ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos


Principles of Finance Videos 166 videos

Principles of Finance: Unit 1, Company Formation, Structure, Inception
97 Views

How is a company... born? Can it be performed via C-section? Is there a midwife present? Do its parents get in a fight over what to name it? In thi...

Principles of Finance: Unit 1, Intro: Company Formation, Structure, and Inception: Unit Intro
43 Views

Company Formation, Structure, and Inception: Unit Intro. Sorry, Leo DiCaprio fans—we're not going to be breaking down the plot of Inception. We'r...

Principles of Finance: Unit 1, Alex, That’s Finance Potpourri for $500
67 Views

Okay, so you want to be a company financial manager. It's basically up to you to make money for the shareholders. It would also be swell if you mad...

See All

Principles of Finance: Unit 6, Getting New Tires in 30 Years 2 Views


Share It!


Description:

How should you plan for retirement? Like...in terms of maximizing investment returns, not improving your short game.

Language:
English Language

Transcript

00:00

Principles of finance a la shmoop getting new tires in 30 years

00:06

yeah retiring you knew we'd go there right all right so you're 42 years old [Man discussing retirement]

00:11

and you want to retire in 30 years luckily you decided to watch this video

00:15

so you are properly cynical about your alternatives your goal A) maximize

00:21

investment returns yeah yeah B) minimize investment risk and volatility C) learn [Goals for retirement appear]

00:28

golf ooh there's a gnarly dance oil-water yeah high returns would

00:33

usually imply high risk right well so how do you get high returns without

00:37

taking a lot of risk well you don't you have to take some

00:41

risk and risk comes in many flavors some of which may be digestible to you and [Man eats spoonful of ice cream]

00:46

some of which may not be yeah arguably the biggest delimiter in the

00:50

way you think about retirement investing is the lifestyle you want to lead when

00:55

you no longer work want to live in a trailer in central Mississippi and just [A trailer in the woods appears]

01:00

to you know watch HBO all day alone on the couch well then you don't need a

01:04

whole lot in savings to do that want multiple homes world travel your own jet

01:09

well then yeah you need bank so let's dive into the flavors of risk here in [Flavors of risk appear]

01:13

this video they divide into two pieces there's market risk which is non

01:18

diversifiable like you can't get away from it and then there's company risk

01:22

which you can diversify away from like by not putting all your eggs in one [Eggs appear in a basket]

01:26

basket or one stock all right first market risk well simply put over time

01:30

you want to be long equities that is just like Warren Buffett you want a bet

01:36

on America and invest in the stock market yeah he said that that you know

01:40

betting against capitalism has been a really bad bet for the Russians the

01:45

Chinese who are now the dominant capitalists in the world ironically as

01:48

they embraced capitalism finally and a whole bunch of smaller fails along the

01:53

way, hi Cuba but we're looking at you over decades or even centuries the common

01:58

stock market has compounded at around 10% a year give or take depending on the

02:03

era that you're inspecting and that means that the well your investment in

02:07

it should double about every seven or eight years if you start investing early

02:12

well you're time horizon is decades long and even the [Man discussing time horizon]

02:15

worst decades in modern history still have had positive returns if you include

02:20

dividends in your calculations which you should however yeah always a however

02:25

there in investing if you are structurally long equities meaning you

02:30

own them you will suffer when the overall market goes down question is

02:35

whether you'll care cuz when you're 58 you're not selling anything you just got

02:39

to keep working and paying for your kids to go through college oh I know how that

02:42

is alright and this happens a lot stock markets go down about one in every four [Stock market drops highlighted on chart]

02:47

or five or six years the markets down for the year

02:50

tons of whiny uneducated journalists decry the lost year because you're [Journalist crying at his desk]

02:55

invested money didn't go up in value that year or two those journalists prey

03:00

on nervous Nellie's who did not watch this video hoping they will click on

03:05

sensationalist headlines and if god forbid there are two years in a row when [God appears in the clouds of light]

03:10

the market doesn't go up oh the same journalists will put on the cover of

03:15

their newspaper or blog or whatever that the markets are dead don't invest in the

03:20

stock market anymore you can't make money in it they will exhort you to take

03:23

your money out of the stock market and put it in your mattress because

03:26

investing is dead America is dead capitalism is dead... well the bad

03:31

journalists who never took this course will say you should be as socialist just [Journalist discussing socialism]

03:36

like me let the government invest your money and handle your retirement because

03:40

you know when you think of the best and brightest in America you think of

03:45

bureaucrats in Washington playing poker on your behalf

03:49

yeah you don't want to do that you don't want to let them invest your money all

03:52

right well when the journalists decry that the investing world is dead and [Gravestone of investing world appears]

03:56

over and no longer an opportunity this is usually exactly when you want to do

04:01

the opposite and get fully long equities get fully invested bet on America

04:07

against the journalists when the market goes down your investments will be [Market rocket flying through the air]

