Portfolio Analysis (Stocks, Bonds, Crypto, etc.)

Episode Transcript
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Chris Holling (00:00):
If I if I was going to invest do I put it all

(00:02):
into the space, which some have,and some have absolutely been,
like a success with it so I youknow it's it's not like it's
impossible I it's it's just soit to me it's it's more of a
dice roll, then some gamblingwould be this is the truth about

(00:24):
investing back to basics podcastWe want to help you take control
of your personal finance andlong term investments. If you're
looking for a way to learn thewhy and how of investing, then
you found the right place. Thankyou for taking the time to learn

(00:46):
how to better yourselves.
Introduction there it is. TheWelcome Welcome. Welcome.
Welcome. Welcome. Welcome.
Welcome. Welcome, ladies.

Sean Cooper (00:57):
A lot of welcomes

Ladies and gentlemen, to the next episode
of the truth about investingback to basics. My name is Chris
Holling.

And I'm Sean Cooper.

And we are continuing on with our season
four where the first stretchbecause now we're actually
looking at the episode plan isaddressing analysis is an
analysi portfolio analysi.
That's, that's the technicalterm, right?

Yeah.

Because last time, we were able to talk about
the differences betweentechnical tech Whoo, man,
technical and fundamentalanalysis, and kind of helping
break down how to do both ofthose and how they work and what
they are. And this time, we aredoing portfolio analysis,

(01:59):
whereas the following we'relooking at stock portfolio
analysis. And that's, that'sbecause they're different. So
Sean tells me

Indeed they are.

Oh, right. And I have to guess things. So. So my
guess when when I think of aportfolio, I think I picture a
person walking around with thisbig the, I'm gonna say manila
envelope that is large enough toneed to be carried in a

(02:33):
briefcase. And the Clark Kentlooking figure that carries this
briefcase will then pull out theportfolio and legal pad, and it
has big

That's a padfolio.

Well,

just saying,

Okay, alright. So the Clark Cent looking figure it
with the briefcase in the manilaenvelope, opens it on a port of
the sea, and now has a portfolioand it says, on the manila
envelope, it says port folio,and it's it's written with that
Sharpie where you know, it'shandwritten, but you don't know

(03:13):
by who, because nobody'shandwriting is that good. And
it's, it's on there almost likea stamp. And then you open it.
And there's graphs and piecharts in it. And these graphs
and pie charts have lots ofpercentages in it, and they have

(03:35):
names of other they haveabbreviated names of companies
that you partially owned,because shoot, no, that's a
stock portfolio. You know,

but you, you you brought up this important point,
their stock portfolio, and thatis the distinction that I'm
trying to make stock analysis,which is individual security
now, or individual securityanalysis, as opposed to
portfolio analysis.

You lost me. It's a portfolio analysis but not a
Stockport, but they're both. Weopened it on a port, it's a
portfolio. Okay, so

right, but my point is that you're saying stock
portfolio analysis. And thatwould fall under what we're
covering today.

No, it says it says hello, hello, noise making
phone. It's it. Okay. I've gotI've got it says technical
fundamental analysis thenportfolios

That was last week,

right then portfolio.

That's this week.

And then stock portfolio analysis is the next
one.

No, The next one should just be stock analysis

Well, then my introduction meant nothing,

or securities analysis is more accurate but

Alright. So you're on a port with a
briefcase and it has stock, piecharts and you own shares in a
pie company. And, and whileyou're looking at your pie
companies on a port, then youalso realize that you need to
make sure that you pay the guysthat are keeping your stuff

(05:17):
safe. So you hire privatesecurity. And so that's that's
how you have a securityportfolio. stock portfolio that
you

The fact that you've kept this going as long
as you have is credence to yourimprov ability. I'm impressed

if you should be one thing, you should be
efficient. I okay. All right.
Well, I'm glad that we clearedthis up while we're recording
that, that, hey, this next timethat we're recording portfolio
analysis is different than it'snot different. How am I not
drinking, this is ridiculous

next time, we're talking about security analysis.

Whoa, whoa.

Specifically Stock analysis, but security analysis
is the general topic.

That's this time or next time.

No, that's next time this time is portfolio
analysis.

I'm changing this now. Security port folio, no
security analysis

no whipe portfolio from next week's all together,
this time is portfolio next timeis security or stock
whatever you want to put theiris fine

security analysis.

Correct.

Okay, watch this reintroduction, I might even
start the music again. Watchthis happen, you know, now that
everybody's watched mommy anddaddy fight. Okay.

(06:59):
Welcome, ladies and gentlemen.
My name is, Chris, Hollingright, that was

I'm Sean Cooper

there you go say

That was Sean Cooper, you're just going to do
the whole thing for us.

I'm trying

Fire away, fire awy.

And, and so we are we are addressing the the
stock portfolio analysi series,where, where we are doing stock
portfolio analysis today. Andnext time, we're looking at
security analysis, which isunrelated.

I mean, they have their relation,

I knew you were gonna say that that's why I
stopped and I whatever, whatwhat the hell is a stock
portfolio analysis, Sean, cuzclearly my description of having
a security team out on the portof whatever isn't what we're
after, anyway? I'll just uphere. I'm over here. Just you

(07:57):
go. I'm listening.

Okay, so portfolio analysis, whether you're
referring to stock portfolios,or bond portfolios, or your
overall portfolio in general iswhat we're discussing today, as
opposed to, as opposed toindividual security analysis,
which would be analyzing anindividual stock an individual
company or an individual bond,which again, is just analyzing

(08:23):
the individual company and theoffering that they're they're
presenting, you could alsoanalyze an individual security
in the form of a you know, anETF, although you're not
analyzing the underlyingsecurities, per se.

