EPS 6 - Investing, Not Guessing: Time Horizons, Risk & Why Mutual Funds Keep You Sane

The best things in life are That's what I want.

Hey everybody, this is Jerry and welcome to the Pink Money Podcast where we take a look at all things regarding money from a gay perspective. And today what I'm going to talk to you a little bit about is investing because, you know, lately I've seen so many different ads coming at me from all over the place, you know, where you can invest in gold, you can invest in real estate, you can invest in NFTs, you know, so on and so on and so on. I think that what that really ends up doing to a lot of people is just confusing them because, you know, So the word investment in and of itself, I mean, when you think about it, you know, you think, oh, well, I can maybe invest in a car or I can invest in a house and all those things are true, right? Gold, anything that will increase in value can more or less be considered an investment. I mean, you wouldn't necessarily go out and think that I'm going to invest in a brand new car, right? Because brand new cars really aren't classic. They're not in high demand, so to speak, not like a, you know, 1972 Bronco. And and then expect it to come in value, most likely it's going to do just the opposite. It's going to go down in value, right? As soon as you drive it off the lot, it's going to lose at least 20%. Now, I mean, and I'm talking about things in a general sense, right? Because we can always get into the weeds and we can debate things and, you know, split hairs about all kinds of stuff. But again, on a very high level and a general basis, you know, when I think about investments, what I think about, again, is if you're actually going to put your money into something, is it actually going to grow your money? So let's just say for example that you're a very conservative person and sometimes we think of our grandparents right as very conservative people especially if they grew up in the depression etc world war ii you know maybe where you know things were very scarce in that sense a lot of people don't like taking a lot of risk with their money in fact some people don't want to take any risk at all but if you're investing let's say for the long haul and i'm talking about 5 10 20 30 years you know in the future maybe you're saving for retirement right so you have a very long time frame ahead of you and all kinds of things can happen you know there's wars there's you know political instability there's unexplained events that occur I mean we think about September 11th right so those are black swans they're rare hard to predict events that nobody would see them coming so black swans yeah they do happen you know every so often I'd say almost you know probably been the last 30 years we've had one almost Almost every decade it happened to us. But nevertheless, so when you think about investing, you want to really think about the long term, right? So if you're going to put money aside for a long term goal of retirement, right, you'd pick the right vehicles for it, you wouldn't put your money that you're saving for a cruise that you're taking in a couple years into high risk investment, right? Because what can what goes up can come down and you can always lose your money. And that's the last thing you want when you're saving for a short term timeframe. So you want to put that money aside in something very conservative. Now, interest rates, of course, aren't very high. So you'd probably look into something like short-term bonds, et cetera. That might be a way to go. And you just have to take a look at what the conservative, relatively conservative mix is so that that's something that you potentially could consider. Like money markets, you know, years and years ago used to have really good interest rates compared to savings accounts. And that's really not the case anymore. We really haven't lived in a high interest rate environment since, what, probably the 70s and early 80s. So we haven't seen interest rates anywhere near like 5, 6, you know, 10%. I remember the last time I think I saw any kind of, you know, relatively safe bond fund like Ginnie Mae bonds, I think back in 2008, 9, I think they were like 5, 6%. I remember you could get a fixed annuity, I think a two-year was going for about 6%, you know, about, you know, 20 some years ago. But again, I don't think anything near that exists today. So nevertheless, when I'm thinking about investment, I'm saying, if you're going to put your money into something, it really should be something that you understand fairly well, meaning it's not a really complex thing to grasp. Let's say like an NFT may be something that really doesn't have a lot of history behind it. There's a lot of confusion by a So again, that's a whole nother ball of wax. But for the most part, you know, when you think about putting your money in investment, most people think about stocks and bonds, right? Because you can easily buy stock. If you want to buy a stock in Apple, you just open a brokerage account, you put some money into it and you execute your trade. And the whole concept behind that is you buy low, sell high, you know, ultimately, right? And that's how you make your money, your gain. And that gain is exactly, that's how you determine, you know, that you've actually made some money. Your beginning value makes your ending value. you know, in a very simple term, you know, that's going to be your gain. So I say, for the most part, unless you're an