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RTC2: Starting with the finance and investing basics · The Curve

• 0:00
  Welcome to the Curve Podcast, a conversation for women who want to learn more about money,
• 0:05
  their money for the future they want to have. We're all busy and the pursuit for financial
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  confidence and increasing your wealth should be a simple one. This podcast is for women to learn
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  about investing in a non-scary or intimidating way. With short episodes, you'll have time to learn,
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  digest and understand everything to do with the world of investing. So thank you for being here
• 0:28
  and for listening. Because together we really can raise the curve.
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  Now we've got quite a lot of content to cover today, don't we Vic? We do. I actually
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  bought my night pad because I'm prepared to take notes because otherwise I forget important
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  information. Good idea. Well, the great thing about this podcast is that you can rewind.
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  This is true. Technology will. Yeah, so today we're going to talk about
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  risk and return compound interest and why Albert Einstein sees that compound interest is the
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  sixth wonder of the world. Can I just say on that? I'm pretty sure there are six wonders of the world.
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  Great quote though. We're going to talk about different asset classes and a bit about diversification
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  and why it's so important. So firstly, are we starting with risk and return? Yeah.
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  Can I take a stab in the dark here? Go for it. Is it basically the bigger, you know,
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  and people are like higher risk, higher reward? Exactly. Yeah. Taking a step back. So investing
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  is all about you're trying to maximize your return and minimize your risk. So you're right. Yeah,
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  you're trying to maximize what you can earn from your investment and minimize what you can lose.
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  Similar to most things in life, could doctor, for example, or surgeon is compensated more for the
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  level of risk that he's taking because he's operating on you. So his job's high risk. So he's compensated
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  or his return, which is his salary is higher. Reflecting that. He's like a neithist, right? Because
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  their job is the most dangerous, right? And obviously, skill comes into it and all that. But this
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  is a shop assistant who's selling you clothing. Very little risk involved in that. Unless you're a
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  shopaholic. Nothing wrong with being a shop assistant. But essentially, what you're saying is
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  you're paid for the fact that you're really sticking your neck out. Yeah. And the same is
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  with investing. So if you're taking a lot of risk investing in something that's really risky,
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  you should really be compensated for that level of risk. And when I talk about compensating,
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  I'm talking about the return of that investment. So what you get back is going to be higher if it's
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  a riskier and well thought out investment. Yeah. Yeah. And the return is just the kind of the change
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  in the price of the asset effectively. So for example, if you're investing in property and you buy
• 2:44
  the property for God, it's like, if you're an old client, it's like a million dollars.
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  And then you sell it in 12 months time, that asset that property has increased by 10%. Then that's
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  your return. So you sell that asset in 12 months time. The difference that you make is kind of your
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  return. And there's also other parts that make up the return as well that you can get rental
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  income if you invest in property, which we'll get into a bit later. But can I ask a question
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  on that? So is it then loss if you, if for example, if a asset depreciates or it's a stock or it's
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  a, you know, a house that then depreciates in value, is that a technically called a loss?
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  Yes. So your return can be positive or negative. If the price increases from when you first bought
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  it, then your return will be positive. But for decreases, your return will be negative. So
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  you really want to look at when you're looking at return. If someone comes up to you, they're like,
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  oh my god, I just made 100% in two days on my stock that I bought. You're like, cool. But what
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  is the risk involved in that? That's pure luck in my opinion. That's not skill. You should really
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  be kind of taking a long-term view when you're looking with, when you're looking in terms of risk
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  of return. Okay. So how would I know if something is risky or not risky? Great question, so.
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  So the risk is effectively just the volatility of the asset. And when I talk about asset,
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  that can confuse some people with kind of what is an asset. It's just either property, shares,
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  cash or bonds. There's lots of different types of assets with those are the main four. So
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  the risk is just the return, that the volatility of the asset, the movement. And when I say
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  volatility, I mean, the movement. So it's the movement up and down. And it's the uncertainty kind
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  of how that asset will move in the future. So it's, for example, with Bitcoin, obviously, I mean,
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  I know nothing about Bitcoin. But that to me sounds like a really risky versus something like a
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  supermarket that you're investing in. Exactly. And you can see that in the price of Bitcoin.
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  The price of that shoots up and it shoots down. And then it's kind of all over the show. And right
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  now it's super, super high. And so those movements is what's called volatility. And so that means
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  that that's a really risky asset class or an investment. Because that's recently gone up by like,
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  am I right? It's thinking 3000% something crazy. So in my opinion, I don't think that's sustainable.