What Okay, well, hold on. What's an ETF though?

exchange traded fund =

Okay, See,

we've talked about that before

Yeah, well, that's fine. But you know, for I
knew that. I was just seeing, ifyou knew that. No

Yeah.

It's it's hard.
You know, like, I

no, it's a lot. And there's a stupid number of
acronyms.

Yes. Sorry, continue. Proceed.

So the goal is just to talk about portfolio
analysis, which is a lot of whatsome of the things we've talked
about in the past have built upto when we talked about
correlation, technical andfundamental analysis, those
things kind of feed intoportfolio analysis. So the goal
today is to give you some tools,as Chris likes to say tools for

(09:29):
the tool belt to actuallyevaluate your own portfolio.

You know, I normally talk about a toolbox
but I do like

Oh tool for the toolbox. My bad

like the idea that, that when when you
visualize my mottos, though, youpicture me as like a big bad
construction worker, though, youknow, like, posing,

absolutely.

This is safe, okay. I'm sorry. I was I was
having a village people moment.
Okay?

Anyway, so give you some tools to kind of evaluate
your own portfolio potentiallymeans of improving upon it or
building it differently if needbe in the future.

Okay,

so there's a couple different things when you're
looking at your overallportfolio and, you know,
building it out going forward.
We've talked aboutdiversification in the past how
that related to correlation. Soone of the first things that you
can do when evaluating youroverall portfolio is actually
looking at the holdings that youare invested in, and how well

(10:41):
diversified they are. So acouple different tools that you
can use for that Morningstaroffers, like their, what are
they called, their style boxes.
So it, if you're looking at astyle box for stocks, they range

(11:01):
from small cap to large cap, sosmall, mid, and blend, and
that's the capitalization of thecompany, how large they are,
basically, and then whether theyare a value stock, a growth
stock, or a blend somewhere inthe middle. So you end up with
nine different boxes in there,the Morningstar style box. So if

(11:24):
you're trying to be diversified,you want to at least fill some
of those boxes, and you know,branch some of the extremes in
that box. With that said,You're, you're still just
talking about stocks. From thatstandpoint, you're not talking
about bonds and a variety ofother investments. And you're
also just talking about,potentially, you could just be

(11:45):
talking about domestic stocks,not even talking about
international stocks. So that'sone level of diversification is
that if you look at that stylebox, another would be what I
alluded to earlier. So lookingat the global investment
universe, so as opposed to justinvesting in US stocks, you're

(12:06):
looking at European or Asian orSouth American, Africa, stocks.
And you get start getting intosome emerging markets, even
micro or frontier markets, whichwould be even less developed
than the emerging markets. Sosome of those, you know, they

(12:27):
become fairly risky as you youget down that line, but they
also can potentially enhancereturns, that's just along the
stock universe. So then youcould also apply that that
Morningstar style box to each ofthose, those regions. So small
cap large cap value to growthwithin each different continent,

(12:49):
if you will.

And, and so then you

go ahead,

sorry. So when, when we're doing this, and it's
the, that's what we're workingon, is we're working on the
analysis of the stock portfolio.
And we're,

not a stock portfolio, just portfolio in
general, whether it's comprisedof stocks, bonds, what we've
talked about so far is juststocks, I was about to jump into
bonds, but

right, okay. But But when you're when you're
looking at this, you're you'resaying that, as you have these
other options, you the way I wasgetting it was that you're
talking about the different waysto do looking at correlation,
diversification, type, typeapproaches. And the analysis

(13:31):
portion of it is, is taking allthose things in consideration
and seeing where, where thingsare, should be diversified,
where things should be offset,and where, where does, where
does

so far, we're just talking about evaluating your
own portfolio and findingweaknesses in it,

okay.

Or if you should be building a portfolio from
scratch, these are some thingsyou want to consider as you're
going about it. Sospecifically, right now just
talking about diversification,because we've already talked
about correlation and howimportant that is, to a
portfolio and the ability topotentially reduce risk or
enhance returns, and thecombination of those two factors

(14:14):
via correlation anddiversification. And so these
are some ways that you candiversify your portfolio some of
the things you might consider asyou're going about diversifying
your portfolio,

which is done due to your analysis, or can be done
due to your analysis

this, this whole thing is analyzing the
portfolio? This is the analysis

I'm just tying little bows as we're, as
we're moving forward, tiny.

Has nothing. So when we talked about like
technical and fundamentalanalysis last week?

Yes.

A lot of that will not apply to today. That that
mostly applies to the followingwhich the stock analysis now

Security analysis

there are aspects of it that could potentially
Apply to today. But forportfolio analysis, we're
jumping back a couple weeks tothe diversification, the
correlation, and then we'll bebringing in some other aspects
that you would want to analyze.
When looking at your wholeportfolio. It's a bit more basic
approach, then what we'll getinto next week as we start to

(15:21):
tie in some of the moretechnical aspects of it. More
the numbers when we analyze anindividual security,

right,

but it's something that anyone can do anyone should
do when looking at theirportfolio, because it's just
important to have at least abase level understanding of how
to evaluate your own portfolio,even if you've hired an expert
to do it for you, understandingwhat it is that they are doing,

(15:53):
and being able to spotweaknesses in their own
knowledge base. So

I totally agree with that.
I think that's really important.

