What's a Good Return on Investment?

Two Cents

27 Nov 201906:24

Summary

TLDRThis script offers a nautical-themed exploration of investment options, comparing them to navigating the seas. It discusses the safety of savings accounts versus the potential rewards of riskier ventures like stocks. It highlights the low interest rates of typical savings accounts and the slightly better returns of high-yield accounts and CDs. The script also touches on the middle ground of bond funds and the historically high returns of the S&P 500 Index fund, cautioning about the volatility of stock market investments. The key takeaway is the importance of aligning investment strategies with individual financial goals and the necessity of diversification to mitigate risk.

Takeaways

🧭 Investing is like navigating the seas: it requires balancing safety and returns.
📈 The stock market is at an all-time high, but savings accounts offer less than inflation.
💰 The goal of investing is to make money grow, but the path to get there varies in risk.
🏦 Savings accounts are the safest but offer low returns, with average interest at 0.09%.
💹 High-yield savings accounts offer better returns but may still fall short against inflation.
📊 Certificates of Deposit (CDs) offer higher returns but require a minimum deposit and a lock-in period.
💼 Series I Savings Bonds are a government-backed option with a guaranteed return.
🔄 Bond funds provide a middle ground with average annual growth but no guaranteed returns.
🌐 The stock market, represented by the S&P 500, offers higher potential returns but comes with more risk.
🌪 Short-term stock market investing can be volatile, with significant ups and downs.
🌟 Diversification is key to managing risk and ensuring no single investment can cause significant loss.

Q & A

What is the main theme of the script?
-The main theme of the script is comparing the process of investing to navigating the high seas, emphasizing the balance between safety and strong returns.
Why is the stock market compared to 'choppy ocean waters'?
-The stock market is compared to 'choppy ocean waters' because it can be unpredictable and volatile, much like the sea, requiring careful navigation to achieve financial goals.
What is the current state of the stock market according to the script?
-The script states that the stock market is at an all-time high, suggesting a potentially risky environment for investors.
Why are savings accounts considered a 'safe' investment?
-Savings accounts are considered safe because they are insured by the government and offer a guaranteed return, albeit a low one.
What is the average interest rate for a U.S. savings account as mentioned in the script?
-The average interest rate for a U.S. savings account is mentioned as .09%.
What is a high-yield savings account and how does it differ from a regular savings account?
-A high-yield savings account is a type of savings account that offers a higher interest rate than a regular savings account, typically ranging from 1-2% or more.
What is a Certificate of Deposit (CD) and how does it work?
-A Certificate of Deposit (CD) is a type of savings account offered by banks or credit unions that pays a higher interest rate than a regular savings account but requires a minimum deposit and a commitment to not withdraw the funds for a fixed period of time, typically between 1 to 5 years.
What is the current interest rate for Series I Savings Bonds?
-The current interest rate for Series I Savings Bonds is guaranteed at 1.9%.
What is the difference between a bond fund and a stock fund?
-A bond fund invests in bonds, which are considered less risky and offer fixed returns, while a stock fund invests in stocks, which are riskier but have the potential for higher returns.
Why is the S&P 500 Composite Index mentioned as a 'north-star' for stock investing?
-The S&P 500 Composite Index is mentioned as a 'north-star' for stock investing because it tracks the performance of the largest 500 corporations in America, providing a broad measure of the U.S. stock market's health.
What is the historical average annual growth rate of the S&P 500 over the last 90 years?
-The historical average annual growth rate of the S&P 500 over the last 90 years is 9.8%.
What is the recommended approach to investing according to the script?
-The script recommends aligning investments with the right financial goals, diversifying to minimize risk, and considering the time horizon for investments, with a preference for long-term investments over short-term ones.

Outlines

00:00

🌊 Navigating the Investing Seas

The script begins by drawing a parallel between embarking on a high seas adventure and making investment decisions. It highlights the dilemma between opting for safety, akin to staying close to shore, or venturing into riskier but potentially more rewarding investments, like setting sail for deeper waters. The script emphasizes the current high stock market and low savings account returns, underscoring the goal of making money grow. It introduces the concept of expected returns and risks associated with different investment options, and encourages viewers to start planning their financial journey. The paragraph then delves into the safety and liquidity of savings accounts, pointing out their low interest rates compared to inflation. It suggests alternatives like high-yield savings accounts, Certificates of Deposit (CDs), and Series I Savings Bonds, each with their own benefits and drawbacks, such as penalties for early withdrawal or minimum deposit requirements. The script positions these options as suitable for short to medium-term financial goals, such as saving for a house down payment.