experienced investor and you really do your homework, let's say someone like a Warren Buffett, right, who really understands the market well and he does his homework, he really knows, you know, what the earnings per share is, you know, based on this company versus that company and really has a good feel for these industries and these sectors of the market now a lot of people can develop that level of expertise sometimes it takes a lot of time unless you learn it from other people you know if you're an investment banker and you've gone to school and you've you know worked in that field and you developed an expertise in that area sure you can use you can learn that at a very young age but if you're let's say a nurse or something and you don't really follow the market very closely but you want to grow your money I'd say you know you probably want to stick to something like like a mutual fund, right? A mutual fund is a very simple way that you can grow your money in a relatively safe environment because what mutual funds really bring to the table is you have professional money management because you have a portfolio manager who has that level of expertise where he or she and their team will do the homework. They'll go out and kick the tires. They'll speak to the management team. They'll be able to look at the various industries and do an apples to apples comparison And, and they do all that, you know, bottoms up analysis before they ultimately decide, Hey, we're going to invest our money into it. Now you might want to do that yourself. And maybe you do know a particular sector, you know, really, really well. So that's cool. You know, maybe you can buy some stock into that, but if you were going to invest in stock again, individual stock, then you're probably taking a lot more risk because quote unquote, you're putting all your eggs in one basket and that individual stock, like we've all seen with all kinds companies they're here today gone tomorrow now that gone tomorrow could be literally tomorrow or could be 5 10 15 20 years in the future you know you never never know I mean what comes to mind is I was thinking about this one woman she was receiving her dividends that she lived on from a company a bank called Wachovia and I remember speaking to her about it and you know she was just insistent that that was such a rock-solid company and it was never going anywhere and she She just was very, very happy with the dividend she was receiving. And I encouraged her to be more diversified. Of course, she wasn't listening to anything I said. Fast forward, of course, you know, a few years later, where's Wachovia? Doesn't even exist anymore. Where's your dividend? You're not living on that anymore because that stock doesn't exist anymore. So anything can happen. We all seen things even like real estate that can go upside down that no one ever thought could happen. So, you know, I just think that a mutual fund for a large majority of the population is a great way to go and really what a mutual fund is in very simple terms just imagine let's say an empty swimming pool and let's say thousands of people are standing around it and everybody reaches in their pockets and purses and they dump all their money in the pool and they all stand around it shouting grow money is not going to grow on its own right so a professional money manager jumped in the pool scoops up all the money and starts buying things that make our money grow like stocks and bonds. What we really benefit by is having that professional money management. Again, someone who has the skills, the knowledge, the experience, and gets paid to make those investing decisions for us so we don't have to. Then we also have diversification because we're not putting all of our eggs in one basket. We're getting a basket full of either stocks or a mix of stocks and bonds, but we develop a portfolio that we can easily invest in that's immediately diversify. And a diversified portfolio, just in a general sense, you'd probably say at least 12, you know, a dozen or so, 15 some odd stocks. So, and that can depend on the mix of stocks that you have as well, whether they're great big large companies, medium-sized companies, small companies, sector-based companies, etc. So, A, you have professional money management and mutual fund. B, you have instant diversification. And C, it keeps our expenses low. Because again, if you were going to go out and you were going to buy all these financial instruments yourself, you'd probably have to have a lot of money, right? But when you invest in a mutual fund, you don't have to have that much money. And I can think of mutual funds where you can get in today for like $250. And you can buy shares, additional shares for like 50 bucks or whatever it is. So it's a very easy way for you to get invested in the market, whether it's your retirement account or whether it's just a regular investment account. And mutual funds by and large can cover the whole plethora, everything in the market that you can think of, you know, because they cover everything. I remember when mutual funds were not so prolific and there was really, you know, the large cap mutual funds that pretty much dominated the entire market and then they added small caps and And then they added, you know, medium sized companies, etc. And most fund companies didn't have probably more than 10 funds, where now you have companies like Fidelity and Schwab that offer hundreds, everything you could think of in the