Investing Made Simple: Part 1

If you are going to invest in a company, then you want it to be a profitable company, right?

In the world of stocks, you are essentially buying shares of ownership in a company. When that company is profitable, we hope to see the value of our ownership (shares) in that company increase over time. Flip side, when they aren’t as profitable or they are losing money, the value of our shares go down with the company’s valuation.

If you are going to loan money to the government or a company, you want them to pay you back with interest, right?

In the world of bonds, you are lending money out as an investor. You are hoping they’ll pay back your principal, plus interest. As the lender you want the highest interest rate possible, right? So what if a pandemic hits the world, and in order to stabilize the country the Federal Reserve drops interest rates to practically zero? Will the government pay back your principal? Probably! But how are you supposed to make money on your money if there’s no interest payment?

Oversimplification, but it explains why all investments contain risk

Investment Risk Stinks. Diversify, Right?

Rather than investing in only one company, then participating in their profit and losses, why not own shares in multiple companies? Financial people call this diversification. It’s supposed to help you mitigate investment risk. In other words, own shares in lots of companies across several industries (like healthcare or technology) all over the globe.

Most people attempt to diversify by picking a handful of mutual funds for their 401(k). Then they have a Roth at Edward Jones, a few shares of Walmart at eTrade and a rollover at Merrill Lynch. Diversification, right? Maybe.

Without a Plan, You’ll Have Chicken Soup

Pick up four brands of chicken soup and look at the label; the packaging and price points are

different. Yet, if you look at the ingredient list, you’ll see they have the exact same ingredients. They are the same product, just packaged differently.

When I show people that Fund XYZ in their 401(k) has the same ingredients as the Fund in their Roth and the rollover at Merrill, they see that they aren’t actually diversified. When I show them that Walmart is present in all the funds, the lights go on. That isn't diversification, that’s Chicken Soup Syndrome*. (*Leanne’s metaphor, not an official financial term.)

Who Cares?

I do, and so should you! This is your money we’re talking about. Instead of spending that money on life, you’re investing it with the hope of return on investment.

It’s my opinion that very few investors understand what they own in their portfolios. In a world filled with lots of different investment options, ETFs, mutual funds, hedge funds and not to mention zillions of indexes to look at, it's no wonder investors are in the dark.. Popular portfoliotheory chases returns. This leaves investors unsure of what they have invested in, what companies they own or why they lent money out in the first place.