04:11

dragged down with it yes that's called market risk and well really nothing you

04:16

can do about it unless you want to try to be clever and trade around the market

04:20

and that is sell your stocks when you think the markets overvalued

04:24

hefty taxes on your gains and then be smarter than the market by getting

04:28

invested in just the right time so good luck with that the guy who can do that

04:33

is called the yutz like you know the golfer who sinks 8, 40 footers in a round [golf balls lands in golfer hole]

04:38

and shoots a 61 are you the yutz? we doubt it what we're getting at is that

04:43

the market risk lives with you there's only modest math that can be

04:47

applied to it to reduce risk in your investment grid and that's why market

04:52

risk is often referred to as non diversifiable risk or systemic risk like

04:58

there's just risk in the system don't worry about it the risk of the market [Up and down arrows appear]

05:01

going down and up it's just part of being in the dance of capitalism and

05:06

investing it's a natural part of the system so while there's not much you

05:10

could really or should really do about market risk there was a whole lot you

05:13

can do about company's specific risk that is the baskets you choose in which

05:18

to house your eggs have a lot more to do with your investing for retirement

05:21

success than the conditions of the overall market at any given time you can

05:26

relatively easily do something about company risk when it comes to [Diversification meaning appears]

05:29

diversifying your portfolio here's an idea for starters don't put all your

05:34

savings in one company...wow what a concept right yeah again go back to the

05:40

yutz are you the magic lottery ticket winner the yutz the one who will pick [Person holding lottery ticket]

05:44

that one stock that's the lottery ticket winner of its day all right well Warren

05:49

Buffett yeah he's a yutz.. Berkshire Hathaway go look at the stock oh yeah

05:52

and then there's Zuck, Mark Zuckerberg a Facebook and Bill Gates

05:56

Microsoft and Larry Page, Sergey Brin their yutz's, yeah Google Google... Jeff

06:01

Bezos he's the biggest yutz of all Amazon they picked one stock they were [Person picks up amazon stock]

06:05

the yutz and it went up well a lot... you think you're one of them well guess

06:09

what you're not if you were you wouldn't be watching this stupid video they were

06:14

born knowing all of this financial crapola and while they just did it and

06:18

they got lucky and I'm pretty sure they would tell you that luck and timing

06:22

beats a whole lot of smarts almost any day oh and Phil Knight yeah Nike yeah

06:27

he's a yutz too - and think about it when it came to career choices we bet Tiger

06:31

Woods never looked into the merits of being an orthodontist versus being a [Tiger Woods working as an orthodontist]

06:36

truck dispatcher yeah some people are just born to be a

06:39

yutz go with it anyway to optimize risk reduction while maintaining good growth

06:43

prospects in your investments titrating individual company investments levels of

06:48

exposure to them and other liquidity constraints well all that matters a lot

06:52

when it comes to that optimization what did we just say there well it just means

06:56

that one pattern to mitigate risk at an individual company level revolves around

07:01

choosing your portfolio so that you don't put more than say 10 percent of

07:06

your portfolio into any one stock like you're choosing at least 10 different

07:10

stocks if you choose 10 only you're pretty well diversified right there and

07:15

that way if any one stock blows up well the rest of your portfolio mollify is [One stock explodes]

07:19

the disaster if you think about the math if one of your 10 stocks literally went

07:24

to zero which would be awfully rare in a public company and the market goes up

07:28

about 10 percent a year on average and take a year or so to catch up not that

07:32

big a deal not the end of life right you like investing in tech great want to

07:36

put all your eggs there well probably not but well maybe here's a radical idea [Man discussing portfolios]

07:41

for you courtesy of shmoop at no extra charge if you step back to the outer

07:45

atmosphere of Earth at about 50,000 feet and you look down at all of the sub

07:50

industries in which you can invest with a 30 year time horizon doesn't tech look

07:55

relatively good like could tech broadly compound at maybe 12% a year instead of a

08:00

more mixed bag market which included oil and paper and pulp and a bunch of

08:05

commodity chemicals which may or may not be valuable in the future well sure [Bottled chemicals in a factory]

08:09

well the price you'd pay if you put all your eggs in one techy basket volatility

08:14

yeah your bad years would really suck and well think about the other big

08:19

industries as we zag with our pro investor hat on instead of zigging like [Man wearing pro investor hat]

08:24

everyone else is doing on the diversification is always good bandwagon

08:28

all right well think about oil may be good tons of climate change regulations

08:32

coming electric cars are now a thing nuclear power outside of the US is the [A nuclear power plant appears]

08:37

it thing today don't you think that in 30 years a very large percentage of cars

08:42

will be powered by alternative energy and there's uber and lyft as well hmm

08:47

and if demand for oil drops even 5% well pricing plummets so it's hard at least [Oil industry price drops 5% on chart]