market. So, you know, whether you go with investing directly with the mutual fund company itself, or you invest through a mutual fund through your brokerage account, like at a Schwab or Fidelity or what have you, then that's an easier way again, to buy directly into something. Now, when you're ultimately looking at mutual funds and you're deciding, hey, there's so many out there, how do I narrow it down? Well, you can go into what's called a fund screener tool, or you can ask somebody. If you ask somebody, it can be friends or family, right? They're going to have their own opinion. You can work with a financial professional, like a financial advisor, someone who might charge you or may not charge you or works on commission, all those things you'd want to determine when you meet with this person or before you even meet with them and say, hey, how How do you get paid? And they're going to tell you. You know, I don't get paid until I manage your money. Or I get paid a commission based on what you buy. That might be something you may want to avoid, right? Because you might feel like, well, you're going to steer me into something that we know that you're going to get a commission off of. So I feel like, you know, maybe that's not always in my best interest. You know, someone who has a fiduciary duty to you probably is going to make the most suitable recommendation they can. But usually most advisors have a range of... Mutual funds are financial products that they offer. They can pretty much sell anything they want, but they could be limited by the company that they work for. So all those can be things that you'd want to take into consideration when you're working with somebody. Again, it's really how do you get paid and how much does that ultimately cost me. And when you buy into a mutual fund, sometimes there are loaded mutual funds and there's no load mutual funds. Loaded mutual funds mean you pay a little bit to get in and sometimes you pay to get out. No load mutual funds, just the opposite. There's no load up front, so you don't have to pay anything initially, right? So there's no sales charge to get into the fund. Some funds are open, some are closed, and a closed fund generally means that it's closed to new investors. You can't get into it if you're a brand new investor. All these things are in general sense, again, because anything can happen. Sometimes closed funds will let family members in. Sometimes, you know, they have an open window window where they let new investors in. All depends. All depends. But anyway, so mutual funds, they're also, you know, priced on a daily basis. They take all the money that's in the fund. They subtract out the cost of doing business and they divide that by all the outstanding shares and that derives the net asset value or the daily price per share. And that's what you buy and sell it. So when you're looking for, you know, how much is this going to cost me when I get into it, really what you're looking into is the NAV or the the daily price and that's what you pay like I said to get in or get out you know you buy or sell so when you redeem your shares you just pay you know whatever the market closes at that day because you will never know unlike a stock where you can watch the stock going up and down throughout the day and you can say hey this is a good time to buy a mutual fund doesn't have that so it will only have that one daily price usually usually it's at 4 p.m. the close of the New York Stock Exchange and then the funds will be priced you know probably a couple hours after that but you your orders always have to be placed before the market closes. So that means when you're purchasing or when you're redeeming, that those orders have to be placed before the market closes. So you never really know. But generally, you're not going to talk about huge, huge swings like if you were buying individual stock because individual stock can go way up and way down in a very short period of time. So mutual funds, because generally they're very, very diversified for the most part. Again, you're talking about usually, you know, hundreds of companies companies let's say even like 50 companies so those 50 companies are all going to work independent they're not all generally going to go up the same day they're not all going to go down the same day there's always going to be a mix of everything so you never never know and generally what the what happens at the when the fund closes for the day is they're running all those calculations what are the prices of all these companies that you know we've we've you know the portfolio manager has purchased and that's in the mutual fund so nevertheless there's also what's called an expense ratio for each mutual fund. And that's really where it's sort of a hidden cost, if you will. So the fund can tell you what the expense ratio is, or you can look it up in the prospectus, which is the documents you get when you actually buy into a fund. You're supposed to get it before you actually buy, but sometimes people will say, just send me a prospectus in the mail, and they put their money into the fund regardless. But in the prospectus, it details all these... components of what the fund is what its objective is and what the expense ratios are what the management fees are if there's any 12b1 fees which are called marketing fees and again these loads and everything are all in there and you can read that and that's a good thing but a prospectus is very dry boring reading sometimes