Anyway, so we've talked about that. Stocks and
diversification among your thisthe stock portion of your
portfolio. Then there's also thediversification, so
diversification between assetclasses, so stocks, bonds,
alternatives. So we've talkedabout that first piece, the

(16:23):
stocks inside the bonds, if youlooked at like, again, that
morning styles, Morningstarstyle box, it's gonna be quite a
bit different for bonds, you'relooking at the, the credit
rating of the company. Soranging from what is it triple,
triple A double A. Okay, so onthe bond side, Morningstar style

(16:46):
box, you're looking at thecredit rating, so low, medium,
and high, which is based ontypically like Moody's s&p, they
do credit ratings for differentcompanies, ranging from triple A
would be a very high rating downto B or B two, and then even
below B or below B two. And onceyou get I think you cross the

(17:10):
threshold of from triple B downto double B is where you break
into the high yield what theyclassify as high yield or junk
bonds. But again, you're lookingat that spectrum of low, medium
and high in terms of creditrating. And then you also have

(17:31):
the the duration of the bond,which is really a combination of
the length of the bond and thethe coupons they're paying to
calculate out the interest raterisk. So you've got as far as
the interest rate risk limited,moderate and extensive. So
typically, the shorter term thebond, the higher the coupon, the
lower the interest ratesensitivity is going to be. So

(17:53):
you could have a, again, it's anine box style nine box grid,
and you can fill each aspect ofthat grid with pieces of your
bond portfolio.
So it's just different ways toexpand the diversification of

(18:14):
your your overall portfolio. Soyou're diversifying between
stocks and bonds. So equity andfixed income, you're
diversifying in terms of styleand internet region. On the
equity side, you can do the samething on the bond side diversify
in terms of the style, or thecredit rating and the the

(18:36):
interest rate sensitivity aswell as where you are
geographically. So providingthat diversification helps
offset various risks that youmight take on in the portfolio.
Other ways, as you get beyondthat, those are some of the
traditionally speaking, if youlook at the modern portfolio

(19:03):
theory, MPT, which some peopleclaim modern portfolio theory is
dead, and I just think theydon't fully understand modern
portfolio theory because theybelieve it only applies to
stocks and bonds. And I thinkthey're, they're missing a big
aspect of what modern portfoliotheory was trying to get in the
first place.

Sounds like they're not very modern to me.

modern portfolio theory has been around for quite
some time. So for the idea thatit's modern is it's kind of
silly at this point

When does something stopped becoming
modern?

I don't know.
That's a good question. Is therea timeframe?

I don't know.
That's why I'm asking you

I don't know. At any rate, so, modern portfolio
theory, when it was firstintroduced, was specifically
applied to stocks and bonds andit goes back to that idea of
diversification and having lowercorrelated asset classes. So
traditionally The bonds offsetthe stocks, when stocks do

(20:02):
poorly, the bonds did at leastdecent. Unfortunately, what we
found is for diversificationpurposes, when things go really
bad, like 2008, most things tendto do fairly poorly. Now, there
were certain types of stocksthat actually or excuse me
certain types of bonds thatactually did fine in 2008, or

(20:23):
did well, relatively speaking.
But there were other assetclasses that actually did even
better. So from my standpoint,modern portfolio theory is,
should just be extended toexpand additional asset classes
that have come about over theyears. So you start looking at
alternative asset classes,alternative assets, alternative

(20:43):
strategies, and start addingthose into the portfolio and
evaluating their correlation tosome of these more traditional
asset classes, to figure out howyou can blend the portfolio to
optimize the risk and return foryour particular risk tolerance
and your ability to assume risk.

(21:04):
So some of the things that mightcome up as you're, you're
building out a portfolio orenhancing a portfolio. After
you've already covered these,these traditional asset classes.
You might look at emergingmarkets, managed futures, some

(21:24):
hard asset classes, so realestate, even natural resources,
private equity, mergerarbitrage, things like covered
calls, convertible arbitrage,these are all alternative assets
and alternative strategies thatcan be mixed into the portfolio
to try to enhance that riskreward relationship via

(21:49):
diversification and correlation.
Now, I'm not going to jump intoeach of these asset classes
today, because

That's a lot

It would take hours. But we will talk about
some of them in future episodes,especially if someone has one in
particular they'd like us todelve into, we can do that just
hit us up, let us know. Anyway,so when analyzing your
portfolio, that's one of thefirst things you can do is
evaluate your owndiversification. Now, actually,

(22:17):
calculating the correlation ofyour portfolio is a little bit
more challenging, but you don'tnecessarily have to know the
exact calculation. If you haveExcel, you can plug in the
historical returns annualhistorical returns of any two
asset classes, and plug in asimple equation into Excel. And

(22:40):
it will calculate thecorrelation between the two
asset classes to give you anidea. Now, again, that that
correlation from a historicalstandpoint, if you you go out,
oftentimes, it's calculated forthree years, sometimes five
years, yeah, if you're using atool to analyze these things,
for you just understand what itis evaluating, if it's three

(23:04):
years, five years, what haveyou. And know if it's
incorporating some of the reallyimportant periods. For example,
if it's incorporating, like2008, yes, you might find two
asset classes that are have notbeen correlated, over the last
three to five years, maybe theyhad a low correlation of say,
like point one or somethingalong those lines close to zero.

(23:27):
But if you look at 2008, theircorrelation jumped to like, .6
.7, that's not as advantageousas something that might have a
correlation today of say, youknow, negative point one, and in
2008, had correlation ofnegative point eight, they
actually went in oppositedirections, that's fantastic. In
a period, like 2008, so anyway,

well, and I'm just trying to, it's so hard I
this is something that we runinto several times when we're on
here, where we have numbers thatare just just auditory, and it's
and it's difficult to not justwrite them down and such. So
when, when we're looking atthese things, and we're and I

(24:10):
understand that, you know, it'sbest to go back and listen to
the correlation, diversificationtype stuff, when you're when
you're looking at all this whenyou're evaluating these
different percentages ofpositive versus negative and,
and such, but for, for juststarting out and just starting
to look at these things and juststarting to evaluate like we are

(24:30):
building a portfolio we've we'venever built a portfolio before.
And we're putting this alltogether and we're starting to
keep track of some of thesethings. Then we are we putting
these negative versus thepositive, side by side to each
other. Are they in differentcategories that you try to
separate like bigger broadcategories as you're doing this?

