[MUSIC] Hey, welcome back. We were last time talking a little bit about stocks and bonds. And we started touching on sort of those risks of, what are your risks of losing money, as well as your potential for gaining money? And I want to talk more about that. Because I think that's really what's scary to people, is that understanding, what are the investment risks, and then trying to make a judgment about them. So let's think about that and look at some different things. We can kind of classify the risks. And this isn't every risk that is out there by any means, but these are sort of the big ones that we need to keep in mind. And one of them is really about interest rate risk. So we have forces that drive things in our marketplace. And sometimes interest rates over all may go up or they may go down. And bonds really do react depending on the bond market and on these interest rates. So interest risk is number one, what we need to think about when we're making purchases of bonds. So we have to keep in mind that bond prices will be affected depending on what is happening with interest rates. And it’s an inverse relationship. So when interest rates in the bond market rises, the price of your bond is likely to go down. The other thing we need to keep in mind is that many people invest in bonds to get those returns that interest rates that is paying out. If there's a lot of inflation, or really, if there's any inflation, inflation is going to eat away at the value of that fixed return of that interest rate. So we also have purchasing power risks that can happen with bonds. So two kinds of things to think about, interest rate risk and purchasing power risk with bonds and other kinds of investments where you're essentially loaning money. Now, keep in mind that purchasing power risk, that sort of inflation risk, isn't really such an issue in the shortterm because it takes a while for it to really add up. But for longterm investments, it's really your worst enemy. And so, one of the things that I do want to just mentione here is that sometimes people say to me, I really want to keep my money safe. I just want to know that what I have I hold, and I'm not concerned about it growing. And I hear what people are saying, but they need to think about that inflation risk, which we touched on earlier. But there is a risk even when you have your money in a savings account and you're not going to lose because of changing volatility in the marketplace. We still have purchasing power risk. So what about stocks? Well, stocks are also driven by what we call market risk. So, the whole stock market may go up or down depending on things that are happening in the world, that are happening in the country. And individual stocks from companies can follow that. Doesn't always happen that way but there's a tendency. So when the whole market is moving then you need to keep in mind that the value of your investment may also be changing with it. So, we just have to keep those in mind, that not everything will follow the same way as the stock market, but we still do have to watch out for market risk. The other thing to keep in mind is that individual businesses may or may not follow the market. And so, for an example of this would become to what we call business risk. If we go back to Sam, well, Sam thought his tennis shop was going to do really well, but actually, it doesn’t. It does really poorly and he has to close the shop. He just cant afford to even keep it going. And so this is business risk for the individual. You can also have a business risk for the whole industry as a whole has a problem. So, maybe in a recreation was just having a big issue. And Sam's tennis shop just kind of of followed along with that. So we need to think about the business risk as well as the market risk when we're looking at purchasing in the stock market. So, let's go back to our example here of Ann and Mike. If you remember, Ann loaned $10,000 to Sam to open up that tennis shop, and Mike bought into the business with $50,000. So who lost the most if the shop closed? You can see that Mike lost more and Anne was she lost didn't loss as much. And that's pretty representative of what might happen in a situation like this. If you remember before when we talked about who are the potential to gain the most, Mike had a lot of potential, but he also had the bigger risk. So that's kind of a way to think about investing. Often is that when you have more risk, you usually have more potential for a return. So that's the scary part right? That thinking about, what if I lose that money? And I know that it really holds up people from investing a lot of times. But what we want to keep in mind is that this is for the longterm. So what we're thinking about investing, don't look at prices as they move up and down day by day, we want to look in terms of 30 years what happens to different investment options. And what research tells us is in the long-run, the stock market is our best bet against inflation and price increases. So that's again, something really important to keep in mind. So let's just take a look at this a little closer with comparing the average return over about 10 years versus long term here about 50 years of the Standard and Poor's 500 stocks. Which is a measure of how the stock market has been doing in the US that's commonly used. A 10 year Treasury bond from the US government, again, a good measure of kind of how bonds are doing. And then, a 3 month Treasure bill from the US government, which is considered a very safe, pretty liquid type investment. So what you can see here, is that although we might experience more volatility in the stock market, in the long-run it tends to do better, significantly better, than the bond market or having your money in something like a savings account or a Treasury bill. But we have to be willing to ride the volatility. That up and down of the stock market and stay with it in order to see these types of returns. What are the risks of different kinds of investments that you may be making? And what are the potential returns? And where is your comfort level with finding that spot of return versus risk? [MUSIC] [SOUND]