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  Something going up that much is a really risky asset. And I would much prefer to invest in something
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  that generates kind of 10% return per annum. Yeah. And that's just my risk appetite. Some people
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  would love to invest in Bitcoin and in thrill. And they don't mind kind of potentially losing all
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  their money. Because that's what you've got to consider when you're investing in anything really
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  is that you can lose 100% of your investment. That's terrifying. I know that we're talking
• 5:34
  about best case scenario here. But that is the reality, right? You could invest in something that's
• 5:38
  so high risk. And you lose all your money. And you only hear stories. You only hear good stories.
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  Nobody goes around tooting their own Trumpet about all the money that they've lost. And so you
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  kind of get this warped perception that investing in property or investing in shares is really good.
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  And you can only make money. It's like, well, no, you can you can very easily lose money as well.
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  But I guess coming back to that, like Bitcoin going up 3,000%. Like on the flip side of that,
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  and like, what's a low risk investment then? I was going to say, because all my money has set
• 6:08
  in a long term deposit in the bank forever. And I'm guessing that's the worst or like the lowest
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  return you could get on anything, right? Yeah. Well, totally, especially where interest rates are
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  at the moment, like term deposits, they're generating 1% at the moment, which is, you know,
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  is super low, especially for someone your age, who can take a bit more risk, because you've got
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  such a longer time horizon for no kids and no responsibilities. Yeah, you've got no dependence
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  exactly. I guess with term deposits, they're low risk, because they're like, they're the
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  hell for a fixed period. They're hell by a reputable kind of financial institution or a bank.
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  And they're usually kind of backed by the government as well, some of them. So it means it's
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  unexciting and boring, but it's a say that you're not going to lose all your money, like you couldn't
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  stop. Exactly. But the return reflects that. That's why you're only getting kind of 1% return
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  ish, is because the likelihood of you losing your money is far lower than investing in shares.
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  So if we're kind of comparing the two term deposits, you've got a 1% return, but very, very low risk
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  of you losing your money, shares, you could be getting, gosh, anything, let's say, let's say
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  20% return, but that 20% could also be negative 10%. So you're taking that extra risk.
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  Nesting out over time, your overall return for investing in shares, say if you picked a 10-year
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  period, would be overall significantly higher. Just a bit of interest. Has the banks ever just
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  like had a total meltdown and people have lost their money in a term deposit? Like, can you actually
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  lose? And that isn't possible. It kind of happened in the GFC, like there was a lot of banks that got
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  kind of... Hey, no abbreviations in this podcast. Going to financial crisis. That was what happened
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  in the global financial crisis was many people had money with the banks, and then the banks did all
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  this kind of crazy lending of those of your savings effectively, particularly in the US, the United
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  States. Appreciate it. And that led to them getting into financial trouble and therefore having
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  to get bailed out by the government. If you're getting a return, there's still an element of risk,
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  but much, much, much lower. Especially when you're getting 1%, which is pretty measly. And then also
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  if you look within the asset class of shares, if you looked within that class, there's companies
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  that are way more riskier than others. A supermarket, for example, you know, a pretty kind of
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  defensive... People are going to continue to shop at a supermarket. Everyone needs toilet paper.
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  Exactly. Exactly. It's a staple. It's necessity versus the likes of kind of a biotech company where
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  the uncertainty of a drug becoming successful, you know, we have no insight into that. And you know,
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  even the company itself might not. So investing in like a biotech company, for example,
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  the uncertainty around that is high, but the payoff could be significant. The return you get if
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  that drug is successful could be significant. And they're just even vested in the company that
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  came up with the COVID vaccine. Yeah. Yeah, versus a supermarket where you're probably just going to,
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  you know, your returns are going to chug along. You're probably going to get maybe five percent
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  return depending on what supermarket. But there's less, there's uncertainty. So therefore,
• 9:26
  your return is lower because your risk is lower. So it completely depends on what you invest in.
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  But yeah, your high return means high, high risk. I feel like I've come up with a really good
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  example in case people are still not sure what you're talking about. If you go to the horse racing,
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  which I hope not that many people do anymore, but say you bet on horses and you're betting on like
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  misty star who's won 10 years in a row. Or are you bet on, I don't know, floppy Joe who's never
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  won a race in his life. A floppy Joe wins. But say he wins. And there's probably very few people
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  who would have bet it on him, right? So then if he actually wins, you have way more, there's way
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  more pool of money to share in therefore it's going to be a higher award, right? Rather than just
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  going for like the safe option. Your payoff or the odds of sloppy Joe winning. I should have thought
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  of saying this way. Yeah, it's not on people's radar. They're not thinking about it. Therefore,
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  when he does win, the returns weigh greater rather than everyone kind of piling into
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  misty star misty star misty star. I'm glad you remembered their name. Yeah, I know.
