August 9, 2024 • 19 mins
Are you truly aware of what you own in your investment and retirement accounts? Prepare to unlock the mysteries of investment funds and portfolio allocation on this episode of "Bullshit on Stilts." We promise you'll come away with a solid grasp of different investment products, such as individual stocks, mutual funds, index funds, and ETFs. Discover how these financial instruments work, their unique advantages, and the significance of diversification. We also dive deep into the concept of Net Asset Value (NAV), a critical factor in the pricing and trading of mutual funds. Get ready to boost your investment knowledge and sharpen your financial BS detector!
Understanding your investment posture and portfolio allocation is more crucial than ever. We'll guide you through the intricacies of what you own and why, shedding light on the importance of aligning your investments with your financial goals. By examining the various types of investments—stocks, bonds, mutual funds, and ETFs—we'll help you navigate the often confusing landscape of asset allocation. Through relatable analogies to lifestyle choices, we make sense of how different investment strategies can set appropriate expectations for market performance. Don't miss this enlightening discussion that promises to elevate your investment acumen and provide clarity in an often opaque financial world.
We love to hear your thoughts, questions, and ideas. Send us a text!
Developing your financial bullshit sniffer one episode at a time.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Welcome to Bullshit on Stilts, a podcast hosted by
two guys with vast financialbackgrounds and great bullshit
sniffers who call out the clichecrap, spackle and flap doodle
spewed by so-called expertsacross the landscape of
financial advice Identifying asdoctors of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
(00:24):
to bring you a lively, if notdeadly, mix of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
to bring you a lively, if notdeadly, mix of serious analysis,
hijinks and tomfoolery, allwithin a 99.1% bullshit-free
safe space.
Let's get after it All right.
Today, on Bullshit on Stilts,we're going to be exploring a
(00:44):
little bit deeper the first ofthe Fab Five for investing,
which is what do you own?
A big, important question, andso that's what our recording
effort is going to be on thismorning with Kelly and Mark.
So, mark, during the Fab Five.
Obviously, the first questionhere is what do you own in terms
of in your investment accounts,your retirement accounts, what
(01:05):
is it that you exactly own?
And I know we went through itpretty quickly during the Fab
Five itself and we want to takean opportunity to get a little
bit more detail for ourlisteners out there, to help
them develop their owncapabilities and, so to speak,
their bullshit sniffer.
Speaker 2 (01:20):
I'm really grateful for all that you do, right?
So, with what do you own?
Let's confine this to packageproducts, meaning mutual funds
or exchange-traded funds, maybeUITs and individual bonds and
individual stocks.
And so, kelly, it might beinformative and beneficial for
you to at least genericallydescribe what each one of those
(01:44):
individual investment types are.
Speaker 1 (01:48):
So I'm pausing for a second just to think through.
If you think of, like a wirediagram and everybody originally
thought of, when I invest money, I'm going to buy a stock in
Home Depot, I'm going to buy anindividual stock.
Most people don't think ofbuying individual bonds but an
individual stock.
Well, as the markets havechanged, the financial service
(02:11):
industry has evolved.
There's been this proliferationof investments that really are
funds, let's say genericallyfunds.
There are different types offunds and we'll walk through
that.
But when we think of anindividual stock, that's it.
I buy it, I own the number ofshares I purchased.
Stock goes up or down and I'mbeholden to that one individual
(02:33):
stock performance.
In this example, if I buy afund, I'm buying into a bucket.
They use the term pool ofinvestment.
So instead of one stock, maybethe fund I own has 100 stocks,
200 stocks, 300 stocks.
So with one share I now have afully diversified exposure,
(02:53):
let's say, to this stock marketin our example here.
So then you ask me, can I kindof go through the other one?
So there are different types offunds.
Right, the age-old mutual fundout there is a pool investment
on stocks and or bonds orwhatever it owns inside it.
Just think of it having abucket and it owns individual
securities underneath it or it'sempty stocks.
(03:13):
That mutual fund is kind of acool character because it's
always buying and selling itsown shares.
What I mean by that is when Ibuy a mutual fund selling its
own shares.
What I mean by that is when Ibuy a mutual fund, I don't buy
it at the moment I put mypurchase order in.
I buy it when the market closesat the end of the trading day
(03:34):
and then when I do buy it, it'sthe mutual fund that issues new
shares to me.
If I was selling it, conversely, the mutual fund would buy
those shares back from me.
So it's kind of a nice system.
The next step is going to a fundthat may have very, very little
management in it, called anindex fund.