(24:51):
Or is it all just one big listof positives and negatives in in
the numbers? How do you how doyou organize that

You mean when you're if you're actually going
into the process of calculatingcorrelation,

no, when you're keeping track of the the
different amounts that you havehere. So like, let's say that
you're paying, paying goodattention to where the positives
and negative percentages are,are happening.

What do you mean positive and negative
percentages?

Isn't that what you just said? That you haven't?

Yes, I was referring to correlation
specifically.

Yes. So when you're keeping track of your
correlation, how do you maintainthe organization for that? Where
Where do you? Are? Is this justyou keeping those numbers in
mind? Do you when you're whenyou're building a portfolio?
Because that's what we're doinghere? Is this something that you
are? I have no, never built aportfolio before? Like, I have
no idea. I have a general, Ihave a general idea of of that.

(25:44):
I'm sure I'm not describing itvery well. I hope that that made
sense. What I'm trying to ask,not at all

kind of, so let's say for example, if you're just
getting started,

right

As a hypothetical, something you could do would be
to take a standard asset class.
So state take the returns of thes&p 500. Okay, that's an index,
you can there's lots ofdifferent ETFs, and even mutual
funds that track that index thatyou can invest in.

Right,

that would give you broad diversification. for
domestic large cap stocks,

yes.

If you were taking that as your basis, and then you
wanted to diversify from there,you could take these various
asset classes that I'm talkingabout, and calculate their
correlation to the s&p 500.

Okay,

so you could take the Barclays Capital aggregate
bond index, and calculate thecorrelation. And a lot of this
stuff is going to be available,depending on what tools you're
using, what investment groupyou're using, or application
that you're using, it mayalready have this calculated
out, there's a good chance thatit will at some somewhere. But

(27:07):
you can calculate thecorrelation of those two asset
classes. The lower thecorrelation, the more it's going
to diversify the portfolio, themore it's going to reduce the
perceived risk. And here we'retalking about risk in terms of

(27:29):
standard deviation.

Okay.

And that strict standard deviation, not just
downside standard deviation,that a lot of people utilize, or
skew or kurtosis, or anythinglike that, just standard
deviation, which we can talkmore about. But you can do that
with any any asset class, youcan evaluate that correlation.

(27:54):
And again, any any of the lowerlower correlation. Provide has
more potential to provideenhancements to the portfolio in
terms of reducing risk. Now, thelong term rate of return of each
of those asset classes, alsoimpacts the portfolio obviously.

(28:15):
So for example, if you're addingasset classes, an asset class
that has a lower rate of return,you're blending in those those
two rates of return, which,depending on the blend,
depending on the correlation,may potentially reduce the
return if we're just talkingabout two asset classes, then

(28:37):
it's most likely going to reducethe rate of return. If you add
in a another asset class that islower. As you start to build out
multiple asset classes, you canadd in asset classes that have
higher rates of return and lowercorrelation. Typically, they're
going to be very risky on astandalone basis. But when
blended into the portfolio, youcan actually mix and match these

(29:00):
to potentially enhance returnswhile also simultaneously
reducing risk, or maintainingthe same risk while enhancing
returns or keeping returns thesame while reducing risk. So you
can start to mould the portfolioas you add in different asset
classes based on their rates ofreturn and the correlation from

(29:21):
your to your other asset classesthat you're comparing to or your
overall portfolio. Does thatmake sense?

I think so. Yeah.
Because I mean, the theunderstand the analysis is the
is the base level ofunderstanding in order to make
those things happen. And that's,that's what I'm trying to say is
like, we we know that we want tocreate an analysis we want to
look at, at all thepossibilities of taking in a
variety of asset classes as thisis being built. And I was more
saying a like, Hey, I I'mbuilding a portfolio today. I've

(29:54):
got this legal pad in front ofme. Now what do I do was kind of
was kind of what I was asking,essentially of like, how do you
even organize that from the getgo at all, which I think you've
touched on some of that. Andthat's, it's to have?

Yeah, I mean, that's kind of what I'm trying
to get at is. When I'm talkingabout an analysis, I'm talking
about analyzing or evaluatingyour overall portfolio. And if
you're starting from scratch,then it's a matter of checking
off all of these boxes. When Iwas talking about
diversification, I was talkingabout that stuff, those style
boxes, those are all differenttypes of stocks, or bonds or

(30:34):
asset classes that you caninvest in, that are going to
provide some level ofdiversification for your
portfolio. So if you're, you're,you've got a blank page in front
of you. And you've got the, thestyle box, you're trying to fill
in a bunch of those differentstyle boxes with your

(30:55):
investments.

Right. Right. I think I'm beginning to
understand that. Now.

Okay.

I was just trying to make sure that there was a
bottom up, here's what we'redoing, here's where we're going.

Right.

Okay, good.

So other ways that you can continue to enhance or
evaluate your portfolio. We'vetalked about exchange traded
funds versus mutual funds, andactive versus passive
investments, those are anotherway of diversifying even within
the same asset class. So youcould have potentially an ETF

(31:41):
that invests in large cap growthcompanies. So that's one of the
style boxes, large cap growth.
So you could have passive ETFsthat invest in those so you
could have an active mutual fundthat invests in those same
companies. But even that isgoing to provide some level of
diversification. Now, whether ornot it's sufficient
diversification to warrant thecost and warrant the effort is

(32:03):
debatable. But my point is thateven the difference between
active versus passive investingcan provide a level of
diversification and choosing howthat fits into your portfolio
goes into this overall analysisof your portfolio,

which we also touched on in our active versus
passive.

Exactly,

yeah. Okay, full, circle. Look at us go. Good. I
like it.

