Bullshit on Stilts: Tackling the bullshitology of financial decisions.
Join two financial brains turned podcast hosts unleash their wit and wisdom drawing on vast financial backgrounds. Using highly-tuned bullshit sniffers they call out the clichés, crap spackle and flapdoodle spewed by so-called experts across the landscape of financial advice. Identifying as doctors of bullshitology you can count on your hosts to bring you a lively if not deadly mix of serious analysis, hijinx, and tomfoolery. All within a 99.1% bullshit free safe space.
Bullshit on Stilts: Tackling the bullshitology of financial decisions.
What's in Your Investment Portfolio? Knowing What You Own?
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.
Developing your financial bullshit sniffer one episode at a time.
Welcome to Bullshit on Stilts, a podcast hosted by two guys with vast financial backgrounds and great bullshit sniffers who call out the cliche crap, spackle and flap doodle spewed by so-called experts across the landscape of financial advice Identifying as doctors of bullshitology. You can count on your esteemed hosts okay, maybe knuckleheads to bring you a lively, if not deadly, mix of bullshitology. You can count on your esteemed hosts okay, maybe knuckleheads to bring you a lively, if not deadly, mix of serious analysis, hijinks and tomfoolery, all within a 99.1% bullshit-free safe space. Let's get after it All right.
Speaker 1:Today, on Bullshit on Stilts, we're going to be exploring a little bit deeper the first of the Fab Five for investing, which is what do you own? A big, important question, and so that's what our recording effort is going to be on this morning with Kelly and Mark. So, mark, during the Fab Five. Obviously, the first question here is what do you own in terms of in your investment accounts, your retirement accounts, what is it that you exactly own? And I know we went through it pretty quickly during the Fab Five itself and we want to take an opportunity to get a little bit more detail for our listeners out there, to help them develop their own capabilities and, so to speak, their bullshit sniffer.
Speaker 2:I'm really grateful for all that you do, right? So, with what do you own? Let's confine this to package products, meaning mutual funds or exchange-traded funds, maybe UITs and individual bonds and individual stocks. And so, kelly, it might be informative and beneficial for you to at least generically describe what each one of those individual investment types are.
Speaker 1:So I'm pausing for a second just to think through. If you think of, like a wire diagram and everybody originally thought of, when I invest money, I'm going to buy a stock in Home Depot, I'm going to buy an individual stock. Most people don't think of buying individual bonds but an individual stock. Well, as the markets have changed, the financial service industry has evolved. There's been this proliferation of investments that really are funds, let's say generically funds. There are different types of funds and we'll walk through that. But when we think of an individual stock, that's it. I buy it, I own the number of shares I purchased. Stock goes up or down and I'm beholden to that one individual stock performance. In this example, if I buy a fund, I'm buying into a bucket. They use the term pool of investment. So instead of one stock, maybe the fund I own has 100 stocks, 200 stocks, 300 stocks. So with one share I now have a fully diversified exposure, let's say, to this stock market in our example here. So then you ask me, can I kind of go through the other one? So there are different types of funds. Right, the age-old mutual fund out there is a pool investment on stocks and or bonds or whatever it owns inside it. Just think of it having a bucket and it owns individual securities underneath it or it's empty stocks. That mutual fund is kind of a cool character because it's always buying and selling its own shares. What I mean by that is when I buy a mutual fund selling its own shares. What I mean by that is when I buy a mutual fund, I don't buy it at the moment I put my purchase order in. I buy it when the market closes at the end of the trading day and then when I do buy it, it's the 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.
Speaker 1:The next step is going to a fund that may have very, very little management in it, called an index fund. It's called an index fund simply because it tries to deliver the same return that the indexes that we know and love do on a yearly basis. The indexes that we know and love do on a yearly basis the S&P 500 index, or the Dow Jones 30 index, or the Wilshire 5000, russell 1000. There are boatloads of indexes that represent the entire investment world and there are lots and lots of index funds that you can buy again a pool, and you get to purchase a share and you're diversified, just like the mutual fund. The difference is the index fund. There's no active management. They're typically very, very inexpensive.
Speaker 1:The last one I'll talk about is the exchange-traded fund. Again, pool fund, 100 stocks, 300 stocks, whatever inside that investment exchange-traded fund. But here's the little nuance An exchange-traded fund, also known as an ETF, you can buy or sell that investment during the day's trading. Oh really, if I buy the ETF at 11.30 am, I will basically have purchased that security at 11.30 am, whatever the price is in the market today. Or I could sell that ETF at 1130 am. It doesn't wait for the markets to close in order to execute buys and sells of the fund itself. Where a mutual fund does just that, you got to wait. You can put your purchase or sale order in at 1130 am, but nothing will be transacted until the markets close. And now your purchase or sale order in at 1130 AM, but nothing will be transacted until the market's close. And now your purchase or sale orders are executed.
Speaker 2:So explain that to me. Why is it with an individual stock 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 a sell signal, or I just get scared. I can sell my individual stocks in my ETF scared. I can sell my individual stocks and my ETF, but I can't my mutual fund, whether it's actively managed or it's an index fund, because of something called a NAV correct.