It's called an index fundsimply because it tries to
(03:57):
deliver the same return that theindexes that we know and love
do on a yearly basis.
The indexes that we know andlove do on a yearly basis the
S&P 500 index, or the Dow Jones30 index, or the Wilshire 5000,
russell 1000.
There are boatloads of indexesthat represent the entire
investment world and there arelots and lots of index funds
(04:19):
that you can buy again a pool,and you get to purchase a share
and you're diversified, justlike the mutual fund.
The difference is the indexfund.
There's no active management.
They're typically very, veryinexpensive.
The last one I'll talk about isthe exchange-traded fund.
Again, pool fund, 100 stocks,300 stocks, whatever inside that
(04:39):
investment exchange-traded fund.
But here's the little nuance Anexchange-traded fund, also
known as an ETF, you can buy orsell that investment during the
day's trading.
Oh really, if I buy the ETF at11.30 am, I will basically have
purchased that security at 11.30am, whatever the price is in
(05:04):
the market today.
Or I could sell that ETF at1130 am.
It doesn't wait for the marketsto close in order to execute
buys and sells of the funditself.
Where a mutual fund does justthat, you got to wait.
You can put your purchase orsale order in at 1130 am, but
nothing will be transacted untilthe markets close.
And now your purchase or saleorder in at 1130 AM, but nothing
(05:25):
will be transacted until themarket's close.
And now your purchase or saleorders are executed.
Speaker 2 (05:28):
So explain that to me .
Why is it with an individualstock and an ETF, if I, for one
reason or another, want to buy,I think there's a buy signal for
one reason or another, or asell signal, or I just get
scared.
I can sell my individual stocksin my ETF scared.
I can sell my individual stocksand my ETF, but I can't my
(05:49):
mutual fund, whether it'sactively managed or it's an
index fund, because of somethingcalled a NAV correct.
Speaker 1 (05:54):
Yes correct.
Speaker 2 (05:54):
Can you explain that?
Speaker 1 (06:00):
This just in.
Investors can purchase or sellETFs when financial markets are
open during the trading day, butmutual funds can only finalize
purchase and sale orders afterfinancial markets have closed
and they've calculated thefund's net asset value Back to
you guys.
(06:20):
So if you take a mutual fund,an exchange traded fund or an
index fund anything as a fundthe NAV or net asset value is
simply.
I'll give you an example.
Let's say we run a fund andlet's say that there's 100
stocks in this fund and let'sjust say that every stock's
(06:41):
market value is $1.
And let's say there's 100shares that people own of our
fund.
As a result, what we do is wesimply take the value of all the
stocks our fund owns and wedivide that value by the number
of shares that people own of thefund.
That then results in the netasset value, which is the share
(07:02):
price of the mutual fund thatyou're either going to buy or
sell at on that given day,moment or what have you.
Speaker 2 (07:09):
All right.
So you have explainedindividual stocks, you've
explained mutual funds, bothactively managed as well as
index funds, and you'veexplained ETFs, which can be
actively managed as well asindex also.
Speaker 1 (07:25):
Really, what we're talking about is active versus
passive.
Right, an index strategy isconsidered passive.
So if you hear people talkingabout we invest your money in a
passive strategy, really they'reinvesting in index funds,
that's what they're doing, orexchange traded index funds.
Speaker 2 (07:40):
Right, so we also have other types of funds not
just stocks.
Speaker 1 (07:45):
We've covered stocks.
Speaker 2 (07:46):
We also have bonds or theme-based specialty.
Speaker 1 (07:51):
Sure, so it runs the gambit of the types of funds
that exist out there.
You can have a general fundlike the S&P 500, and it owns
basically similar names as theS&P does.
You can have a fund that onlyfocuses on a certain part of the
financial markets let's sayhealth care called a sector fund
.
Maybe there's an oil and gasfund which is a sector fund.
(08:13):
It could be financial servicesa sector fund.
So those funds focus theirinvestment holdings in a
specific arena health care.
If health care is doing wellthis year, pretty much all
sector funds that focus onhealthcare will be adding
positive returns to theirshareholders' pockets.
The others are specialty funds,or alternatives as they're
(08:36):
called, which is somewhat cheekand tongue here.
That, for instance, the firstone out there would be a real
estate investment trust, whichis a real estate fund.
It's a pooled vehicle, justlike we've been talking about,
but all it owns are real estateassets underneath it, and now
you have started to introducesome new assets types to an
(08:58):
investment plan.