Yeah, exactly.
So another thing to evaluate,and this one is probably just as
important as a lot of theseothers, and that is the cost of
your portfolio. How much is itcosting you to build out this
portfolio, and you want toevaluate everything. There was
actually a report conducted byor a study conducted by

(32:51):
Morningstar, I brought them up acouple different times today.
And they evaluated a variety ofdifferent factors trying to
assess which assess whichfactors influenced your rate of
return the most. Now, we'vealready covered the idea that,
you know, Harry Markowitz vieweddiversification as the one true

(33:12):
free lunch. And I would say,it's not necessarily free, but
it's a relatively cheap lunch,if you will. And that that
absolutely impacts your yourrate of return,

I enjoy a good burger king run every once in a
while.

But this study evaluated a number of other
factors, things that mostinvestors would assume create
could potentially greatly impactyour your rate of return, the
one thing out of everything theyevaluated that had a positive
correlation to your rate ofreturn was the cost, meaning the

(33:48):
lower the cost, I guess it wouldbe an inverse correlation. The
lower the cost, the better yourrate of return, it was very,
very simple. Even their ownMorningstar star rating
classification had nocorrelation to future returns.
It was actually a slightnegative correlation, not a huge

(34:08):
one, but a slight negativecorrelation. So the one thing
that actually could predictfuture returns was the cost of
the portfolio.

Interesting,

lower the internal, the lower the internal expense
ratio of the fund that you wereinvesting in, the better the
returns. So if you apply that tothe thinking of your overall
portfolio, cost is one of thethings that you can easily
control is within your control,and that actually impacts your
rate of return. So keep a veryclose eye on cost. And there are

(34:41):
multiple levels you can controlthat cost. If you're hiring
someone, know what they'recharging, you know how they're
charging you. If you hiresomeone that tells you they're
not charging you anything. Athey're lying to you

That's true.

But B they're. It's most likely The way they're kind
of getting around it is the funditself is paying them. So they
personally are not charging youthe fund is charging you and
then paying them so or payingtheir broker dealer and then
paying them. So it's kind ofroundabout. But anyway, the

(35:16):
point being understand what whatyou are paying your professional
if you choose to hire them,either they are fee based or
commission based if they're feebased, it means they are billing
you directly. Know what they'rebilling you if they are
commission based, know whichfunds they are using, and what
those funds are billing arecharging you. Which brings me to

(35:39):
the second level of the feestructure, which is any funds
that they're using, most likelyhave their own fees. And we
talked about mutual funds,typically around that one to 2%
annual fee depending on whichclass they're using. So one of
the most common, especiallyamong commission based advisors

(35:59):
is going to be an a share,mutual fund. a share mutual
funds typically charge about 5%upfront, meaning you invest
$100,000 5000, of that instantlygets taken out as not invested,
that's their fee, most of itgets paid out to the broker
dealer which gets paid to youradvisor. That's what they're
getting paid so only 95,000 ofthat initial 100,000 is actually

wow, being invested. Now that's
that's average, some A sharescharge more or less. But that's
that's pretty typical is 5%upfront. And then the mutual
fund is still going to chargesomething on the back end,
annually, roughly one 1%, someof the more expensive ones get

(36:39):
up to two on the A share a shareside. And a portion of that is
going to be a 12 b one fee or asales and marketing fee, which
is normally about 25 basispoints or one quarter of 1%. And
that is also getting paid out tothe broker dealer which is
getting paid to your advisor. Sothey are getting paid. It's just
a matter of how they're gettingpaid. So you've got in this in

(37:01):
the on the commission basedside, you're not actually
necessarily looking at what theadvisor is getting is billing
you because they're notnecessarily billing you directly
you're looking at what the theshare class they're using is
charging you, if they're using Bshares have basically gone away,
if they're using C shares, it'stypically a little there's

(37:23):
there's no upfront fee, there'sno, that initial fee isn't
there, like with the A shares,but their annual fee is going to
be higher. So probably closer tothat 2% range.
If somebody is using ETFs, orexchange traded funds, those,
those funds typically have muchlower internal expense ratios

(37:45):
than the mutual funds that we'vebeen talking about. So maybe
around the 30 basis points. Sothat's point three of 1% 1%
would be 100 basis points. So 30basis points, point three,
those, those are just averages.
So you want to look up whatthose actual fees are for the
funds that you're utilizing, insome cases, they're even

(38:06):
utilizing fund of funds. Soespecially target date funds,
any type of retirement date fundor target date funds, those are
fund of funds and there areother fund of funds out there as
well. But the it's it'sliterally a mutual fund that is
made up of a bunch of othermutual funds, so it's gonna have
its own internal expense ratio,and then all the funds that it

(38:26):
holds have their own internalexpense ratio well. Okay.

And so you have to dig into it and determine what
the additive expense is thatyou're actually charging what
you're actually paying. Ifyou're in a retirement fund,
like a 401k, sometimes the fundit's or the the program itself
will have a fee that you'rebeing billed as well. But that's

(38:54):
kind of getting into the weedsfor general purposes, your
advisor fee, the internalexpense expenses of the funds.
And then one of the things thatmost people are not familiar
with when it comes to fees, isthe fees associated with trading
the the turnover in that thosefunds. And oftentimes, that's at

(39:16):
least historically, that's beendisclosed in the statement of
additional information. So it'snot even in the prospectus where
most people might look,although, I think they've
started to shift to disclosethat in the prospectus now, as
well, but it's not included inthat internal expense ratio,
because it changes so much yearover year, they're not required
to disclose in the internalexpense ratio, it's an

(39:37):
additional fee that you have togo hunting for it, on average
increases the fees of your fundsby about 40%. So if

Jeez

your internal expense ratio is one now it's
one point you're most likelypaying closer to 1.4. If it's
two you're paying closer to 2.8.
If it's only point three, thenyou're really paying closer to
What is that point 42

That's a lot.