they're 50 to 100 pages and there's all kinds of stuff in there it's helpful but it may be very overwhelming and may not really tell you every single thing usually in the first couple pages you're going to see more or less what you need to know you know expense ratio and what the fund invests in etc you know those are the most important things to pull and whether there's 12b1 fees but all that can be you know looked at through a fund screener tool as well so fund screeners are just you can look them up you know hey i want to look for no load mutual funds and you'll you get hundreds of them and you can decide you know if i'm looking for growth oriented mutual funds i'm looking for income i'm looking for growth and income i'm looking for a sector fund technology or goal or whatever it is so in the fund screener you can you know choose these mutual funds if you want to do the legwork on your own right so if you're do-it-yourselfer and you kind of have a good feel for what you want to put your money and then go down that path do it yourself there's a lot of good fund companies out there very reputable ones that offer a whole range of mutual funds that you can have at your leisure to peruse and choose mix your own portfolio so if you have let's say a thousand bucks, you know, you could buy three, four or five mutual funds as long as you meet the investment minimums. Now, would you want to do that? Depends. It all depends, right? How diversified you want yourself in and of the mutual fund arena itself, because you want to construct a portfolio that's relatively balanced, but it has to meet your objective. So meaning if you're investing in a retirement account, you probably again have that long term timeframe. So you for the most part you're probably going to be a little bit more aggressive in your investing strategy because you got such a long time frame if the market goes crazy all it really does is you know give you an investment opportunity because the market drives prices down that's a good time to buy more than you ordinarily would because basically everything's on sale and ultimately 20 30 years down the road when you start to sell your shares then you know you want prices higher and if you're investing for you know 20 30 years then more often than not you know, you're going to buy at a much lower price today than 20, 30 years in the future. And if you invest on a regular and consistent basis, can even be set up to invest automatically through what's called a dollar cost averaging approach, where you're just doing a regular and consistent investment on either monthly, bi-monthly, whatever it is, you know, basis. So where you drop in, let's say a couple hundred bucks every month, and that buys your shares, and sometimes the market will be up, sometimes Sometimes it'll be down. But over the long haul, you get the average price per share. And that's just a simple way to buy into the market. And you just continue to do that over and over and over. And that's typically what's happening like in your 401k. Your employer is pulling that money out of your paycheck. It's being invested in the market. And then it's actually buying generally mutual funds. And if you don't pay attention to things like your 401k, you definitely want to work with a financial professional to analyze what you're actually getting. And a lot of people sometimes turn a blind blind eye to that because they don't think it's so important right now but it's really more important to get it right so that you get the right mix and you're invested in something that's really going to help you grow your money the last thing you want to do is find that you've been putting your money into a very very conservative bond fund over the last six seven years and you wonder why your 401k has never grown and sometimes they will just automatically open you up something start dumping your money into it and it's just holding you money for the most part. It's not growing it. So you really have to conscientiously create that portfolio mix so that you get the right mix that's comfortable to you and for you. So you want to look at, am I willing to take a lot of risk or I'm not really wanting to take any risk? Maybe you're a moderate investor. I'm moderately aggressive, moderately conservative, what have you. And you might have different objectives and different investment strategies and level of risk for different portfolios because you can have multiple ones right you can have one for your college fund you can have one for retirement you can have one that i'm setting up to take a cruise and i want to be you know a little bit aggressive but you know on more conservative side so i'll go with a moderately you know conservative approach and maybe you don't want to invest in stock or maybe you want a mix of like a balanced fund of stocks and bonds or maybe you just want to go with a maybe more moderately aggressive bond fund so stocks and bonds kind of work like a teeter-totter in a general sense stocks go up bonds go down and stock in and of itself is really what you're getting when you're buying into a company directly and you're essentially buying ownership you're usually buying common stock of that company now it can be all different kinds but again we're talking generalities here so you're purchasing ownership now sometimes a lot of companies let's say they want to build a building and they don't want to issue any more stock because they don't want to dilute their ownership and so maybe