Speaker 2 (08:59):
So, kelly, it seems to me that you've kind of outed
yourself as a contrarianinvestor, because you don't do
things tongue-in-cheek, you dothem cheek-in-tongue.
Is that fair enough?
And we do have funds that are.
Speaker 1 (09:12):
Well, I'm a little dyslexic, so it might be the
tongue-in-cheek andcheek-in-tongue got messed up
here.
It could be that.
Speaker 2 (09:19):
Well, it adds to the quaintness in your charm in this
part.
All right, so we've talkedabout individual stocks, we've
talked about specialty funds,we've talked about ETFs,
indexing, active management,specialty, but we also have
fixed income, which can get veryinteresting, almost as
interesting, because it's abigger market than the stock
market.
(09:39):
We can get into different typesof bonds, both individually as
well as in the mutual fund.
Can you just run down maybe thetop five or six?
Speaker 1 (09:49):
So in a portfolio, let's say, you're thinking about
, you're in your 401k plan,you're looking at the investment
options that you have and someof them undoubtedly are targeted
date retirement funds.
These are ragu.
Everything's in their kind ofportfolio.
The big differential is whatpercentage is in stocks versus
what percentage is in stocksversus what percentage is in
(10:09):
bonds.
As a result, when you thinkabout bonds, one the reason why
people add bonds to portfolio isto reduce, or theoretically
reduce, the volatility orvariation in the account value
day-to-day, week-to-week,month-to-month.
They're looking for morestability and maybe some income.
Well, within the bond market, asyou said, mark, it's a huge
(10:31):
market.
It dwarfs the stock marketsomething like six, seven, eight
fold.
So when we think about bonds inretirement accounts and so
forth, the biggest gorilla inthe group is going to be your
medium-term bonds,intermediate-term bonds, and
when we say that, we're talkingabout usually government bonds,
government agency bonds are inthere, mortgage backs are in
(10:54):
there, asset-backed bonds may bein there, corporate bonds may
be in there.
So it's kind of a potpourri,once again often of high-quality
bonds issued by financiallystrong institutions, entities
issued by financially stronginstitutions, entities,
municipalities and so forth.
When you add to that the nextstep that you'll find in
(11:14):
portfolios was usually UShigh-yield bonds.
High-yield bonds also known asjunk bonds.
Right, high-yield bondsactually add oomph to an
investment portfolio.
While they're bonds, theirreturn profile is very similar
to stocks and small cap andsmall cap big time.
So, as a result, what happensis when you get these high
(11:36):
flyers like a high yield bond oreven a small cap stock fund as
part of the recipe that you'reinvesting in or thinking about,
what you get is because they'remore volatile, because they have
a lot more highs and lows andthe rollercoaster ride of
investing.
What managers will do andadvisors will do is they'll try
to reduce the percentage ofdollars in those accounts or in
(12:00):
those areas to kind of absorbsome of that volatility, and I
think I'm getting off on atangent around the volatility?
Speaker 2 (12:07):
No, but it's an important tangent to get off on,
because we're talking aboutwhat do you own?
Yeah, and you are not incontrol.
If you say, well, I've got somefixed income and I got a mutual
fund or five mutual funds and Ithink I got a couple of stocks
in there, I was talked intoRight right, that's not control.
Or if you look at the pie charton your statement and you see I
(12:30):
have mutual funds, what doesthat mean?
That's right, you don't knowwhat's in there.
Is it all small cap?
Are there 10 of them?
10 small cap managers Are?
Speaker 1 (12:36):
you kidding me.
Speaker 2 (12:38):
I'm not kidding, bro, I'm not kidding.
Or are they a mix of large cap,mid cap, small cap, or all bond
funds, specialty funds, youdon't know?
Yes, yeah.
Speaker 1 (12:47):
No, that's true.
I think that it's tough forpeople when they're looking at
this, because they've gone to401k meetings, let's say, or
they've heard it.
They've met with advisors andthere's a lot of discussion,
there's lots of questions thatfinancial professionals will
pose to a client, prospectiveclient.
What have you?
The vast majority of thosequestions are driven toward what
(13:09):
percentage, what mix of stocks,bonds, cash and or specialty
investments is appropriate forthis person's time horizon, for
their risk tolerance, for allsorts of things that are in
these questionnaires.
Ultimately, the answers thatyou give to that financial
professional will, would youagree, dictate.
Is that too strong of a wordhere?
Speaker 2 (13:30):
No, let's use it.
Speaker 1 (13:31):
Yeah, dictate so the answers that you give to those
questions that you're asked willdictate what percentage of
stocks versus what percentage ofbonds, cash and or specialties
is suitable for thatprofessional to recommend.
