So why do big investment banks say you should be happy with 10% portfolio return a year? In this video
I'm gonna go over some basics of passive investing and why as an active investor or active trader you can beat those 10%
returns a year comfortably
Hey welcome, on this channel
We talk about stocks and options
With the idea of taking a passive investor into an active trader while allowing you to maintain a full-time job
Or trade as a full-time job, so if you're new here consider subscribing and today
We're going to be talking about passive investing versus actively investing or trading
so to quickly go through some basics of the stock market the number one reason why it is so powerful is because
compounding interest
But because companion interest takes so long to play out you really have to start early to be able to see the potential of
Compounding interest as you can see here it takes 20 years to really see that
Exponential growth that you get from compounding interest
And if you put it on to thirty years or four years or even 50 years
The potential you can get from the stock market is kind of mind-boggling
Another reason to start actively investing and taking control over your finances and working towards financial goals is
The stock market is complicated, and you're gonna make mistakes and those mistakes are gonna
Cost you money, and if you wait until you've seen exponential returns already you're gonna
Have a lot more money at risk and that's gonna affect you more in the long run now to go through a few
basic passive investing strategies
I'm gonna tell my story on how I learned about the stock market
Initially and really what I saw about past
Investing that was pretty flawed and one in the end pushed me towards active investing and active trading
so the first strategy being a stock portfolio this consists of you going out yourself and
Buying 20 to 40 different stocks these stocks would then diversify your portfolio
essentially decreasing your risk
compared to if you just went out and bought one or two stocks if
One of those stocks crashed your whole portfolio would end up crashing as well and compared to having a stock portfolio
You just have a little section of your portfolio that crashes
And that's not as big of a deal as a beginner go out and buying 20 to 40 different stocks
I didn't know how to do that some of those stocks can cost a thousand dollars a share so if you wanted to
Allocate one percent of your portfolio to that certain stock and it costs a thousand dollars
Your trading account would have to be a hundred thousand dollars
This pushed me to learn about mutual funds and think of a mutual fund like a stock portfolio
But it's created through people pooling their money together if I had a thousand dollars
I could not buy twenty to forty different stocks
so then I could go and buy into a mutual fund and
I would then get the same return as that mutual fund so if that mutual fund made ten percent return over the year
I would then make ten percent return on my money that I invested as well
Then the question was which mutual fund do I buy there are thousands of different mutual funds?
And I didn't know how to gauge which ones I should buy
This led me to seeing that I should look for ones that are beating the S&P 500 index return
Which is considered to be the leading indicator of how the market is doing as a whole this let mean ascetics on
Choosing different mutual funds. This is a graph of
mutual funds versus the S&P 500
With the S&P 500 being that market indicator, and that's the red line and as you can see
the mutual funds will either beat the index or lose and get less return than the market and
So I found out that a lot of mutual funds really don't end up beating the stock market
or it's just hard to choose a mutual fund that will beat the stock market and
That can really be 50/50 chance
With the idea that mutual funds were kind of a gamble on which ones would be the stock market and which ones wouldn't I?
Actually found index funds and index funds are designed get the exact same returns as the stock market
So there are also a stock portfolio that you buy into
But there one that is matched exactly to what is in the stock market index so for the sp500
Which is on this graph if you?
Buy into the S&P 500 index fund you will be getting a portion of those 500 companies that the S&P
500 has in its index with the motto of if I can't beat the market I might as well be the market
Index funds made a lot of sense the only problem was
nixed funds and just long-term pinehold strategies
They don't make money in a downwards market and in a sideways market
To give you an example of what I mean by a sideways market
We're gonna look at the S&P 500 again
and this is a chart of more than 20 years if you were holding an index fund between the years of
around 1998 to around
2011
that's what I mean by a sideways market the market did go up and down, but your
portfolio amount would have been the exact same at the beginning of
that 1998 and at the end of that around 2011 in the
Grand scheme of things do you actually would have lost money due to inflation?
This makes it so buying hold strategies like index
Funds only make money when the market goes up
They lose some money when the market goes sideways, and they lose money when the market goes down
And this is why I believe active investing or active trading
Allows you to make money in all three of those scenarios
Another quick thing is if you're gonna
Go the bind hold strategy the stock market crashes a lot
And so if you're gonna have all your money in the index fund of the stock market
You're gonna have to realize in your lifetime of holding over the next 30 or 40 years
You're gonna have to watch your account go through swings of maybe 30 to 50 percent
And I know that I couldn't personally
Sit through my money blue using that much value over the course of a couple years
So why is a small-time investor can we look to beat those hedge funds or just beat the stock market return in general
This is because of our account size those hedge funds
Allocate tens of billions of dollars to buying one stock for us, we're allocating
Nothing compared to that and this allows us to either buy that stock or sell that stock
instantaneously without affecting the price of the market if one of those hedge funds put 30 billion dollars
Into buying a stock at one time that stock would skyrocket
And they don't want to do this because this loses them out on a lot of profits
so it'll take them months to buy up a position or
sell an old position and
because of that they miss out on a lot of gains or
Potential gains because hedge funds take so long the bias on stock
they will start buying before they really should and
So it will look something like this as it is trending down to where they want to buy it
they will have to buy at a loss and
Then as it gets to the price point that they want they will again continue to start buying it
But they will then buy as it starts going up losing out on potential gains
and
Then as the stock gets to the price point that they want to sell out
They will have to start selling earlier than they want to as well
Missing out on some of the profits
And then they will have to start selling later than they want to as well missing them out on
Locking in their profits
And so this creates their profit zone to be something like this to where they can't capture the whole move
Comparing this to us
We can buy right the bottom and sell rate the top this gives us the profit potential of that whole move
I don't want to mislead you and say you'll be able to buy right at the bottom and sell right at the top
Perfectly every time, but this is why we can beat the stock market returns and the professional hedge funds
They can't buy and sell
Instantaneously like us when we see a potential for profit
We can allocate our whole portfolio right away
And we can sell our whole portfolio as soon as we see that profit potential not there anymore these hedge funds
Have a lag time in buying and selling
Causing them to not have as much profit potential as us so the first thing I looked into on how to grow my small account
was penny stocks and penny stocks are really small value companies that trade for pennies a share and
because they trade like this they can be so volatile and
As you can see in this one it gained almost 30 percent in one day
This allows you to make the same gains on your account
But because they trade so quickly you really have to make a full-time job of trading penny stocks
And that's really not what I wanted to do while I was in school
Because I want to start actively trading while being in school or maintain a full-time job. I started looking at trading non. Penny stocks and
These stocks will still make substantial gains
But it will just be over a couple days or a couple weeks
As you can see on this stock it took a couple weeks to make a twenty percent gain
But because it took that time it would allow you to be able to trade this while having a full time job
or being a full-time student
But if you wanted to date rate you could still do that
You could either buy shares or you can buy options which would leverage your shares
And this would allow you to still get the same returns that those penny stocks would give you every day
But the beauty of this is if you started learning while having a full-time job
And then started mastering the markets and you want it to start day trading you could do that and switch
but if you started with penny stocks you would have to only day trade and
Making that switch from having a full time job to just leaping into something like that really isn't possible
Hey, thanks for watch this video subscribe if you want to start actively investing and take control over your financial future if you have any
Burn questions right now ask them in the comments below. I will get back to them and with that in mind. I'll see you soon
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