08:53

at the moment to get excited about this industry as a long-term systemicly good

08:57

industry with your 30-plus year hat on maybe it's more cyclical tons of cash

09:02

dividend yield in the meantime not saying it's a bad industry to invest in

09:06

but 30 years maybe, maybe give it some thought it makes struggled hits 10% of [Person struggling with dumb-bells]

09:11

your compound numbers after the industry normalizes its growth rates and yeah

09:15

there are trades you can make money in it but is that what you want to spend

09:18

your time doing trades are for yutz the few blessed ones who can actually

09:22

do that for a living not for normal people like you and me [Mark Zuckerberg appears]

09:25

alright banks think margin compression profit margins going down the old stodgy

09:31

world of banking well slowly dying the price while the profit margins of

09:35

institutions are declining one factoid in 1970 Merrill Lynch charged about 50

09:41

dollars for a stock trade of about a grand today that same trade cost about

09:45

two bucks yeah how do you make that up meantime banks you really want to own [Man discussing banking]

09:49

those for 30 years all right moving on consumer discretionary it's called

09:53

Amazon people they're the new Walmart and they're oh so much more powerful or

09:57

at least destined to be just wait till they sell cars and life insurance and

10:01

condos how are their meaningful profits for the businesses which have to sell [Man sitting on a table and man with a chainsaw appears]

10:05

through the Amazon pipeline when Amazon can extract an arm a leg and a lung in

10:10

return for distribution and oh by the way they deliver ice cream now in these

10:14

really cool drone things to your driveway mmm interesting you really want [People working in a store]

10:18

to own retail stores yeah all right next category healthcare

10:21

regulations well people are getting older and poorer at least by the time

10:25

they finally die because we don't smoke anymore yeah

10:28

the government's getting deeper in that world with such friction it's hard to [Uncle Sam appears with a heart]

10:32

create outsized returns and okay we'll stop the unfiltered and kind of random

10:36

musing here but there is in fact a rational argument to have a retirement

10:39

portfolio highly exposed to tech or at least to growth companies it's hard to

10:44

imagine a world 30 years from now that isn't massively more reliant on [New York city appears]

10:48

technology in our daily lives than it is today you know think driverless cars and

10:54

airplanes and trucks think home robots factory robots, diagnostics of [Diagnostic robot approaches man in hospital bed]

10:59

the most invasive and personal kind, bots that manage our online presence the

11:04

music we learn to like and the interpersonal you know relationships we

11:08

choose to Kindle or punt can you handle 20% more volatility in

11:12

your financial life are you actually gonna look at your portfolio every day

11:15

as you go along the way working hard thinking about retirement well probably

11:19

not then maybe shooting for the 12% instead

11:21

of the 10% worth it if you can ignore the volatility maybe the basic idea is

11:25

that as you cut your own path in your financial lives you got to read

11:29

everything you can listen everything you can hear and then forget it [How to invest for dummies book appears]

11:31

make your own assumptions remember that driving by looking in the rearview

11:34

mirror thing yeah that's what people like us write about we can only point to

11:38

previous patterns that worked but they all work until they don't so previously

11:43

the notion had always been to be evenly exposed across a dozen core industries

11:48

in a portfolio that reduced the risk the most but like why would you want to be

11:54

at all exposed to the paper and pulp industry if you have a 30 year time

11:58

horizon like does anyone think we'll be using more paper in 30 years versus [Man places cynical hat on head]

12:02

today yeah let's put on our most cynical hats and asked why this ethos would have

12:07

been even marketed to the public mm-hmm well who is usually the catalyst to get

12:11

investors like you and me to invest and be all diversified up the yin-yang yeah

12:17

well stockbrokers when does a stockbroker usually get fired when [Stockbroker sleeping at his desk]

12:21

volatility is high in an investor who didn't take this course gets nervous

12:25

they sell their portfolio and then bad things happen while putting 10% of your

12:29

portfolio in a dead money industry like paper and pulp is a good way of

12:34

"stabilizing the portfolio" it's like holding 10% cash it stabilizes but cash [Man smelling stack of cash]

12:39

doesn't go up why is that good if you have a 30 year time horizon just sits

12:43

there isn't that like giving up about 1% a year in compounding in performance ie

12:48

if the market goes up a 10% a year and then 10%, 10% is 1% and cash is just cash

12:54

it just sits there pretty much doing nothing but anchoring way down your [Cash falling to the bottom of the ocean]

12:58

portfolio over time you know kind of like congressman yeah, hi, we're looking at you

13:04

we love you guys...

Related Videos

GED Social Studies 1.1 Civics and Government
39794 Views

GED Social Studies 1.1 Civics and Government

Fake News
11938 Views

How do you tell fake news from real news?

Finance: What is Bankruptcy?
260 Views

What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...

Finance: What is a Dividend?
1777 Views

What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...

Finance: How Are Risks and Rewards Related?
589 Views

How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...