And if you're not working with aprofessional and you're in your
401k plan and you're answeringan investor questionnaire, what
(13:53):
that plan is trying to do is dothe exact same thing without a
middleman.
Based on your answers to thesequestions, we identify you
having a moderate risk toleranceand, as a result, of the 24
investment funds you have inyour 401k, three of them meet
the needs of a moderate investor.
(14:13):
Here are the three, and that'swhat this is all about.
So for you to know what you oweis all about you being able to
sniff out the BS when it happens, or the salesmanship or
anything or any manipulationthat going on, and being sort of
aware that if I have lots andlots of stocks, I do expect my
volatility, the variation of thevalue of my account day to day,
(14:37):
week to week, month to month Iexpect that to be higher, much
higher than if I had only bondsin a portfolio or only
certificates to deposit from abank account.
So it really helps youunderstand what you can expect
in the trip of that investmenttime horizon.
Speaker 2 (14:56):
So what you own should be representative of your
investment, risk tolerance,your time horizon, what you're
attempting to accomplish with agiven portfolio.
So it provides a lot of clues.
Speaker 1 (15:10):
I often look at why you own something, what you want
to, and why you own it as theposture you take.
So if you're a fighter, youtake a posture just before you
get into fight your fightingstance.
If you're a golf player, youset your feet a certain way
depending on the type of shotyou have.
So you set your posture.
And so if you're sailing a boatand the weather's going to get
(15:31):
kind of rough, you set the sailsbecause of what's going to come
about.
How are you positioned in yourinvestment account to weather
the storm that is the financialstock and bond market?
Speaker 2 (15:45):
If I have intermediate-term and short-term
bond funds, I have large-capgrowth and income mutual funds.
That gives me a clue as to yourinvestment profile, your
investment objectives.
If I have lots of individualstocks pretty much small cap,
(16:06):
I've got some specialty funds intechnology, let's say, or in
metals.
That gives me a clue as to whatmy investment profile is for
risk as well as my investmentobjective.
Knowing what you own whenyou're looking at that and
you're reciting what you own,knowing what you own when you're
looking at that and you'rereciting what you own, not
specifically but at least ingeneral terms, does that kind of
(16:28):
match up.
That's why it's important toknow what you own.
Speaker 1 (16:36):
Some of the biggest issues that people have when
they're investing money isunfulfilled expectations.
Well, I got my money investedand boy, we're going to have a
banner year.
Last year was great and all ofa sudden, at the end of the year
, your portfolio ain't doingthat great.
And the question is well, whyisn't it doing that great?
The first question back wouldbe what do you own?
Why do you say the market didso well and you didn't?
(16:58):
And if we go back to your whowas it the Stanford or Princeton
professor that compared hissmall cap investment account to
large cap US stock account?
Yeah, that's kind of BushLeague.
Ultimately, a big part of theexplanation as to why you're
doing better or worse than themarkets depending on how you're
looking at the markets is goingto come all the way back to what
(17:19):
do you own, what's yourallocations and, inside that
allocation, how are youimplementing?
And we've been talking aboutthat.
But really, how do youimplement your allocation plan?
Do you use individual stocksand individual bonds?
Do you use some funds orindividual stocks and bonds?
Lots of clients that we'veworked with yeah, they have, in
some cases, individual bonds fora portion of their investment.
(17:42):
Some of them want to buy stocks, and so they'll have stock
holdings, and yet a lot of theother money may be in funds
index funds, exchange tradedfunds, mutual funds depending on
their proclivities, let's say,when it comes to investing, and
what they find to be theirapproach to it All right.
Speaker 2 (18:00):
So if I am a conservative investor and let's
put an investment objective or adiet objective to this, just to
have some fun with it?
Speaker 1 (18:09):
You're just looking at me, aren't you?
Yeah, because you know that Ihad some sweets last night and
so you're like maybe a diet?
Yeah, and don't take thispersonally.
Speaker 2 (18:17):
But you know, if I'm, you know borderline morbid
obese no, I'm not talking aboutyou.
I see, don't take thatpersonally.
But let's say, you know I'mtrying to lose 5 pounds or 10
pounds, and because I've got 5or 10 extra pounds on me, my
sugar levels might be a bit high, as well as my lipids, my
cholesterol level, and so whatam I stocked up on?
(18:38):
And I go to the pantry and whatdo I see, dor, and what do?
Speaker 1 (18:41):
I see Doritos hostess ho-hos carbs, slim jims, stuff
like that.