Yeah, anyway, so they start to add up, if even if
you're buying just individualstocks, or in the case of the
exchange traded funds, thebroker dealer may be charging a
transaction fee. So there may bea fee associated with every
single trade you make. So everytime you buy or sell, you want
to know what those are, if thatfee is only $5, it's not a

(40:28):
killer, but it's still going toadd up if you're doing a lot of
trading. If that fee is $50 pertrade, it's really going to eat
into your returns if you'redoing more trading.

Is this is this stuff? The the different
transactions that occur? The thepercentages that are sometimes
involved in the upfront or? Orduring? Or are these all
relatively easy to find? Ifyou're talking to somebody that
that is running these, say, amutual fund or something like

(41:00):
that? Like is, is it is it easyto track down the information of
where these transactions are? Orwhere, where these fees

Not always no

Okay,

some of it is, so the internal expense ratios,
those are pretty well disclosed,if you're using a trading
platform, they're going to haveit typically disclosed, you
know, on their summary page, theadditional fees that are
associated with the trading andthings of that nature, typically
are not. I've actually gotteninto arguments with wholesalers
of mutual funds that said thatthey didn't have any additional

(41:33):
fees, and then I had to show itto them in their their own
company's statement ofadditional information.

Oh, wow.

So even some of the professionals in the industry
are not familiar with all of thefees associated with investing.

Okay. Wow, that's, impressive

But again, it is one of the things that you can
control, it's one of the thingsyou want to be aware of

Sure.
Which is super important. Ifyou're, if you're taking this on
whether whether you're bringingsomebody on or you're you're
doing it yourself. That's

right,

I think that's very valid,

oh, some trading platforms. Maybe they're not
charging, like trading fee.
They're a lot of the newer ones,the Do It Yourself ones, because
they have a lot of clients thathave very small investments,
they're actually charging like aflat monthly fee. Maybe it's $1.
And maybe it's a few dollars,you want to evaluate those fees.

(42:30):
I've talked to people who had,you know, just a few $1,000
invested. Or even less than thata couple $100 invested on these
platforms. And they're payingit's like 12 bucks a year. But
if you only have a couple $100invested, that's actually a very
high percentage fee that you'repaying, and your ability to

(42:53):
offset that via gains in themarket becomes incredibly
difficult your your returns,your potential rate of return is
hampered a great deal

Gotcha.

So you want to evaluate the fees. In terms of
your overall investment. don'tjust look at it and go, Oh,
well, they charged me 50 centsfor this or they charged me a
buck for this or something alongthose lines. How does that
actually impact your potentialrate of return? If you're

(43:27):
investing 100 bucks, and theycharge you five bucks $5 for it?
That's 5%

Yeah,

that's not insignificant.

Absolutely.
That's a good point.

If you invested $10,000, and they charge you
five bucks, yeah, that'sprobably no big deal. But this
is one of the things you cananalyze, evaluate, when you're
looking at your portfolio, orwhen you're building a portfolio
is the cost.

Okay, yeah, but that makes a lot of sense. And
then it just depends on what youare and aren't comfortable with
and what is available to you.
Because some of these also sitas as programs that you
automatically get placed intothrough through your employer as
well. If it's

correct,

if it's through However, it's the the several
different retirement optionsthat are available to you if
you're if you're looking into itif you don't look into it, but
you know, say say so I have a457 that I have that I know that
there are options to to lookinto have go through this amount

(44:33):
for this fee, and somebody willmanage your stuff. And I think
I've glanced over what thatamount was but I don't think I
thought too hard about it. Andso I think it's going to be a
good opportunity for me to go inthere and and have a look at
that personally.

Yeah,

because really to me all I saw it as initially is
very much a Oh, well. You knowthis. What do you mean you want
me to keep track of this stuff.
I don't want to keep track ofthis stuff here. Yeah. Oh, it's
it's it's $5 Yeah. $5. Okay.

Right.

So I'll be interested to see where mine
sit. And so I was, I was reallyjust addressing that because
that's, that's something that incase, whoever's listening hasn't
considered that, then it mightnot just be a matter of Oh,
well, I need to consider thesefees, or I need to consider
these percentages. If I go and Italk to somebody, if somebody

(45:29):
approaches me, if I decide thatI might try to take on one of
these funds, or I start doingsome of this stuff actively, it
might already be part of yourday to day as it is currently.
And it might be something that'sworth evaluating, like, I need
to go and evaluate on my own.
today.

Yeah. So anyway, those are the kind of the big
three that you can do to startevaluating your own portfolio is
diversification. evaluating yourdecisions between passive and
active management, andcontrolling the cost of your

(46:11):
portfolio, those are, those arethe big three that you should,
should be doing kind of on aminimum. Beyond that is where we
start to get in the weeds, itbecomes more of a numbers
intensive game, where you'reactually evaluating your overall
portfolio. And it's, it's aboutits performance to a degree, but

(46:33):
it's also about it's the risksassociated with the performance
that you're you're getting. So

I think that's reasonable. I just, I just think
it's great that we, we coveredon a couple of subjects that
happened previously, that we're,we're addressing today, as if
you knew that these werebuilding blocks that were
important for a future episodeand a future season. Once upon a
time. It's like

that was the idea.

It's like you planned this out. And I and I
showed up and got confused acouple of times along the way.

Yeah, so if you do want to get more into the weeds,
plot out the performance of thethe portfolio, you could do a
monthly or quarterly most likelyannually, look at the average
return, calculate the standarddeviation. And then what you can
also, I alluded to this earlier,you can take just the negative

(47:40):
returns and calculate thenegative standard deviation. So
the negative volatility, and seehow wide those swings are to
evaluate the portfolio. You cando this when evaluating even
like mutual funds, or ETFs. Ifyou're comparing multiple to one
another, comparing that averagereturn the standard deviation,

(48:06):
the negative standard deviation,you can even start to compare
skewness or kurtosis, which likeI said, that that's not
something that we're going todelve into deeply today.