they don't want to take out a loan either either from a bank so they can start selling bonds which is essentially saying hey this is an iou to you you buy this bond for a thousand dollars and let's say they pay you x interest and you can you know receive that interest for as long as the bond is not called meaning the company doesn't bring it back so That can be a good way for you to have a source of income and develop that ability to grow your money. And again, it can be very conservative ways or very aggressive, like junk bonds have a tendency to be very aggressive, but you can go into very conservative bonds, like I said, short-term bond or maybe a Ginnie Mae bond or something like that. So a lot of that may sound daunting and overwhelming, and you could be even thinking, no way, I'm already tuned out. I don't even want to think about this kind of stuff which is again a good reason that if you're not a do-it-yourselfer and maybe even if you are a little bit more hands-on but you'd rather work with somebody early on in your investment career career meaning you know this is what you're going to do is put money aside for your retirement or your non-investment account so in that sense you want to work maybe with somebody early on or just get their insight into your portfolio and create a mix for you that you're comfortable with and by the the way that's probably something that should be monitored by you and your investment professional at least on an annual basis I'd say a couple times a year it's not going to hurt but you don't want to be you know reallocating your portfolio constantly creating a whole new you know investment strategy where you do a whole you know sell off of everything and rebuy everything that's not a good strategy you want to just tweak your portfolio if it needs to be tweaked based on again has things have things changed in the market or have things changed for you. Maybe you went through a divorce. Maybe you just bought a house. You have got a new job and you got a lot more money or just the opposite occurred. You got downsized and now you have less money. Whatever it is, all those factors, those life events will come into play when you're looking at your overall financial situation and the overall mix of your portfolio. So those are things you just want to work through yourself or work with a financial professional to help guide you and to give you the right advice and we've kind of talked about these this before when you're working with a financial professional you just want to work with somebody who you know and trust and kimberlion is going to be there for you you don't want to have your neighbor really give you the best investment advice because who knows what their investment background is they're always going to tell you you know they i got the biggest fish ever you know or i my mutual fund you know or my portfolio has grown 30 you know who knows what they're going to tell you and whether that's true or not they're always is probably going to lie to you. That's how people are. But if you really work with a professional group, which is what I would encourage most people to work with an investment company or a brokerage firm, that has been around a long, long time and that you can easily get a hold of somebody. And even if it's not the same person you worked with, let's say last year, you know that you still have the backing of that company there. So if things go awry, you can always have a level of recalibration through this company. If it's, you know, ABC Joe over here and he splits town, what's your recourse then, right? Hopefully people are licensed, meaning there's a level of professionalism behind that because they can't really sell you mutual funds or annuities or anything like that unless they're licensed. And you can always just simply ask, are you licensed? And they'll tell you yes or no. Series seven is what most financial professionals have. And that enables them to sell you stocks, bonds, mutual funds, and all that good stuff. But if you're mutual funds directly typically they only have like a series six and again that just is a level of registration and saying competence etc that you know the sec and the the nasd you know created to make sure that people are skilled in what they're doing and that they're not some shyster who's there to take your money and really is going to put you in stuff that they don't even know but hey mistakes happen they happen all the time even you know um seasoned financial professionals can make mistakes because they cannot predict the market. They don't know what's going to happen tomorrow any better than you or I know. Now, we can look at the history of things, right? We can look at a track record of our mutual fund over a three-year, five-year, ten-year basis, and we can get a sense of what the fund has done in all these different conditions. But, you know, as they always say, past performance is not an indicator of future performance, so nobody knows. something could really again go awry tomorrow and the market goes crazy and we're down again another black swan event we just don't know so nevertheless mistakes can happen and sometimes people do get put into the wrong thing which is the reason that you need to monitor your money and monitor your portfolio so if there is something that has gone awry it can be corrected now sooner versus later so all that being said it's just keeping an eye on everything investing in something that you can understand fairly