Speaker 2 (18:46):
Okay, so maybe there's a mismatch here.
I want pizza Indeed.
So knowing what you own givesyou clues.
Is it consistent with what youthink you're trying to
accomplish?
Speaker 1 (18:58):
Yes, and, as we've been belaboring this, it's about
all the things inside youraccount, or accounts, and how do
they break down when it comesto stocks, bonds, cash and or
specialties.
What percentage is in there?
And that'll be a great guidefor you to have appropriate
expectations when markets go upand when markets correct and go
(19:19):
down.
So the next thing we'll betalking about is number two why
do you own it?
Welcome to Bullshit on Stilts, a podcast hosted by
two guys with vast financialbackgrounds and great bullshit
sniffers who call out the clichecrap, spackle and flap doodle
spewed by so-called expertsacross the landscape of
financial advice Identifying asdoctors of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
(00:24):
to bring you a lively, if notdeadly, mix of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
to bring you a lively, if notdeadly, mix of serious analysis,
hijinks and tomfoolery, allwithin a 99.1% bullshit-free
safe space.
Let's get after it All right.
Today, on Bullshit on Stilts,we're going to be exploring a
(00:44):
little bit deeper the first ofthe Fab Five for investing,
which is what do you own?
A big, important question, andso that's what our recording
effort is going to be on thismorning with Kelly and Mark.
So, mark, during the Fab Five.
Obviously, the first questionhere is what do you own in terms
of in your investment accounts,your retirement accounts, what
(01:05):
is it that you exactly own?
And I know we went through itpretty quickly during the Fab
Five itself and we want to takean opportunity to get a little
bit more detail for ourlisteners out there, to help
them develop their owncapabilities and, so to speak,
their bullshit sniffer.
Speaker 2 (01:20):
I'm really grateful for all that you do, right?
So, with what do you own?
Let's confine this to packageproducts, meaning mutual funds
or exchange-traded funds, maybeUITs and individual bonds and
individual stocks.
And so, kelly, it might beinformative and beneficial for
you to at least genericallydescribe what each one of those
(01:44):
individual investment types are.
Speaker 1 (01:48):
So I'm pausing for a second just to think through.
If you think of, like a wirediagram and everybody originally
thought of, when I invest money, I'm going to buy a stock in
Home Depot, I'm going to buy anindividual stock.
Most people don't think ofbuying individual bonds but an
individual stock.
Well, as the markets havechanged, the financial service
(02:11):
industry has evolved.
There's been this proliferationof investments that really are
funds, let's say genericallyfunds.
There are different types offunds and we'll walk through
that.
But when we think of anindividual stock, that's it.
I buy it, I own the number ofshares I purchased.
Stock goes up or down and I'mbeholden to that one individual
(02:33):
stock performance.
In this example, if I buy afund, I'm buying into a bucket.
They use the term pool ofinvestment.
So instead of one stock, maybethe fund I own has 100 stocks,
200 stocks, 300 stocks.
So with one share I now have afully diversified exposure,
(02:53):
let's say, to this stock marketin our example here.
So then you ask me, can I kindof go through the other one?
So there are different types offunds.
Right, the age-old mutual fundout there is a pool investment
on stocks and or bonds orwhatever it owns inside it.
Just think of it having abucket and it owns individual
securities underneath it or it'sempty stocks.
(03:13):
That mutual fund is kind of acool character because it's
always buying and selling itsown shares.
What I mean by that is when Ibuy a mutual fund selling its
own shares.
What I mean by that is when Ibuy a mutual fund, I don't buy
it at the moment I put mypurchase order in.
I buy it when the market closesat the end of the trading day
(03:34):
and then when I do buy it, it'sthe mutual fund that issues new
shares to me.
If I was selling it, conversely, the mutual fund would buy
those shares back from me.
So it's kind of a nice system.
The next step is going to a fundthat may have very, very little
management in it, called anindex fund.
It's called an index fundsimply because it tries to
(03:57):
deliver the same return that theindexes that we know and love
do on a yearly basis.
The indexes that we know andlove do on a yearly basis the
S&P 500 index, or the Dow Jones30 index, or the Wilshire 5000,
russell 1000.
There are boatloads of indexesthat represent the entire
investment world and there arelots and lots of index funds
(04:19):
that you can buy again a pool,and you get to purchase a share
and you're diversified, justlike the mutual fund.
The difference is the indexfund.
There's no active management.
They're typically very, veryinexpensive.
The last one I'll talk about isthe exchange-traded fund.