Good because I can't even spell that.

But those are things you can use to evaluate
your overall portfolio. And whenwhen you're using those, what
you're you're looking for. Andthe reason that I like the
standard deviation, you take aan asset class and you calculate
out its average return, there'sa difference between it's it's

(48:43):
the geometric return and theaverage return. So the average
return is just the averagereturn that you might expect to
see on any in any given year.
Okay, or whatever time periodyou're evaluating, but that's
average return, you might expectto see in any given year, the
geometric return accounts forthat standard deviation, and is
the annualized rate of returnthat the investor is actually

(49:07):
experienced. So you could havetwo asset classes that have the
exact same average rate ofreturn call it 10%. So each
asset class average rate ofreturn 10%, any given year,
you'd expect each one to beabout 10%. Now, obviously,
there's going to be a variety ofreturns that happen, and that's

(49:31):
where the standard deviationcomes into play. But if one of
those asset classes has astandard deviation of say 5%,
and the other has a standarddeviation of 15%, the geometric
return, so the return that youactually experience on an
annualized basis for the onewith the 15% standard deviation

(49:54):
is actually going to be lowerthan the one with the 5%
standard deviation.

You lost me.

Ah, it's just the way the math works out. average
return exact same higher thestandard deviation, the lower
the geometric return lower thestandard deviation, the higher
the geometric return, geometricreturns always going to be lower
than the average return. But towhat degree depends on the
standard deviation, thevolatility of the actual
returns?

Okay? Okay. I mean, I'll take your word for
it.

I mean,

it doesn't make sense, in my head

without showing it to you. It without showing it to
you in a spreadsheet orsomething that it's a little bit
challenging. Basically, thenegative returns on the higher
standard deviation. If you let'ssay you had a, you start with
$100 investment and it loses15%. Now you're down to 85

(50:58):
bucks. Now, if you get a 20%return on your $85, you're at
back to $102. So you lost 15%gain 20%. But you're only up 2%?

Actually, that makes sense. And I feel like
because it actually just theonly reason it makes sense is it
was actually a differentdescription that I came across
at another point where it it's,it was using the same percentage
as as just an awareness so thatyou weren't having the wool
pulled over your eyes is kind ofthe the demonstration of it

(51:34):
where if you have you know, Xamount in a fund, and say just
just for the easy math, it's$100. And the $100 exists, and
you you lose 50% into your intothis fund. And so now you have
$50, but then an increase is50%. Well, now you have $75. So

(51:55):
it's dropped, and it raised thesame percentage. But that
doesn't mean that there wasn't atrain, like a change in the
actual monetary value itself.
And that,

right, so the average return in that example,
is nothing like what youactually experienced,

right?

Your geometric return,

right?

That's exactly, that's exactly what I'm getting
at there.

Okay. That's, I don't know why that was a hard
concept for me to. I promise

No, that's okay.
But you can see that in standarddeviation, the standard
deviation gives you an idea ofhow much that is going to impact
your actual realized rate ofreturn.

Right. Okay. That makes far more sense.

Yep. And that's something you can evaluate on an
entire portfolio basis. So youcan actually evaluate your
entire portfolio or a comparableportfolio. So if you have a
portfolio and you want to builda new one, you build it out, and
then you can compare. Okay, doesthis make a difference for me,

(52:56):
in terms of my average return mygeometric return my standard
deviation, does it actually movethe needle? The other aspect of
that that standard deviationthat most people don't consider,
and this is what hurts mostinvestors is the psychological
aspect. The higher the standarddeviation of the portfolio, the
more wild the swings are, themore likely most investors are

(53:19):
to make poor decisions. I'vetalked before about the idea
that the average equity fundinvestor earns only in over the
course of a decade, only about3.5% annualized, while the s&p
500 annualized earn somewherebetween eight and 12%, depending
on the decade that you'reevaluating. That's a very wide

(53:42):
gap between equity returns andwhat the average investor is
actually receiving. And that'sfor psychological reasons
they're buying at the wrong timeand they're selling at the wrong
time. And it's because of theemotional roller coaster that
goes on. When investing and thean easy way to try to control

(54:07):
that emotional roller coaster isto minimize that standard
deviation minimize the inputsthat actually cause people to
make poor decisions.

You know, this is all making sense to me now
because within our title of uskeeping track in our episode
plan on what we're touching onnext within stock portfolio
analysis, analysi. We also havein parentheses, crypto
currencies, question mark. Andand

yeah, we can talk about those.

Well, I mean, the fact that to be completely
honest I think, I think we'rewe're probably running short on
time on this on this stretch butit unless you have a different
opinion about it, this fitsexactly into what you're talking
about. In this in the stretch ofthe the wide swing With
volatility that,

oh, yeah,

I tend to see cuz that's, that's some of the most
volatile space that I've seen,ever.

Very.

And so when you're talking about you have
these wide swings and letemotions get involved into it
anyway, then it fits right intowhat you're talking about, which
is, I just, I just thought itwas funny that, that we're we're
hitting on that somewhatnaturally, but specific to, to
cryptocurrencies.

Right.

