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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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there in investing if you are structurally long equities meaning you

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

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

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

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

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or five or six years the markets down for the year

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

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

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

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

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

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

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

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

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

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

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

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

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bureaucrats in Washington playing poker on your behalf

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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truck dispatcher yeah some people are just born to be a

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

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prospects in your investments titrating individual company investments levels of

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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everyone else is doing on the diversification is always good bandwagon

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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to own retail stores yeah all right next category healthcare

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

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they finally die because we don't smoke anymore yeah

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

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

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

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

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

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

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

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

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

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

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

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

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not then maybe shooting for the 12% instead

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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we love you guys...

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