Again, pool fund, 100 stocks,300 stocks, whatever inside that
(04:39):
investment exchange-traded fund.
But here's the little nuance Anexchange-traded fund, also
known as an ETF, you can buy orsell that investment during the
day's trading.
Oh really, if I buy the ETF at11.30 am, I will basically have
purchased that security at 11.30am, whatever the price is in
(05:04):
the market today.
Or I could sell that ETF at1130 am.
It doesn't wait for the marketsto close in order to execute
buys and sells of the funditself.
Where a mutual fund does justthat, you got to wait.
You can put your purchase orsale order in at 1130 am, but
nothing will be transacted untilthe markets close.
And now your purchase or saleorder in at 1130 AM, but nothing
(05:25):
will be transacted until themarket's close.
And now your purchase or saleorders are executed.
Speaker 2 (05:28):
So explain that to me .
Why is it with an individualstock and an ETF, if I, for one
reason or another, want to buy,I think there's a buy signal for
one reason or another, or asell signal, or I just get
scared.
I can sell my individual stocksin my ETF scared.
I can sell my individual stocksand my ETF, but I can't my
(05:49):
mutual fund, whether it'sactively managed or it's an
index fund, because of somethingcalled a NAV correct.
Speaker 1 (05:54):
Yes correct.
Speaker 2 (05:54):
Can you explain that?
Speaker 1 (06:00):
This just in.
Investors can purchase or sellETFs when financial markets are
open during the trading day, butmutual funds can only finalize
purchase and sale orders afterfinancial markets have closed
and they've calculated thefund's net asset value Back to
you guys.
(06:20):
So if you take a mutual fund,an exchange traded fund or an
index fund anything as a fundthe NAV or net asset value is
simply.
I'll give you an example.
Let's say we run a fund andlet's say that there's 100
stocks in this fund and let'sjust say that every stock's
(06:41):
market value is $1.
And let's say there's 100shares that people own of our
fund.
As a result, what we do is wesimply take the value of all the
stocks our fund owns and wedivide that value by the number
of shares that people own of thefund.
That then results in the netasset value, which is the share
(07:02):
price of the mutual fund thatyou're either going to buy or
sell at on that given day,moment or what have you.
Speaker 2 (07:09):
All right.
So you have explainedindividual stocks, you've
explained mutual funds, bothactively managed as well as
index funds, and you'veexplained ETFs, which can be
actively managed as well asindex also.
Speaker 1 (07:25):
Really, what we're talking about is active versus
passive.
Right, an index strategy isconsidered passive.
So if you hear people talkingabout we invest your money in a
passive strategy, really they'reinvesting in index funds,
that's what they're doing, orexchange traded index funds.
Speaker 2 (07:40):
Right, so we also have other types of funds not
just stocks.
Speaker 1 (07:45):
We've covered stocks.
Speaker 2 (07:46):
We also have bonds or theme-based specialty.
Speaker 1 (07:51):
Sure, so it runs the gambit of the types of funds
that exist out there.
You can have a general fundlike the S&P 500, and it owns
basically similar names as theS&P does.
You can have a fund that onlyfocuses on a certain part of the
financial markets let's sayhealth care called a sector fund
.
Maybe there's an oil and gasfund which is a sector fund.
(08:13):
It could be financial servicesa sector fund.
So those funds focus theirinvestment holdings in a
specific arena health care.
If health care is doing wellthis year, pretty much all
sector funds that focus onhealthcare will be adding
positive returns to theirshareholders' pockets.
The others are specialty funds,or alternatives as they're
(08:36):
called, which is somewhat cheekand tongue here.
That, for instance, the firstone out there would be a real
estate investment trust, whichis a real estate fund.
It's a pooled vehicle, justlike we've been talking about,
but all it owns are real estateassets underneath it, and now
you have started to introducesome new assets types to an
(08:58):
investment plan.
Speaker 2 (08:59):
So, kelly, it seems to me that you've kind of outed
yourself as a contrarianinvestor, because you don't do
things tongue-in-cheek, you dothem cheek-in-tongue.
Is that fair enough?
And we do have funds that are.
Speaker 1 (09:12):
Well, I'm a little dyslexic, so it might be the
tongue-in-cheek andcheek-in-tongue got messed up
here.
It could be that.
Speaker 2 (09:19):
Well, it adds to the quaintness in your charm in this
part.
All right, so we've talkedabout individual stocks, we've
talked about specialty funds,we've talked about ETFs,
indexing, active management,specialty, but we also have
fixed income, which can get veryinteresting, almost as
interesting, because it's abigger market than the stock
market.