And I think I've talked to you about crypto in
itself, but I, my, my own humbleopinion into the into the crypto
world, because that's, that'ssomething I get questions about
all the time, is, you know,should you at all get involved
in the in the crypto world tome, and I feel like you said

(55:50):
something similar. So if I'mspeaking for you, please correct
me. But to me, it's so volatilethat I certainly wouldn't hang
my hat on any of it. But it'salso volatile enough that I
think it's kind of fun. So Ifind some stuff where I go, I'm,

(56:11):
I'm comfortable with losing Xamount. And if it turns into
something great, then Hooray.
And if it doesn't, then Oh,well. And, in theory, for me, if
I if I get a big volatile swing,which I've only seen some minor
ones with, with how I have mineset up. If it gets to a point
where it's, it's a volatileenough swing, I'll probably pull

(56:33):
out my original investment, andthen just let whatever I gained
as a profit margin in there justplay on its own. But I haven't,
I haven't made that back yet.
Currently, personally. Butthat's, that's where I sit on
that, where if I had to make adecision between whether I was

(56:56):
if I if I was going to invest,or I put it all into the space,
which some have, and some haveabsolutely been, like, a success
with it. So I, you know, it'sit's not like it's impossible. I
it's, it's just so it. To me,it's it's more of a dice roll
than some gambling would be.

Right,

like at least you can count cards somewhere on the
street? Like, I don't

no, I mean, it gives you an idea of what we're
talking about when it comes toanalyzing your overall
portfolio. Yes, there are atasset classes out there, like
cryptocurrency that could thatare definitely have very low
correlation to other assetclasses, some of your
traditional asset classes, theycan most definitely provide

(57:47):
diversification on a standalonebasis. They're very, very risky.
Could they be a piece of aportfolio? Potentially? Could
they enhance the portfolio?
Again, potentially, it's amatter of evaluating how it fits
with your portfolio? Does itimprove it in a way that fits
your risk tolerance, yourability to assume risk? Because

(58:08):
there are certain asset classesthat quite frankly, if you're
investing in them, and I use theword investing very loosely In
this scenario, it should bemoney that you don't care about
ever seen again.

Sure. I think that's valid. That's totally
valid. It's, you know, is thejuice worth the squeeze? See,
I'm getting all kinds of quips,toolbox, juiciness, and I think
we need to wrap this up.
Otherwise, I'm just gonna comeup with more quips. It's just

I agree.
I agree. That was pretty muchwhat I wanted to cover.

Okay, good. Well, I like it, I like
that we were able to, to touchon the analysis I have of
overlooking everything. And andtalking about, you know,
addressing these these buildingblocks that we're looking into
if, if you haven't taken thetime to poke around into our,
our correlation, diversificationand passive versus active

(59:10):
investing, which both were righttowards the end of our third
season, then go ahead and takesome time really, really go into
those because we we did touch onthat here, but not not in the
way of really expressing howthose all function and in that
stretch to me and In comparison,I think we we had a much more

(59:32):
thorough explanation happeningin those rather than.

Oh, yeah, absolutely.

But you know more

today was about aggregating them into a means of
evaluating your overallportfolio. So

right

your your aggregate investments

and we will continue with the ag Agra
aggregation ness. My words areon point today.

I think you added an extra syllable there

Chris Holling (01:00:00):
You Shut your mouth aggregate, the the
aggregationness of the analysicontinues moving forward, where
we're going to continue toadjust on some of these. And
just just to keep you sortainterested. We've got security
analysis that we're looking atnext, where you're, we're
talking about some alternativeinvestments, perhaps precious

(01:00:22):
metals might get addressed.
Because I know that's it's kindof interesting. And then we'll,
we'll talk about some moreactive investing where maybe
we'll interview me later. We'rewe're still we're still
discussing that. Because becauseyou haven't had enough time
talking to me. But yeah, isthere is there anything else

(01:00:46):
that you want to throw into ouranalysis eyes before we wrap
this up here?

Sean Cooper (01:00:52):
No, I think we're good.

Okay, good. Well, thank you again, for coming out
to learn more, and gettingdeeper, we really are getting
into some pretty deep, densestuff. And, and so if you're,

yeah, wait till next week,

oh, you shut your mouth with. So really kudos if
if you're getting into this,because I think this is, you
know, a bigger separation than,than even just the base level
stuff that we've been doingbefore. And so we appreciate you
coming out here and really justwanting to learn more, because,
like, like we've said before, weappreciate you taking the time

(01:01:29):
to want to learn how to betteryourself. And in this way, it's
it's bettering yourself and, andkeeping the others honest, that
you might be, you know, workingand doing your investments for
you. I think it's just a good,good tool tool for the toolbox.
So thank you again for joiningus on the truth about investing
back to basics. My name is ChrisHolling.

And I'm Sean Cooper,

we will catch you next time.
podcast disclaimer disclaimer.
The disclaimer following thisdisclaimer, is the disclaimer
that is required for thispodcast to be up and running and
fully functioning and movingforward. This is going to be the
same disclaimer that you willhear in each one of our

(01:02:16):
episodes. We hope you enjoy itjust as much as we enjoyed
making it. All content on thispodcast and accompanying
transcript is for informationalpurposes only opinions expressed
herein by Sean Cooper are solelythose of Fit financial
consulting LLC unless otherwisespecifically sighted. Chris
Holling its me is not affiliatedwith Fit financial consulting

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represent the views of fitfinancial consulting, LLC. This
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engage number one you knowactually I guess I get to be the

(01:04:35):
captain in these because I'm,I'm leading leading this and
then you your your Spock.

Okay, I'm fine with that. You saying you're Kirk.

Yes.
That's exactly what I'm saying.
We need to discuss the numbrs just a little bit longer. Di
cussing numbers at this time wold be illogical. We should ac
ually just be crunching the nubers, but there's no time to cr
nch numbers when I have such aong narrative. Nothing Spock, no

(01:05:16):
hing,

Nope you know, you are flying

Han Solo. See how much hate mail we get for that?
hat'd be funny if like all twoto 20 of our listeners are all b
g time. Star Wars S

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