In his book Saving and Investing, Michael Fischer writes:
Compounding our money with a return over a long period is the key to accumulating larger sums, but what is it that allows our money to receive a return, and what determines whether this return will be good or bad? […] As savers and investors, a key way for us to compound our money is by directly or indirectly making our money available to users of capital. Users of capital can be companies or governments, who are looking for money to undertake projects or to buy something.
This relationship between providers and users of capital forms the backbone of our financial markets and our economic system. Before diving into the first of two parts on this topic, Michael explains why it's important to start here:
Starting with the right thing (1:34)
What is capital? Capital is money. Capital can take other forms — real estate, for example — but for our purposes, capital is cash available for investment, cash which can be used to build bridges and construct factories, and so on. When we, as investors, provide capital to governments and companies, each party hopes for a positive return through this arrangement. Michael explains:
Providers and users of capital (7:47)
Obviously, this is not a sexy topic; it's difficult to locate additional information about it on the web. I did, however, find one excellent article about how venture capital works, which does a fine job of illustrating the relationship between providers and users of capital.
Author: Michael Fischer
Michael Fischer spent nine years at Goldman Sachs, advising some of the largest private banks, mutual fund companies and hedge funds in the world on investment choices. For more information, visit Michael's site, Saving and Investing, or purchase his book.
Not a sexy topic?!?! I disagree. OK, maybe that’s just me. Adding my two cents. It makes sense to borrow money (capital) if what you can do with that capital right now enables you to do a lot more than if you tried to save up the money and then built your new investment. For example, let’s say I’m taking the bus to work at a job that pays $8/hour. However, if I buy a car for $3000, I can commute to a different job that pays $16/hour. In this case, it would make sense for me to borrow money… Read more »
These videos are fascinating. Since these posts are about the basics of finance, I thought I’d try giving it a shot to “boil” it all down to the most basic steps for success. Here goes: 1. Work your butt off. 2. Save as much as you can. 3. Stay the hell outta debt. 4. Fund a money-market emergency fund to at least 10K. ING is a good place to open such an account. 5. Invest for retirement,i.e., open a Roth IRA and stick it in a broad stock-market index fund, like The Vanguard Total Stock Market Index Fund. 6. Buy… Read more »
11. I got to thinking that I would actually add one more step to my above list … I don’t have kids, so I tend to forget this one, but if you have kids, you should start an ESA,i.e., an Educational Savings Account. Start this when your kids are babies and let it grow tax free in a broad stock market index fund, like The Vanguard Total Stock Market Index Fund.
5a) or your employer’s 401k, particularly if it offers an employer match. (Free money.)
And while I like Vanguard Total Stock Market, I’d suggest that if you’re going to pick *one* fund in your retirement account you’d be better served by picking an age-appropriate Vanguard Total Retirement fund. Better diversified, and automatically adjusts the risk profile as you near retirement; both good things if you’re a hands-off investor.
(FWIW, I hold Target Retirement 2035 in my Roth.)
JD, I was kind of skeptical at first but I’m liking this guy more and more. I think I may have to watch all these things again.
I was feeling really low the past few days and interestingly today’s videos have perked me up a bit.
I do keep wanting to wash his hair though! lol
db
@James Kew:
Just my 2 cents, but those “age appropriate” accounts are SUPER conservative. If you’ve got 18 years to retirement I’d do it myself. My brother has a Fidelity Freedom Fund 2040 and he returned 8% last year. By comparison I returned 22.5% with a mix of international, real estate, dividend and growth funds. Just remember as you get closer to retirement to move more money into something less volatile like bonds and/or blue chips.
@Seth: this may depend on how you define “super conservative”. It may also depend on what fund family you use. But I think labelling all target-date funds as “super conservative” is dangerously misleading. Current constituents of Vanguard Total Retirement 2035: 71.9% Vanguard Total Stock Market Index Fund 10.3% Vanguard European Stock Index Fund 10.3% Vanguard Total Bond Market Index Fund 4.8% Vanguard Pacific Stock Index Fund 2.7% Vanguard Emerging Markets Stock Index Fund This is in no way “super conservative”; a 90/10 stock/bond allocation with some worldwide diversification on the stocks. Your returns are excellent, but is it possible that… Read more »
I would be the first to admit that my investments are pretty aggressive, but I can afford that risk since I have another 45 years to retirement.
I shouldn’t have been so general. I guess the point is do your homework (which you obviously have) before investing in any fund. I can definitely see the convenience for a hands off investor. I guess that’s just not me.