easily you may not know again all the bells and whistles down to the nitty gritty but typically not really that necessary and you want to work with somebody who you can rely on and trust and believe that they have your best interest at heart and if they are a fiduciary and they have a special designation for that then that can give you more confidence and if they're not working directly on commission and maybe they get paid a different route then that can also maybe give you more confidence in working with that individual now just because they're working on commission doesn't make them a bad guy right because they have to put food on their table as well and as long as they are competent and that they're trustworthy and they have i'd say backing behind them that proves that either by education or the company and you again can ask them you know where'd you go to school you know what kind of credentials do you have and And they should be able to explain all that to you and not feel offended. In fact, I think most people feel grateful that you're asking because it gives them a chance to kind of show off and say, well, I have, you know, this, you know, CFP designation or I have, you know, these alphabet of letters behind my name because, you know, I've taken this and this and this. And, you know, all these tests can be difficult. They're not for the average person. So even the Series 7, I think, is one of the most difficult tests to pass, you know, outside of like the the bar and you know a medical license so they're difficult but they're not unattainable but nevertheless different designations will help you sort of assess you know the competence level of this individual but speaking to them and whether they're speaking to you in a very respectful way or they're patronizing you or condescending to you all that will come out and definitely don't work with anybody who is not respecting you you simply just say you know what I think I'll um table this for right now I'm not ready to invest and you just go on and move to somebody else and you can invest with whomever you want that gives you that level of comfort and expertise fire them if you want to no skin off their butt and you can always move your money from one company to the other very easily you can transfer your money from one company to another you don't you're never stuck with whatever company it is and if you're unsure before you move your money make sure you get good solid financial advice so they can help you and guide you and make sure you're not losing a lot of money because you definitely want to make sure that whatever you're invested in that you can get out of it without losing a lot of money and that can sometimes happen with like annuities etc you know that there's a high fee to get out of it if you get out of it early and you have to kind of know all that and they want to make sure that they're not making a mistake and encouraging you to do something that's going to be detrimental to you so all that can be taken into account when you work with somebody but going back to investment making this a full circle again invest in individual stock if you feel like it i would say maybe you can take a small amount of money and maybe 20 percent of what you intend to invest in my maybe buy yourself some apple google whatever nfts if you want to kind of try your hand at it but would you put a hundred percent of your money into it most likely no right because that's just probably be very aggressive and in fact if you're going to invest you want to make sure that the money you're investing is not like your emergency fund which should be at a minimum three to six months worth of living expenses I would say you need longer than that but that again goes back to your personal comfort level whatever you feel that you're comfortable having that if things go south for you you have that cash cushion to fall back on and rely on and then after your daily expenses are paid then you have your investment money and that money is what you can use to you know put towards your long-term goals retirement college funding what have you and then you can take that little bit of money that's left over and toss it into your favorite thing and see what happens but that would be probably the best thing but you know it's up to you really ultimately what you do I'm just giving you some in my experience some things that I've seen and some ways that I've always encouraged people to think about investing. So that's pretty much it for me today about investing. There's a lot more things we can go into and I'm going to talk about other aspects about investing and we'll go into some of the weeds and some of the things, you know, I think can be sort of esoteric to a lot of people or they really don't understand very well. And we'll cross that bridge when we get there. But if you have any questions or comments, you can always reach me on pinkmoneyonline.com. You can go to the comments or questions or hello, and I'll and you can always shoot an email to me, and I'll answer any questions that you have. And if you want to be a part of the show, let me know that too, and maybe we can set up something where we can talk to you in a very anonymous way, and so no one knows directly what your business is, and that might be something we can do too. Shoot me a line if you have any comments or questions. I'd love to hear from you. And other than that, you guys have a great one, and we will look forward to speaking with you next time.