=Intro bookend=

Hi. 

In this lesson, we will discuss asset building and investments in greater depth. 
In earlier videos we discussed the importance of being careful around debt, due to the undesirable side effects of compound interest on the debt side. It is just as important to build assets, and do so early and often, in order to maximize the tremendous benefits that compound investment returns can have on the asset side.

=Learning objectives=

After this lesson, I hope you will be able to do the following:

* Classify major types of investments
* Distinguish between debt and equity
* Explain public securities markets
* Calculate investment value under compound returns

and finally, 

* Describe the importance of living below your means, and starting your savings early

=Investment types=

We have discussed earlier the idea of using your spare income to build a base of productive assets or investments.
Productive assets come in a variety of shapes and sizes, so let's try to get a handle on things by classifying the universe of investments.
The main ways to deploy your money is in debt, equity, or everything else which we'll just call 'stuff'.

Debt is when you lend money in exchange for a relatively fixed return. 
When you lend money, you are usually pretty high in the priority ranking as far as getting paid, which is a big plus. The borrower has to fail really severely before you lose money.
On the downside, you have a limited upside - even if the borrower rakes in mountains of cash, you only get whatever was promised to you, not a penny more.

With equity, you get part ownership of the enterprise. You have less safety - the debtholders are first to get paid. But your upside is unlimited, as you get to keep a share of all future profit.

So in essense, by moving from debt to equity, you give up some safety, in exchange for potential for higher future gains.

Then there's stuff. This is the option to just buy some things, like old coins, paintings, baseball cards, gold, soybeans, and so on, in the hope that they appreciate in value, so you can sell them and walk away with more money than you started with. The characteristics of this type of investment vary widely depending on the specific things you buy.

=Investment universe=

In addition to the asset type dimension, which includes equity, debt, and stuff,
we should talk about the market type dimension, which can be broadly partitioned into private and public markets.

In the private markets, you deal directly with the party seeking funding or selling stuff. You might invest money directly into someone else's business, lend money directly to a borrower, or buy and hold the actual stuff you expect to appreciate.

The public markets are established to provide an easy way to trade ownership claims on debt, equity, and stuff in small, convenient increments, generally called securities. 
So, instead of investing a relatively large sum directly into someone's business in the form of debt or equity, you can buy pre-packaged pieces of ownership in a businesses, called shares of stock, or pieces of outstanding debt, called bonds. 
Instead of buying actual physical stuff and storing it somewhere, you can buy claims on pieces of that stuff in convenient increments, without having to actually deal with it physically.

=Securities certificates=

Organized public markets have been in existence for hundreds of years. The first ever publicly traded company, the Dutch East India Company, was established in 1602 and first issued shares that traded on the Amsterdam exchange in 1606. Here's one of the securities issued by the company in the 1600s. 
Here are a couple more stock and bond certificates issued in the 19th and early 20th century.
These days paper certificates are almost entirely obsolete, having been replaced with computerized recordkeeping. 

=Pros and cons of public markets=

Public markets have grown in volume and variety tremendously over the years, since they provide a number of important advantages, all stemming from the ability to trade securities quickly and in reasonably-sized chunks. 
For instance, if you lend someone a few thousand dollars, but now need the money, you might have a tough time trying to sell the debt to someone else. If you own some publicly traded bonds, you have a much easier time liquidating these assets.
The small denominations also mean you can easily build a diversified portfolio invested in dozens, even hundreds of different assets, such that you are not risking too much on any particular enterprise.

Public markets have their downsides also, though.
First, there are fees involved for the various intermediaries, second, since the markets are convenient and liquid, there are many participants, and competition for assets often drives prices above what you'd pay for comparable value in the private market.

A lot more can be said about the investment universe, and probably will be in future videos. This is but a high-level overview of the possibilities.

=Investment returns=

So now let's take some time and apply what we know about rates of return to model the future of an investment portfolio. 

Let's address the hypothetical situation where you are going to save 5000 dollars every year starting now for the next 40 years. If you are about 20 years old now, that'll take you out to age 60 or so. 
We haven't discussed inflation yet, which is the change in the value of a unit of money, such as the dollar, over time. For now, let's just assume that all figures are adjusted for inflation. You can take my word for it that if we assume a 5% real rate of return, it is relatively reasonable, even a bit on the conservative side.

So, let's start our time line, and take it 40 years out.
Let's put our constants over on the side. Annual investment, 5000, rate, 5%. 
Let's keep track of the total investment value in the second column, and the annual dollar return in the next.
So at time 0, we invest our first 5000 dollars. 
By the end of the year, we earn 5% on that, which turns out to be 250.
Our total investment value at the end of the year is then the previous 5000, the 250 we earned as return, and the new 5000 that we are putting in.
Now, before we fill down, let's lock in the reference to the investment amount, and the rate of return.
Now fill down one, looks good, next year we make 512 in returns, add another 5000, and we are up to 15762.
Let's fill it down all the way and see what we observe.

So, 40 years later, we have about 640 thousand dollars to our name, and we made 30 thousand dollars in investment returns just in that one year. Not bad. One could probably retire on that relatively comfortably.
Notice that because our investment account grows every year, the dollar return we get also increases.

=Quiz 1=

Here's a question.
In what year does the dollar investment return become greater than the annual 5000 dollar contribution to our investments?
Take a moment, examine the spreadsheet, and see what you come up with.

Examining the stream of investment returns, we can see that in year 15, the growth in investments that is due to asset returns, 5394, is actually greater than the growth due to us putting in another 5000. And it only grows bigger from here.

=Quiz 2=

So let's say you are 20 years old. If you start saving the 5000 per year right now and earn that 5% rate of return, we have seen that you'll end up with 640K in assets by the time you are 60 years old.
What if you delay making contributions to your assets for 10 years, and start saving 5000 per year when you are 30. How much in assets will you have by the time you are 60?

If you delay for 10 years, you only have 30 years to go until you are 60. So you start with your first investment then, then go for 30 years. You can see that you have only 350K or so, or only a bit more than half of what you'd have had if you'd started saving immediately.

This is an important lesson, because it is a generally applicable observation regardless of the specific numbers you use. Time is your friend when it comes to compound returns, so the more time you give your assets to grow, the better off you are, and not just linearly, but exponentially so.

Let's plot the value of our assets on a chart. Select what we want to plot, and insert chart.

When you delay savings, you might at first think that you are just giving up this initial part, from time 0 to time 10. But what you are really giving up is the end part, from time 30 to time 40, because you end up with 30 rather than 40 years to build assets, which has a dramatic impact on the final outcome.

So, it is very important to spend less than you earn, also called 'living below your means', as early as possible, so that you can maximize the benefit of compound returns, and build that cushion of invested assets.

=Additional reading=

I hope you have gained an understanding of asset returns, and will take the lesson of the importance of prioritising your savings to heart.

If you are looking for more reading on the topic, The Richest Man in Babylon by George Clason is a fun yet informative read.

Thank you.

=Attributions=