(09:39):
We can get into different typesof bonds, both individually as
well as in the mutual fund.
Can you just run down maybe thetop five or six?
Speaker 1 (09:49):
So in a portfolio, let's say, you're thinking about
, you're in your 401k plan,you're looking at the investment
options that you have and someof them undoubtedly are targeted
date retirement funds.
These are ragu.
Everything's in their kind ofportfolio.
The big differential is whatpercentage is in stocks versus
what percentage is in stocksversus what percentage is in
(10:09):
bonds.
As a result, when you thinkabout bonds, one the reason why
people add bonds to portfolio isto reduce, or theoretically
reduce, the volatility orvariation in the account value
day-to-day, week-to-week,month-to-month.
They're looking for morestability and maybe some income.
Well, within the bond market, asyou said, mark, it's a huge
(10:31):
market.
It dwarfs the stock marketsomething like six, seven, eight
fold.
So when we think about bonds inretirement accounts and so
forth, the biggest gorilla inthe group is going to be your
medium-term bonds,intermediate-term bonds, and
when we say that, we're talkingabout usually government bonds,
government agency bonds are inthere, mortgage backs are in
(10:54):
there, asset-backed bonds may bein there, corporate bonds may
be in there.
So it's kind of a potpourri,once again often of high-quality
bonds issued by financiallystrong institutions, entities
issued by financially stronginstitutions, entities,
municipalities and so forth.
When you add to that the nextstep that you'll find in
(11:14):
portfolios was usually UShigh-yield bonds.
High-yield bonds also known asjunk bonds.
Right, high-yield bondsactually add oomph to an
investment portfolio.
While they're bonds, theirreturn profile is very similar
to stocks and small cap andsmall cap big time.
So, as a result, what happensis when you get these high
(11:36):
flyers like a high yield bond oreven a small cap stock fund as
part of the recipe that you'reinvesting in or thinking about,
what you get is because they'remore volatile, because they have
a lot more highs and lows andthe rollercoaster ride of
investing.
What managers will do andadvisors will do is they'll try
to reduce the percentage ofdollars in those accounts or in
(12:00):
those areas to kind of absorbsome of that volatility, and I
think I'm getting off on atangent around the volatility?
Speaker 2 (12:07):
No, but it's an important tangent to get off on,
because we're talking aboutwhat do you own?
Yeah, and you are not incontrol.
If you say, well, I've got somefixed income and I got a mutual
fund or five mutual funds and Ithink I got a couple of stocks
in there, I was talked intoRight right, that's not control.
Or if you look at the pie charton your statement and you see I
(12:30):
have mutual funds, what doesthat mean?
That's right, you don't knowwhat's in there.
Is it all small cap?
Are there 10 of them?
10 small cap managers Are?
Speaker 1 (12:36):
you kidding me.
Speaker 2 (12:38):
I'm not kidding, bro, I'm not kidding.
Or are they a mix of large cap,mid cap, small cap, or all bond
funds, specialty funds, youdon't know?
Yes, yeah.
Speaker 1 (12:47):
No, that's true.
I think that it's tough forpeople when they're looking at
this, because they've gone to401k meetings, let's say, or
they've heard it.
They've met with advisors andthere's a lot of discussion,
there's lots of questions thatfinancial professionals will
pose to a client, prospectiveclient.
What have you?
The vast majority of thosequestions are driven toward what
(13:09):
percentage, what mix of stocks,bonds, cash and or specialty
investments is appropriate forthis person's time horizon, for
their risk tolerance, for allsorts of things that are in
these questionnaires.
Ultimately, the answers thatyou give to that financial
professional will, would youagree, dictate.
Is that too strong of a wordhere?
Speaker 2 (13:30):
No, let's use it.
Speaker 1 (13:31):
Yeah, dictate so the answers that you give to those
questions that you're asked willdictate what percentage of
stocks versus what percentage ofbonds, cash and or specialties
is suitable for thatprofessional to recommend.
And if you're not working with aprofessional and you're in your
401k plan and you're answeringan investor questionnaire, what
(13:53):
that plan is trying to do is dothe exact same thing without a
middleman.
Based on your answers to thesequestions, we identify you
having a moderate risk toleranceand, as a result, of the 24
investment funds you have inyour 401k, three of them meet
the needs of a moderate investor.
(14:13):
Here are the three, and that'swhat this is all about.