Speaker 1:Yes correct.
Speaker 2:Can you explain that?
Speaker 1:This just in. Investors can purchase or sell ETFs when financial markets are open during the trading day, but mutual funds can only finalize purchase and sale orders after financial markets have closed and they've calculated the fund's net asset value Back to you guys. So if you take a mutual fund, an exchange traded fund or an index fund anything as a fund the NAV or net asset value is simply. I'll give you an example. Let's say we run a fund and let's say that there's 100 stocks in this fund and let's just say that every stock's market value is $1. And let's say there's 100 shares that people own of our fund. As a result, what we do is we simply take the value of all the stocks our fund owns and we divide that value by the number of shares that people own of the fund. That then results in the net asset value, which is the share price of the mutual fund that you're either going to buy or sell at on that given day, moment or what have you.
Speaker 2:All right. So you have explained individual stocks, you've explained mutual funds, both actively managed as well as index funds, and you've explained ETFs, which can be actively managed as well as index also.
Speaker 1:Really, what we're talking about is active versus passive. Right, an index strategy is considered passive. So if you hear people talking about we invest your money in a passive strategy, really they're investing in index funds, that's what they're doing, or exchange traded index funds.
Speaker 2:Right, so we also have other types of funds not just stocks.
Speaker 1:We've covered stocks.
Speaker 2:We also have bonds or theme-based specialty.
Speaker 1:Sure, so it runs the gambit of the types of funds that exist out there. You can have a general fund like the S&P 500, and it owns basically similar names as the S&P does. You can have a fund that only focuses on a certain part of the financial markets let's say health care called a sector fund. Maybe there's an oil and gas fund which is a sector fund. It could be financial services a sector fund. So those funds focus their investment holdings in a specific arena health care. If health care is doing well this year, pretty much all sector funds that focus on healthcare will be adding positive returns to their shareholders' pockets. The others are specialty funds, or alternatives as they're called, which is somewhat cheek and tongue here. That, for instance, the first one out there would be a real estate investment trust, which is a real estate fund. It's a pooled vehicle, just like we've been talking about, but all it owns are real estate assets underneath it, and now you have started to introduce some new assets types to an investment plan.
Speaker 2:So, kelly, it seems to me that you've kind of outed yourself as a contrarian investor, because you don't do things tongue-in-cheek, you do them cheek-in-tongue. Is that fair enough? And we do have funds that are.
Speaker 1:Well, I'm a little dyslexic, so it might be the tongue-in-cheek and cheek-in-tongue got messed up here. It could be that.
Speaker 2:Well, it adds to the quaintness in your charm in this part. All right, so we've talked about 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 very interesting, almost as interesting, because it's a bigger market than the stock market. We can get into different types of bonds, both individually as well as in the mutual fund. Can you just run down maybe the top five or six?
Speaker 1: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 some of them undoubtedly are targeted date retirement funds. These are ragu. Everything's in their kind of portfolio. The big differential is what percentage is in stocks versus what percentage is in stocks versus what percentage is in bonds. As a result, when you think about bonds, one the reason why people add bonds to portfolio is to reduce, or theoretically reduce, the volatility or variation in the account value day-to-day, week-to-week, month-to-month. They're looking for more stability and maybe some income.
Speaker 1:Well, within the bond market, as you said, mark, it's a huge market. It dwarfs the stock market something like six, seven, eight fold. So when we think about bonds in retirement accounts and so forth, the biggest gorilla in the group is going to be your medium-term bonds, intermediate-term bonds, and when we say that, we're talking about usually government bonds, government agency bonds are in there, mortgage backs are in there, asset-backed bonds may be in there, corporate bonds may be in there. So it's kind of a potpourri, once again often of high-quality bonds issued by financially strong institutions, entities issued by financially strong institutions, entities, municipalities and so forth. When you add to that the next step that you'll find in portfolios was usually US high-yield bonds.
Speaker 1:High-yield bonds also known as junk bonds. Right, high-yield bonds actually add oomph to an investment portfolio. While they're bonds, their return profile is very similar to stocks and small cap and small cap big time. So, as a result, what happens is when you get these high flyers like a high yield bond or even a small cap stock fund as part of the recipe that you're investing in or thinking about, what you get is because they're more volatile, because they have a lot more highs and lows and the rollercoaster ride of investing. What managers will do and advisors will do is they'll try to reduce the percentage of dollars in those accounts or in those areas to kind of absorb some of that volatility, and I think I'm getting off on a tangent around the volatility?
Speaker 2:No, but it's an important tangent to get off on, because we're talking about what do you own? Yeah, and you are not in control. If you say, well, I've got some fixed income and I got a mutual fund or five mutual funds and I think I got a couple of stocks in there, I was talked into Right right, that's not control. Or if you look at the pie chart on your statement and you see I have mutual funds, what does that mean? That's right, you don't know what's in there. Is it all small cap? Are there 10 of them? 10 small cap managers Are?
Speaker 1:you kidding me.
Speaker 2: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, you don't know? Yes, yeah.
