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 please leave a like and if you like what we're doing here please subscribe if you have a

topic you'd like us to cover in a future video please leave a comment down below for the plain bagel my name is Richard coffin thanks for joining me today