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  Talk to me about the whole like risk appetite scenario. So how would I even know how much risk
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  I'm comfortable taking? Well, it's totally dependent on your personal situation. But if we're making
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  generalizations here, I would say if you're younger and you've got a longer investing time horizon
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  or if you've got less dependence, so no kids, you've got no mortgage, you know, you've got a
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  bit more financial flexibility. Then you can take a bit more risk, you know, maybe put a bit of
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  money in that biotech company and a bit into the supermarket as well. Or you know, just kind of,
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  I mean, sloppy Joe and to put some more. That's gambling. Sorry, sorry, sorry, no, no, no,
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  but no, it's kind of not horse racing. It's you can take a bit more risk because you can,
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  you've got a longer time horizon, which means you can weather the ups and downs. Say grainy,
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  she has a 12 months time horizon and she look at poor grainy. She needs the money in 12 months.
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  She doesn't want to take a huge bet because come 12 months time, her investment that she made
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  in the stock market or in a company could be could be down 20%. She's just lost 20% of her savings.
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  Whereas someone like us who are a bit younger than grainy, we don't need we may not need that money
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  in 12 months. So therefore we can say we need it in 10 years. Then that investment over 10 years
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  will be a lot higher than it is now, but it might have had years of ups and downs. So what I'm saying
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  is over that the average, the average return over that 10 year period would be a lot higher than
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  say a term deposit. But because grainy doesn't have that time available to her, she needs to put
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  her money in the term deposit. So she would have a lower risk appetite. If someone like me with
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  zero kids, no responsibility, I really could say, look, I don't need that 20 grand or 500 dollars
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  or whatever it is. I'm happy to part with that fix amount of time. And then you can, as you say,
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  whether the storm's to circle up and down until it's at a point where you're like, amazing.
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  It might have been 20 down 10, then up 10, then down 5, then up 40. But overall, this is why we
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  talk about averages because lots can happen in a year and you need to take a long term view
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  when you're investing. Okay. Yeah. That makes sense to me. So it's essentially looking at your
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  financial and your personal situation and figuring out how much money you're going to need in the next
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  say 5, 10 years or whatever you're comfortable with. And when I talk about short term, I mean short
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  term for me would be like sub two years. Sorry. What does sub mean? Sorry. Short term for me would be
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  like below two years, like anything between now and two years time. Okay. I would say kind of
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  medium term would be like five years and long term anything about 10. I mean, yeah, you need to
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  kind of take a five year plus view in my opinion when you're considering an investment. And also
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  don't invest outside your means. So don't, when you get your paycheck, don't invest the whole thing
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  if that's all you've got to live on because with any investment, there's risk. You can lose 100%.
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  So you don't want to be like living on the bones of your ass because you've lost, you've put all your
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  money into the market and you've, and you've lost it all. Also don't go borrow money to invest
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  in the stock market. There's just, that's the one I want to invest in. Yeah. I mean, the hard
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  out experts do it, but they know what they're doing and they've got risk and controls in place.
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  But you know, for everyday investor, definitely don't go borrowing. Don't go remodeled
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  your house from invest in the share market because like I keep saying, there is you can easily lose
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  100% and then you're left with more debt and you're in a worse position. So yeah, I would say
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  invest a little bit here and there and maybe each paycheck, you invest more and more and
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  until you kind of build the confidence and learn it long the way. So something you mentioned,
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  which I think probably ties into the compound interest thing is basically the longer that
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  something's in there, the more you're earning, right? So is that essentially compound interest?
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  Good segue. Oh my god, this is so little fun. So yeah, compound interest. So I don't want to lose
• 14:32
  you all before because it sounds complicated. And it can be a bit of a dreary topic. So we'll try
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  and make it interesting. But compound interest is, it's the fundamentalism investing and the
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  fundamentalist of finance. So if I was to ask you so, would you prefer a dollar today or a dollar
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  in 12 months, what would you say and why? Probably a dollar today because I don't want to buy a
• 14:55
  one dollar lollimax. No, but also like, why would I choose to wait for a dollar if I can just
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  have it now? Exactly. Spoken like a true millennial. But that's the right answer. Like if I could
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  give you a dollar now, you can go away, you can invest that. So then a dollar a year from now is
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  actually worth more. So say you take that dollar, you invest it, you get a 10% return, then at the end
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  of the year, your dollar is now worth a dollar 10. So you can go buy a dollar 10 worth of lollimax.
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  An extra snake. Yeah, exactly. So and then when we start, so you've got a dollar 10 now,
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  whether we're at the end of next year, you've got a dollar 10. Now you're earning 10% on that dollar
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  10 rather than the dollar. So that's kind of compound interest is interest on interest on interest.
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  So you're starting off a higher base when you come into the next year investing. So the percentage
• 15:51
  essentially of what you'll earn your own year is constantly growing as well. Assuming you've made
• 15:55
  a good investment. The percentage is the same. Just for example, sake, but the absolute dollar
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  amount of that percentage, if that makes sense, is higher. So say, well, one 10, a 10% of one 10 is
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  going to be more than 10% of a dollar. Exactly. Yeah. So it's a dollar 21. So so right now, we've
• 16:12
  got a dollar end of the year. We'll have a dollar 10, end of the next year. We'll have a dollar 21.