Speaker 1:No, that's true. I think that it's tough for people when they're looking at this, because they've gone to 401k meetings, let's say, or they've heard it. They've met with advisors and there's a lot of discussion, there's lots of questions that financial professionals will pose to a client, prospective client. What have you? The vast majority of those questions are driven toward what percentage, what mix of stocks, bonds, cash and or specialty investments is appropriate for this person's time horizon, for their risk tolerance, for all sorts of things that are in these questionnaires. Ultimately, the answers that you give to that financial professional will, would you agree, dictate. Is that too strong of a word here?
Speaker 2:No, let's use it.
Speaker 1:Yeah, dictate so the answers that you give to those questions that you're asked will dictate what percentage of stocks versus what percentage of bonds, cash and or specialties is suitable for that professional to recommend.
Speaker 1:And if you're not working with a professional and you're in your 401k plan and you're answering an investor questionnaire, what that plan is trying to do is do the exact same thing without a middleman. Based on your answers to these questions, we identify you having a moderate risk tolerance and, as a result, of the 24 investment funds you have in your 401k, three of them meet the needs of a moderate investor. Here are the three, and that's what this is all about. So for you to know what you owe is all about you being able to sniff out the BS when it happens, or the salesmanship or anything or any manipulation that going on, and being sort of aware that if I have lots and lots of stocks, I do expect my volatility, the variation of the value of my account day to day, week to week, month to month I expect that to be higher, much higher than if I had only bonds in a portfolio or only certificates to deposit from a bank account. So it really helps you understand what you can expect in the trip of that investment time horizon.
Speaker 2:So what you own should be representative of your investment, risk tolerance, your time horizon, what you're attempting to accomplish with a given portfolio. So it provides a lot of clues.
Speaker 1:I often look at why you own something, what you want to, and why you own it as the posture you take. So if you're a fighter, you take a posture just before you get into fight your fighting stance. If you're a golf player, you set your feet a certain way depending on the type of shot you have. So you set your posture. And so if you're sailing a boat and the weather's going to get kind of rough, you set the sails because of what's going to come about. How are you positioned in your investment account to weather the storm that is the financial stock and bond market?
Speaker 2:If I have intermediate-term and short-term bond funds, I have large-cap growth and income mutual funds. That gives me a clue as to your investment profile, your investment objectives. If I have lots of individual stocks pretty much small cap, I've got some specialty funds in technology, let's say, or in metals. That gives me a clue as to what my investment profile is for risk as well as my investment objective. Knowing what you own when you're looking at that and you're reciting what you own, knowing what you own when you're looking at that and you're reciting what you own, not specifically but at least in general terms, does that kind of match up. That's why it's important to know what you own.
Speaker 1:Some of the biggest issues that people have when they're investing money is unfulfilled expectations. Well, I got my money invested and boy, we're going to have a banner year. Last year was great and all of a sudden, at the end of the year, your portfolio ain't doing that great. And the question is well, why isn't it doing that great? The first question back would be what do you own? Why do you say the market did so well and you didn't? And if we go back to your who was it the Stanford or Princeton professor that compared his small cap investment account to large cap US stock account? Yeah, that's kind of Bush League.
Speaker 1:Ultimately, a big part of the explanation as to why you're doing better or worse than the markets depending on how you're looking at the markets is going to come all the way back to what do you own, what's your allocations and, inside that allocation, how are you implementing? And we've been talking about that. But really, how do you implement your allocation plan? Do you use individual stocks and individual bonds? Do you use some funds or individual stocks and bonds? Lots of clients that we've worked with yeah, they have, in some cases, individual bonds for a portion of their investment. Some of them want to buy stocks, and so they'll have stock holdings, and yet a lot of the other money may be in funds index funds, exchange traded funds, mutual funds depending on their proclivities, let's say, when it comes to investing, and what they find to be their approach to it All right.
Speaker 2:So if I am a conservative investor and let's put an investment objective or a diet objective to this, just to have some fun with it?
Speaker 1:You're just looking at me, aren't you? Yeah, because you know that I had some sweets last night and so you're like maybe a diet? Yeah, and don't take this personally.
Speaker 2:But you know, if I'm, you know borderline morbid obese no, I'm not talking about you. I see, don't take that personally. But let's say, you know I'm trying to lose 5 pounds or 10 pounds, and because I've got 5 or 10 extra pounds on me, my sugar levels might be a bit high, as well as my lipids, my cholesterol level, and so what am I stocked up on? And I go to the pantry and what do I see, dor, and what do?
Speaker 1:I see Doritos hostess ho-hos carbs, slim jims, stuff like that.
Speaker 2:Okay, so maybe there's a mismatch here. I want pizza Indeed. So knowing what you own gives you clues. Is it consistent with what you think you're trying to accomplish?
Speaker 1:Yes, and, as we've been belaboring this, it's about all the things inside your account, or accounts, and how do they break down when it comes to stocks, bonds, cash and or specialties. What percentage is in there? And that'll be a great guide for you to have appropriate expectations when markets go up and when markets correct and go down. So the next thing we'll be talking about is number two why do you own it?