The Fundamentals | Why is Investing Important?

we've all heard about amnesty and you

may have even weathered a conversation

about stocks in our ESPYs yet more

Canadians owned cats than a

comprehensive financial plan and few are

confident in their financial knowledge

so before we go into the details let's

start from the beginning hi my name is

Richard coffin and welcome to the plain

bagel let's go over the basics what is

investing well in short investing is the

act of using your money in a way that

earns you a return investments come in a

variety of forms but most people use

what we refer to as securities or

investment instruments these are things

such as stocks and bonds that come from

the company that you decide to invest in

these instruments embody the implicit

rules of your investment including what

you're entitled to and how you actually

go about earning your return your return

is of course the money you earn on top

of what you've committed to your

investment and it's typically

represented as an annual percentage for

example if I invested $50 at the

beginning of the year and I earn a 10%

annual return at the end of the year

I'll have 55 dollars this investment

return is not often guaranteed and will

depend on how your investment performs

throughout the year for example if you

invest in a company and it does well you

will likely earn money on your

investment but if the company struggles

to make a profit you could actually lose

money clearly investors want to maximize

how much money they earn while

minimizing the risk of losing money

which brings us to the first fundamental

relationship faced by investments the

risk return trade-off some investments

pose a higher risk of losing you money

than other investments but it's

generally accepted that these higher

risk investments are required to achieve

higher returns in other words we have to

balance how much additional risk were

willing to take on to achieve those

higher numbers for example imagine you

have two investment options one has a

50% chance of burning you a 5% return

and a 50% chance of earning you nothing

well the other one has an equal chance

of earning you a positive 15% or

of 10% return if you wanted to earn a

positive 10% total return you'd have to

invest some of your money in the riskier

investment since the safer investment

has no chance of achieving this amount

to lower their risk investors use a

technique that's integral to investing

diversification diversification is the

spreading out of investments over a

number of different Holdings to improve

the overall risk return trade-off of the

entire portfolio a fancy way of saying

don't put all your eggs in one basket

I spreading out your investments you

decrease a chance of having more than

one investment lower at the same time

diversification works best when your

investments are uncorrelated meaning

that they move independently of one

another for example if you had all of

your money invested in two car

manufacturers chances are they will be

somewhat correlated and if car

manufacturers don't do well in a given

year your portfolio will see a drop a

portfolio holding a car manufacturer in

a pharmaceutical company on the other

hand will be more diversified and less

impacted by the downfall of one of the

businesses diversification and the risk

return trade-off are two paramount

investing concepts and it's important to

keep them in mind when you're managing

your finances we'll go over the two in

further detail moving forward but for

now this basic understanding will

suffice so now that we've gone over

investments on a high level let's get to

the meat of the video why is investing

important well for many investing is

required to reach financial goals

financial goals can include things such

as buying a house taking regular

vacations and most importantly funding

your retirement when you retire you stop

earning an income and so you need to

make sure you have money coming from

somewhere to pay the expenses and bills

luckily there are a number of tools

available to help you retire some

employers offer a pension plan which

pays out when you retire and in Canada

we have access to a number of programs

including the Canadian pension plan and

old age security that also supplement

our retirement

but not everyone has full access to

these tools at the end of the day a

large chunk of your retirement will be

funded by the money you've saved up

until that point and you may need to put

aside more than you expect for example

you may ascertain at the age of 25 that

you'll need $600,000 by the age of 65 to

retire keep in mind that this number and

all future example numbers are somewhat

arbitrary and are simply for the purpose

of example your own investment

objectives will be unique to your own

circumstances ignoring inflation

investments and government assistance

this amount would provide you $24,000 a

year in retirement if you live to the

age of nine million to reach this

objective using just your income you

need to save approximately fifteen

thousand dollars a year or $1,250 a

month over 40 years that number is

simply not manageable for some and the

situation becomes even more dire when

you take into account inflation

inflation is the overall increase of

consumer good prices meaning that every

year your money sits around it's

actually losing purchasing power because

the cost of living is rising for example

in 2016 the inflation rate was 1 point 4

3 percent meaning that on average prices

including your rent and your food bill

increased by that amount this is why

investing is important it significantly

lightens the burden of saving for

retirement while maintaining your

money's value against inflation but many

people don't think about saving for

their retirement until later on in life

assuming that they'll make up the

difference in the future but if there's

one lesson I'd like you to take away

from this episode it's this nothing

makes saving for your financial

objectives easier than starting early

this is because of another very

important investment concept called

compounding which will acclaim through

the continuation of our example let's

assume that you are able to invest your

money at a 6% annually compounded return

meaning that you earn 6% of what you

invested once a year if you started

saving at the age of 25 with this return

you need to save a total of just under

three thousand nine hundred dollars a

year or about three hundred and twenty

three dollars a month to reach six

hundred thousand by the age of sixty

you'll notice that we are now saving

over $900 less a month than we would

without investing but that's assuming we

start early at the age of 25 let's

instead say that you start your

investing at the age of 45

so you've half the amount of time to

reach the 600,000 you probably need to

double your savings right well not

exactly

your annual contribution will more than

quadruple to over $16,000 a year or over

$1,300 a month and if you start at 55

it's gonna be over $45,000 a year or

over $3,000 a month this is the power of

compounding and it can be both your best

friend and your worst enemy when it

comes to saving compounding or interest

on interest is the process by which the

returns of an asset are reinvested

meaning that they are in their own

returns in other words if you reinvest

the money that you earn on your

investment your savings will grow at an

exponential rate the longer you have if

for example you invest $100 in an asset

that earns you 10% a year in your first

year you'll get $10 now many people

might think that in year two you also

get $10 but that's not the case you'd

actually get $11 because now you're

earning 10% on both the $100 that you

invested and the $10 you earn from year

one in the year after that you would

earn over $12 then over 13 then over $40

and so on so you can see that your

savings are actually exponential meaning

that the longer you have your money

invested much higher your payoff is this

makes investing a lot easier when you

start early and a lot more expensive

when you wait till later on so it's

needless to say that learning about

investments early is important because

it can be very costly to put off and

unfortunately a lot of Canadians are

finding this out too late

in fact in 2016 the Broadbent Institute

indicated that roughly half of non

pension earning Canadians between the

ages of 55 and 64 had savings

representing less than one year's worth

of retirement that's one year of a

properly funded retirement taking into

account government

supplements it's clear that this is not

something we can put off because too

often people find out too late but they

should have started earlier so take the

time to learn about how to save your

money and how to invest because it could

make a huge difference in how your

future plays out and hey we'd be happy

to help you here if you like this video

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the plain bagel my name is Richard

coffin thanks for joining me today