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  And so you can see how your savings just kind of grow exponentially because every year you're starting
• 16:23
  with a higher base, whereas if you just keep taking that money out every year and starting with a
• 16:29
  dollar, that's not compound interest. That's starting from scratch. That's what we call simple
• 16:33
  interest. It's just it's just interest on the same amount, the same beginning amount every year.
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  And that's simple interest. That's simple interest. So compound interest is just interest,
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  uninterest, uninterest. That's why you run sales and invest for the long term because the longer you
• 16:46
  leave it in there, the more rapidly your savings or your investment will grow. Am I right in thinking
• 16:52
  though rapidly is probably not the way to think about it because to me, compound interest sounds,
• 16:57
  it's like the long term gain, right? It's what you were talking about before. It's like, okay,
• 17:01
  I'm happy to get rid of 5 grand for now. I won't touch that for 10 years. So the
• 17:06
  compound interest over that time will grow, right? It's just knowing that compound interest is the
• 17:11
  long term. Yes, and you need to leave it and allow it time to compound. It's kind of the
• 17:19
  understanding. Like if we use an example, so say you had $10,000 and you invested that at 10% per
• 17:29
  year for 10 years. So 10, 10, 10. What is 10% of that? $1,000. At the end of that 10-year period,
• 17:36
  you'd have $27,000. If we just go back to the simple interest example, so just your basic kind of
• 17:44
  interest, you would have earned 10% on that 10,000, which is 11,000. So you've got your earning an extra
• 17:53
  $16,000 in compound interest versus simple interest, if that makes sense. It's crazy.
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  It's just like, if you looked at it on a graph, it would be like a hockey stick. It would look like
• 18:03
  that's what your investment would look like. I guess the big caveat is finding an investment.
• 18:08
  Sorry, hockey stick. Do you mean the bottom of that house? No, no, sorry, the top.
• 18:13
  Could I be very specific? I just mean that maybe it's like the side of a volcano.
• 18:18
  Okay, it's all quite steep. Yes, very steep. But the caveat is it depends on you getting that 10%
• 18:25
  return per annum, and that's an average. So it can also work in the reverse.
• 18:30
  Yeah. Well, obviously, we think about good examples here. We're going to start positive.
• 18:36
  Yeah. But it works both ways of everything you're explaining, right? Exactly.
• 18:39
  But just that compound interest, if there's one thing you can take away is you need to keep it in
• 18:44
  there for the long term. The longer you leave it in the better, I just want to touch on that 10%
• 18:49
  return. With you, for example, your money's an eternal deposit. It's generated 1%. The compound
• 18:54
  interest on a 1% investment is going to be so much lower than a 10% return. That's why you hear
• 19:01
  people harping on about like, make sure your kiwi saver is generating a good return or you're
• 19:05
  with a good fund manager because savings compounding at 1% versus savings compounding at 10%.
• 19:13
  In 10 years time, it's going to be such a significant difference. So if you can make one small
• 19:19
  adjustment and get even a 1% or 2% better return than you're getting over the long term,
• 19:25
  it's going to be phenomenal in terms of your savings, in terms of retirement, in terms of your
• 19:29
  wealth creation. So it's really important to make sure, just to make sure that you're getting
• 19:36
  the greatest return you want for your risk appetite that makes sense. Yeah, yeah. Risk return.
• 19:42
  It's definitely a massive top. One that we could talk about forever. Totally. So yeah,
• 19:46
  with compound interest, really important, it's about the length of time and the return
• 19:52
  than you're getting. Those two things are so important and can make a huge, huge, huge difference.
• 19:57
  This is good. It's kind of like the snail analogy when everyone's like, rather than
• 20:01
  coming quick off the blocks. It's like the tortoise in the here. That's what I,
• 20:04
  it's not a snail. It's not a snail. It's not a snail. It's so right. The tortoise in the here.
• 20:07
  Yeah, you want to be with the, you want to be with the tortoise, but not a really slow tortoise.
• 20:12
  Maybe like a kind of a medium fast tortoise. I love that. Next time, can we go into asset classes?
• 20:20
  Because it's something that I know I hear you talk about a bit and I don't fully understand.
• 20:24
  So I'd love to kind of break that down fully. Yeah, I think that's a really good idea. There's
• 20:29
  there's kind of four main asset classes and yeah, I think it's really important to dig into,
• 20:34
  to each of those and why there's, there's four and why there's so special.
• 20:38
  Pros, cards, etc. All that kind of stuff. Awesome. Okay, great. Thank you so much for joining us
• 20:44
  on today's episode of Raising the Curve. Please subscribe to the podcast and leave a review
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