So for you to know what you oweis all about you being able to
sniff out the BS when it happens, or the salesmanship or
anything or any manipulationthat going on, and being sort of
aware that if I have lots andlots of stocks, I do expect my
volatility, the variation of thevalue of my account day to day,
(14:37):
week to week, month to month Iexpect that to be higher, much
higher than if I had only bondsin a portfolio or only
certificates to deposit from abank account.
So it really helps youunderstand what you can expect
in the trip of that investmenttime horizon.
Speaker 2 (14:56):
So what you own should be representative of your
investment, risk tolerance,your time horizon, what you're
attempting to accomplish with agiven portfolio.
So it provides a lot of clues.
Speaker 1 (15:10):
I often look at why you own something, what you want
to, and why you own it as theposture you take.
So if you're a fighter, youtake a posture just before you
get into fight your fightingstance.
If you're a golf player, youset your feet a certain way
depending on the type of shotyou have.
So you set your posture.
And so if you're sailing a boatand the weather's going to get
(15:31):
kind of rough, you set the sailsbecause of what's going to come
about.
How are you positioned in yourinvestment account to weather
the storm that is the financialstock and bond market?
Speaker 2 (15:45):
If I have intermediate-term and short-term
bond funds, I have large-capgrowth and income mutual funds.
That gives me a clue as to yourinvestment profile, your
investment objectives.
If I have lots of individualstocks pretty much small cap,
(16:06):
I've got some specialty funds intechnology, let's say, or in
metals.
That gives me a clue as to whatmy investment profile is for
risk as well as my investmentobjective.
Knowing what you own whenyou're looking at that and
you're reciting what you own,knowing what you own when you're
looking at that and you'rereciting what you own, not
specifically but at least ingeneral terms, does that kind of
(16:28):
match up.
That's why it's important toknow what you own.
Speaker 1 (16:36):
Some of the biggest issues that people have when
they're investing money isunfulfilled expectations.
Well, I got my money investedand boy, we're going to have a
banner year.
Last year was great and all ofa sudden, at the end of the year
, your portfolio ain't doingthat great.
And the question is well, whyisn't it doing that great?
The first question back wouldbe what do you own?
Why do you say the market didso well and you didn't?
(16:58):
And if we go back to your whowas it the Stanford or Princeton
professor that compared hissmall cap investment account to
large cap US stock account?
Yeah, that's kind of BushLeague.
Ultimately, a big part of theexplanation as to why you're
doing better or worse than themarkets depending on how you're
looking at the markets is goingto come all the way back to what
(17:19):
do you own, what's yourallocations and, inside that
allocation, how are youimplementing?
And we've been talking aboutthat.
But really, how do youimplement your allocation plan?
Do you use individual stocksand individual bonds?
Do you use some funds orindividual stocks and bonds?
Lots of clients that we'veworked with yeah, they have, in
some cases, individual bonds fora portion of their investment.
(17:42):
Some of them want to buy stocks, and so they'll have stock
holdings, and yet a lot of theother money may be in funds
index funds, exchange tradedfunds, mutual funds depending on
their proclivities, let's say,when it comes to investing, and
what they find to be theirapproach to it All right.
Speaker 2 (18:00):
So if I am a conservative investor and let's
put an investment objective or adiet objective to this, just to
have some fun with it?
Speaker 1 (18:09):
You're just looking at me, aren't you?
Yeah, because you know that Ihad some sweets last night and
so you're like maybe a diet?
Yeah, and don't take thispersonally.
Speaker 2 (18:17):
But you know, if I'm, you know borderline morbid
obese no, I'm not talking aboutyou.
I see, don't take thatpersonally.
But let's say, you know I'mtrying to lose 5 pounds or 10
pounds, and because I've got 5or 10 extra pounds on me, my
sugar levels might be a bit high, as well as my lipids, my
cholesterol level, and so whatam I stocked up on?
(18:38):
And I go to the pantry and whatdo I see, dor, and what do?
Speaker 1 (18:41):
I see Doritos hostess ho-hos carbs, slim jims, stuff
like that.
Speaker 2 (18:46):
Okay, so maybe there's a mismatch here.
I want pizza Indeed.
So knowing what you own givesyou clues.
Is it consistent with what youthink you're trying to
accomplish?
Speaker 1 (18:58):
Yes, and, as we've been belaboring this, it's about
all the things inside youraccount, or accounts, and how do
they break down when it comesto stocks, bonds, cash and or
specialties.
What percentage is in there?
And that'll be a great guidefor you to have appropriate
expectations when markets go upand when markets correct and go
(19:19):
down.
So the next thing we'll betalking about is number two why
do you own it?
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