in bond index funds in India. Now, for both US based investors and India based investors, there are some very important reasons to invest in index funds. Index funds are low cost, well diversified, and tend to generate more returns than actively managed mutual funds over the long term. By staying invested in index funds over a long period, such as ten or 20 years, you are most likely to generate more returns and pay less in fees than most investors who are either stock picking, or who are investing in active mutual funds. Multiple studies over several decades have shown that staying invested in index funds for the long term has generated higher returns than either picking individual stocks or investing in actively managed mutual funds. So For investing in stocks or bonds, you can simply choose to invest in index funds, which are both low cost and offer more returns than actively managed mutual funds. Now, if all of this sounds too complex and you want a fund that can handle the asset allocation work for you, there is a simple and very effective solution. You can leave the asset allocation decision to a fund manager by investing in something called target date retirement funds. These funds will adjust your allocation from aggressive to moderate to conservative as you approach the target retirement date. The target fund will decide what to invest in. When to invest in and how much to invest in. You simply need to choose the target date when you plan to retire, and they will manage the asset allocation on your behalf. Given the fact that you don't have to worry about rebalancing your portfolio or picking the right allocation, target date retirement funds offer simplest and easiest path to investing. All right. The correct answer to this chapter question is C, optimizing returns while managing risk. 12. Avoid Stock Trading: Benefits of Long Term Passive Index Investing: Finally, let us start the next chapter with the question. What is the most effective investment strategy for generating long term wealth? Please poll the video and note down your answer. In this chapter, we will talk about why trading stocks is not good for your wealth. This section contains one of the most important lessons that will help you save a lot of time, energy, and worry, and also help you generate more money than stock traders who are trying to buy and sell stocks to achieve higher returns than the market. Let me discuss the findings of a research study called the common stock investment performance of individual investors by Brad Barber and Terence odian. This research paper examined the performance of accounts held by 66,000 households, analyzing the returns over a six year period 1991-1996. The study found that while the stock market returns 1991-1996 were 17.9%, the net average returns of accounts held by households were about 16.4%, which was almost 1.5% lower than the market returns. Interestingly, the accounts that traded the most had a net average return of only 11.4%, which was 6.5% lower than the market return. The study identifies several key reasons why stock traders generated lower returns than the market. Firstly, the more someone traded stocks, the more transaction costs they incurred, which reduces their returns. Secondly, taxation significantly impacts portfolio returns, especially short term capital gains tax, which is very high at almost 20%. Every time a stock trader books a profit in the short term, they pay 20% of their profits in taxes. T hirly, the study mentions that overconfidence bias is a key reason why traders lose money over the long term on their trades. Remember, various human biases makes very poor and irrational decision makers. These biases are often something we are not aware of, such as overconfidence bias, recency bias, anchoring bias, survivorship bias, and many more. These psychological errors lead us to make wrong decisions, which is why most stock traders perform poorly compared to the market. There are two important lessons from the findings of this study. The first and very clear message is that if you create stocks very frequently, you are likely to underperform the market significantly over a long period of time. Secondly, by picking individual stocks, there is no guarantee that you will generate more net returns than the market after accounting for transaction cost and taxes. Now, you might be asking, what is the best investment strategy? The best investment strategy is to be a long term, passive index investor, which simply means consistently investing in index funds for the long term, such as ten or 20 years and staying invested. Do not waste your time, energy, and mental effort on trading stocks because you are unlikely to generate more returns than the market. Instead, spend most of your time, energy and effort on your core profession and generate more money from your core profession to be invested in the index fund. Which can then compound into large sums over a very long period. All right. The correct answer to this chapter question is C, investing in low cost index funds and holding them for ten to 20 years. 13. Key Takeaways and Summary: Now, the course might seem like an overload of information. So in this section, we will recap and summarize the key takeaways from each chapter. The first critical lesson is that investing is essential to beat inflation and increase the purchasing power of your money. If we do not invest in assets that outpace inflation, we will lose the purchasing power of our money. The second lesson is that saving money alone is not enough. As we saw, people who invest multiply their wealth and generate wealth over their lifetime, compared to those who only save their money. The third lesson is the powerful effect of compounding on wealth creation. Even a 2% higher return can result in a difference of millions of dollars over 30 years. The fourth lesson is understanding inflation adjusted returns. Real returns, returns after subtracting inflation are the true measure of the increase in your wealth purchasing power. The fifth lesson is that all investments carry risk. Riskier assets such as stocks that fluctuate more in price than bonds tend to generate higher returns over the long term. It is important to have a balanced selection between stocks, bonds and cash to optimize your risk adjusted returns. The sixth lesson is about maintaining an emergency fund. If you're of working age, you should hold about six to eight months of your living expenses in cash. However, if you're retired or nearing retirement, you might choose to hold 12 to 18 months of your living expenses in cash. Emergency funds are essential to protect your investments and cover for an unexpected life event. The seventh lesson is that stocks represent ownership in a business, while bonds represents money that you lend to the corporation or the government. Over the long term, stocks generate higher returns than bonds, but they also tend to fluctuate more in price, making them riskier. The eighth lesson is the importance of balanced portfolio that aligns with your age, risk tolerance, financial goal, and current financial situation. The objective of proper asset allocation is to optimize for returns while managing risk. The ninth lesson is the difference between mutual funds, index funds, and ETFs. Mutual funds involve a fund manager selecting the investments, while index funds simply track an index, such as the S&P 500. ETFs also track indexes like the S&P 500, but unlike index funds, they can be bought and sold multiple times throughout the day and are more tax efficient. The Most important lesson is that over the long term, index funds tend to outperform actively managed mutual fund. This means that most mutual fund managers who attempt to pick winning investments are unable to consistently generate higher returns than their corresponding index. Additionally, the index funds have lower fees than the actively managed mutual funds. As an investor, you are more likely to generate higher returns and save on fees by simply investing in index funds. Final important lesson is that the best strategy for generating long term wealth is to invest in low cost index funds for the long haul, such as ten or 20 years and avoid trading stocks. Stock traders generally do not outperform the market over the long term. Therefore, the simplest and most effective strategy for everyday investor is to invest in an index fund and stay invested for the long term. By doing so, you will likely generate higher returns than most fund managers and individual investors who are trying to time the market. If you found this courses helpful, then please share this course with your friends and provide your reviews and feedback with the comment section below. Thank you.