05:02

🚢 Exploring the Open Waters of Investments

The second paragraph of the script shifts the focus to public markets, which are characterized by no guaranteed returns, symbolized by the need for life rafts to navigate the unpredictable waters. It introduces bond funds as a middle ground between safe investments and riskier ones like stocks, mentioning a popular bond fund that has averaged a 3.68% annual growth over the past decade. The script notes that returns can fluctuate and even turn negative, which is a risk inherent in this type of investment. It then transitions to discussing the stock market, using the S&P 500 Composite Index as a benchmark for stock investment performance, highlighting its historical average growth of 9.8% per year over the last 90 years. The paragraph also addresses the volatility of the stock market, cautioning that single-year returns can be highly variable and sometimes significantly negative, as seen in certain years. The script concludes by advising that while stocks can be a good long-term investment, short-term investing is risky and not recommended. It emphasizes the importance of aligning investments with financial goals, diversifying to mitigate risk, and maintaining a steady course even in turbulent times.

Mindmap

Keywords

💡Investing

Investing refers to the act of allocating resources, such as money, with the expectation of generating an income or profit. In the context of the video, investing is likened to navigating the seas, where one must balance the desire for high returns with the risk of loss. The script discusses various investment options, illustrating how each relates to different levels of risk and potential reward.

💡Stock Market

The stock market is a platform where shares of publicly traded companies are issued and traded. It symbolizes the volatile and potentially high-reward 'deep waters' of investing in the script. The video highlights the historical performance of the S&P 500, which is an index of 500 of the largest corporations in America, to illustrate the potential for strong returns over the long term.

💡Safety

Safety, in the context of the video, refers to the security of one's investment and the minimization of risk. It is compared to staying close to the shore when sailing. The script contrasts safer investments, like savings accounts and CDs, with riskier ones, emphasizing the trade-off between safety and the potential for higher returns.

💡Returns

Returns in investing denote the profit or loss derived from an investment. The video discusses expected returns from various investment types, such as the average returns from savings accounts, CDs, and the stock market. Understanding returns is crucial for setting investment goals and assessing risk tolerance.

💡Risk

Risk in investing is the possibility of losing some or all of the initial investment. The video script uses the metaphor of sailing into choppy waters to describe the risks associated with different investment options. It underscores the importance of risk assessment in making informed investment decisions.

💡Diversification

Diversification is a risk management strategy that involves spreading investments across various financial instruments, industries, and other categories to mitigate potential losses. The script advises diversification to protect against the possibility of a single investment failing and affecting the entire portfolio.

💡Savings Account

A savings account is a deposit account held at a financial institution that earns interest. In the video, it is described as a 'safe' and 'calm' investment option, akin to staying close to shore, but with low returns, symbolized by the anchor that fails to move.

💡Certificates of Deposit (CDs)

Certificates of Deposit are time deposits offered by banks with a fixed interest rate. The script explains CDs as a slightly riskier but higher-yielding investment than a savings account, with penalties for early withdrawal, representing a commitment to a fixed period.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video mentions inflation to illustrate how low-interest savings accounts may not keep pace with the rising cost of living, effectively resulting in a loss of value.

💡S&P 500 Index

The S&P 500 Index is a stock market index that measures the performance of 500 large companies listed on stock exchanges in the United States. The video uses the S&P 500 as an example of a high-risk, high-reward investment, highlighting its historical average growth rate over 90 years.

💡Bond Funds

Bond funds are investment vehicles that pool money to invest in bonds, which are debt securities. The script describes bond funds as a middle ground between the safety of guaranteed investments and the risk of stocks, offering a balance of risk and potential return.

Highlights

Investing is like navigating the ocean, balancing safety and returns.

Stock market is at an all-time high, while savings accounts pay less than inflation.

The goal is to make money work harder.

Savings accounts are safe and liquid but offer low interest rates.

High-yield savings accounts offer slightly higher returns.

Inflation makes low-interest savings accounts less attractive.

Certificates of Deposit (CDs) offer higher interest rates with a fixed term.

Series I Savings Bonds guarantee a 1.9% interest rate.

CDs require a minimum deposit and have a penalty for early withdrawal.

Bond funds are a middle ground between guaranteed investments and stocks.

Bond funds' returns fluctuate and can be negative.

Stock market investing can be overwhelming due to the variety of options.

S&P 500 Index is a popular benchmark for stock market performance.

S&P 500 has averaged a 9.8% annual growth over the last 90 years.

Investing in an S&P 500 Index fund tracks the index's performance.

Stock market returns can vary greatly from year to year.

Long-term stock market investing can weather short-term volatility.

The best investment depends on the individual's risk tolerance and time horizon.

Diversification is key to managing investment risk.

Align investments with financial goals for optimal results.