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.