Video transcript
- So probably the main thingyou'll hear when you talk about investing is whatis the return that you got on your investment? And return on investment is oftentimes people will say ROI, and there's a lot of differentways of calculating it, but maybe the most basic ways, think about if you put a hundred dollars into an investment this year and then next year you got back $110. So you got a $10 return on top of your $100 that you invested. People would say thatyou got a 10% annual ROI or 10% return on investment annually. Now, it can get more complicated depending on what type of an investment it is and how it pays you outover time, et cetera. But ROI is a really goodthing to think about. Any investment you make,generally speaking, you might say, "All right, if there's onething that gives me a 20% ROI or return on investment, that's better than something that gives me a 10% ROI." And if in terms of risk,they're similar, the same, then that might very well be the case. But it turns out that there's usually a trade-offbetween risk and return. You're usually not goingto get a higher return for something that is equally as risky. If that were the case, everyonewould invest in that thing and not the thing that'sgiving the lower return. And so to just give an example of how you see that in the real world, you can think of very,very, very safe investments. For example, if you just have your money in a savings or checking account you might get low singledigits, 1, 2, 3% on your money depending on where interest rates are, which doesn't feel like a lot, but it's very, very, very safe. If it's less than $250,000 per person, per account type, well, then you are pretty much guaranteed to get your money back. So low risk and arguably low return. If you're to go slightly higher risk, you could do something likelend to the federal government. You lend to the federal governmentby buying treasury bonds and treasury bills,oftentimes T bills for short. Now those are pretty much guaranteed to pay you what they say they're going to pay you. So you say, "Okay, why do Iget slightly higher interest for that than I get onmy checking account?" Well, it's a little bit less convenient if you need your money right that second. Yes, you could sell thosetreasury bills or treasury bonds, but those prices do fluctuate. So you're only guaranteed toget the money plus the interest if you hold it all the way to however long that treasury bond ortreasury bill was for. It might be for one year, two years, or 10 years or whatever it is. And so there's a certain risk, not just for the price fluctuations, but also how accessible is that money, for example, in thatchecking or savings account? If you want that money, you can usually get it within a business, within a working day,usually in a matter of hours. If you have a treasurybond or treasury bill, it's a little bit more complicated and you're going to have moreof those price fluctuations. Now, if you wanted to go upthe risk and return ladder a little bit more, well, youcould lend to other entities. You could lend to big, safe companies. They will pay you higher interest than the federal government will. But there's a little bit more risk that they might not pay that loan back. Maybe they go outta business, maybe something dramatically negative happens to their business. And what you'll generally seeas you go to rescuer, sorry, if you go to riskier and riskier companies they're going to payhigher and higher interest on their bonds. And if you look at the stock market where you're actually buying a share, when you buy a stock where you're buying a piece of the company, you'll normally see that the companies that feel pretty risky, you might feel like theycould have a higher return, but they could also have amuch higher loss as well. While companies that aresafer, generally speaking, you would expect to have lowerrisk and also lower return. So it's important to think about return on investmentwhen you make an investment. And it's very, very, very, very important to think about risk. I can't stress this enough, how many people I'veexplained they're like, oh, I have a 30%guaranteed ROI investment. I'm like, okay, someone's lying to you. Because if it was 30% ROI guaranteed you would have all of themajor investment funds in the world just investing in that. Why would they let littleold Sal invest or you, uncle, why would they let you invest in that if it was really 30% guaranteed? I would be very skeptical of people who say something like that. There's usually a risk that that person isn't thinking about, or that return is in someways shady or fabricated, which also makes me feel that that whole propositionis even riskier. So there are definitely ways that you can get 10, 20, 30% return, but it's usually associatedwith a decent dose of risk. And when you go into something like that, also think about the worst case scenario. It's easy to dream about, I'm making all the money, but think about what would happen if you lost 30% or 50%or 80% of your money? How would you feel then? And then invest accordingly.
