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Okay, as I promised, let's start off with

a brief discussion of just what is meant

by the concept of return on investment, or

rate of return on investment.

>> The easiest way to think about this is

to imagine that you invested $100 in an

investment vehicle, on January 1st of a

given year, If your investment is worth

$110 by December 31st of that year, you've

earned a rate of return of 10 percent.

So if that investment is worth only $105,

the return is five percent and so own.

Now, in considering your rate of return,

the next big

concept I want to introduce, Is the

difference between the

nominal and real rate of return on

investment, the nominal

return is the "what you see is what you

get" return.

In our earlier example, if you wound up

with a $110 on December 31st you're

nominal return

was 10%, but what if over the course of

the year the rate of inflation was 10%?

In this case your real rate of return,

which is the nominal

rate minus the rate of inflation, would be

a big, fat zero.

In other words, all you would have done

that year is tread water with your

investment, because you $110 is worth the

same as the $100 you invested a year ago.

And sure, you now could cash that

investment in $110, but your purchasing

power would not have increased because

with

inflation, everything costs a little bit

more.

The broader point here is to pay attention

to how inflation may

affect your investment returns, and that

kind of attention may help you choose

investment vehicles that are better at

protecting you from things like inflation

or recession, this fact is an excellent

segue to the concept of diversification.

The central idea behind diversification,

is that

different investment vehicles have

different levels of risk.

And sometimes, by combining the right

investment

vehicles, you can reduce your overall

risk.

The classic example to teach

diversification, is that

of the umbrella company and the suntan

lotion company.

In any given year, if it rains a lot more

than the

sun shines, the umbrella company is going

to make relatively more profit than

the suntan lotion company, of course, the

opposite is true when a draught

rolls in, and the sun shines high in the

sky all day long.

Now as an investor with say a million

bucks, hey, I'm a generous guy.

You could choose to invest in the stock of

either one of

the two companies, and if it's a rainy

year and you pick the

umbrella company, you would win big, but

on the downside, if you picked

the sun tan lotion company, you would get

burned, sorry about that pun.

So, to diversify, one thing you could do

is

simply divide your investment funds

equally between the two companies.

That way, in the parlance of Wall Street,

you have "hedged" your risk, for if

one company suffers in any given weather

year,

chances are the other company will do

well.

>> Of course the key point here, as you

move

forward in your life, is to be aware not

just of

the various risks of investment, but also

be mindful of

how you can allocate your investment funds

to diversify your risk.

[MUSIC]

a brief discussion of just what is meant

by the concept of return on investment, or

rate of return on investment.

>> The easiest way to think about this is

to imagine that you invested $100 in an

investment vehicle, on January 1st of a

given year, If your investment is worth

$110 by December 31st of that year, you've

earned a rate of return of 10 percent.

So if that investment is worth only $105,

the return is five percent and so own.

Now, in considering your rate of return,

the next big

concept I want to introduce, Is the

difference between the

nominal and real rate of return on

investment, the nominal

return is the "what you see is what you

get" return.

In our earlier example, if you wound up

with a $110 on December 31st you're

nominal return

was 10%, but what if over the course of

the year the rate of inflation was 10%?

In this case your real rate of return,

which is the nominal

rate minus the rate of inflation, would be

a big, fat zero.

In other words, all you would have done

that year is tread water with your

investment, because you $110 is worth the

same as the $100 you invested a year ago.

And sure, you now could cash that

investment in $110, but your purchasing

power would not have increased because

with

inflation, everything costs a little bit

more.

The broader point here is to pay attention

to how inflation may

affect your investment returns, and that

kind of attention may help you choose

investment vehicles that are better at

protecting you from things like inflation

or recession, this fact is an excellent

segue to the concept of diversification.

The central idea behind diversification,

is that

different investment vehicles have

different levels of risk.

And sometimes, by combining the right

investment

vehicles, you can reduce your overall

risk.

The classic example to teach

diversification, is that

of the umbrella company and the suntan

lotion company.

In any given year, if it rains a lot more

than the

sun shines, the umbrella company is going

to make relatively more profit than

the suntan lotion company, of course, the

opposite is true when a draught

rolls in, and the sun shines high in the

sky all day long.

Now as an investor with say a million

bucks, hey, I'm a generous guy.

You could choose to invest in the stock of

either one of

the two companies, and if it's a rainy

year and you pick the

umbrella company, you would win big, but

on the downside, if you picked

the sun tan lotion company, you would get

burned, sorry about that pun.

So, to diversify, one thing you could do

is

simply divide your investment funds

equally between the two companies.

That way, in the parlance of Wall Street,

you have "hedged" your risk, for if

one company suffers in any given weather

year,

chances are the other company will do

well.

>> Of course the key point here, as you

move

forward in your life, is to be aware not

just of

the various risks of investment, but also

be mindful of

how you can allocate your investment funds

to diversify your risk.

[MUSIC]

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