January 5

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The Biggest Losers

FAMILY UPDATE!  

Christmas has come and gone. The kids, now ages twelve through seventeen, don't view the holidays with as much magic anymore.

Mommy felt a little under the weather on Christmas, so I had to take on her responsibilities. It made me appreciate how much work Christmas can be for a mom. The wrapping, getting everything ready under the tree, Christmas morning, putting together toys, the nonstop messes... Then, dinner with the extended family had me exhausted (I made beef tenderoin which was a hit). It was a fun day and everything but I was in bed by 8:00.

There were a few unique gifts. I got a smokeless firepit. I don't understand the technology, but it doesn't smoke nearly as much. My wife got a lot of Goldendoodle-related items, such as mugs, pajamas, and robes. Probably the biggest hit was the adult dog bed, as you can see below.


Sometimes, I forget that many of you don’t understand some of the basics regarding investing. It is very easy to lose track when not only have I been managing money for twenty years, but my Dad also has a long history of investing. Did you talk about investing in stocks and bonds with your parents around the dining room table?

Probably not.

So, let’s break this down to the absolute simplest terms possible. As I said, I often assume my readers understand certain concepts. If you don’t, the rest of the information may be hard to understand.

When most people invest money, instead of buying a bunch of individual stocks, they put the money into mutual funds. Mutual funds consist of hundreds or thousands of holdings within one investment vehicle.

When somebody says, "You should have a diversified portfolio," it simply means you must spread the money around. Mutual funds are a great way to do this.

I recommend against single stocks as they can be volatile and unpredictable. History shows a very predictable pattern of the total stock market, but individual stocks can do anything.

I don’t care if a company has been around for a long time. That does not mean it will make money. For example, GE has been around forever. It is down 65% over the past couple of years. Heinz is down 60%. Remember Texaco? It was one of the biggest companies in the country at the time. It went to zero.

In 2023:

Moderna (vaccine manufacturer) was down 63%.
Dollar General was down 48%.
Walgreens was down 36%.

Guessing which company will go up or down in any given year is almost impossible. Even the Harvard Endowment, a fund worth over fifty billion dollars, can't seem to get it right. The dozens of fancy stock pickers they employ haven't made as much money as the boring old S&P 500 over the past decade.

When you buy a mutual fund, the mutual fund has a ticker symbol. You need to know the ticker symbol to buy the mutual fund.

Let’s say you walk into Charles Schwab or Fidelity and ask them to purchase $100,000 of SPY. What are you actually investing in? SPY is a fund comprising the 500 largest companies in the U.S., all in one neat package. It means you would put:

$5,800 into Apple
$5,490 into Microsoft
$4,170 into Amazon
$4,070 into Google
$2,260 into Facebook
$1,480 into Berkshire Hathaway
$1,320 into Tesla
$1,290 into NVIDIA Corporation
$1,290 into JP Morgan Chase
$1,210 into Johnson and Johnson
$1,100 into Visa
$1,050 into United Healthcare
$920 into Proctor and Gamble
$910 into Home Depot

This list goes on and on until it totals $100,000. You will own shares in 500 companies. The bigger the company, the bigger the allotment.

Many of you have 401k funds through your company. Maybe you have been told that "You need a balanced and diversified portfolio." All this means is that you want to invest in lots and lots of different stocks and bonds.

Besides big American companies, there are other places to invest your money, such as:

Small-Sized Companies (they are called "Small Cap")
Medium-Sized Companies (Mid Cap)
International Companies (companies from first world nations)
Emerging Market Companies (companies from developing nations)

You can also invest money in bonds. If you remember from past articles, a bond is simply a loan. For example, you loan Walmart $10,000 to help them build a store. They pay you 5% interest for ten years and then repay the loan.

The types of bonds are:

U.S. Government Bonds (You are loaning money to the U.S. federal government)
Municipal Bonds (Loans to municipalities)
Corporate Bonds (Loans to companies)
International Bonds (Loans to companies and governments overseas)

So a "diversified and balanced portfolio of stocks and bonds" might look like:

30% Large Cap
10% Small Cap
10% Mid Cap
10% International
10% Emerging Markets
10% U.S. Government Bonds
10% Municipal Bonds
10% Corporate Bonds

*This is an example portfolio. I am not giving you advice on how to invest your money.

In addition, different asset classes move in different directions at different times.

In 2007, Emerging Market Companies made 40%, and Small Companies lost 2%.

In 2008, U.S Treasury Bonds made 5%, and Large Companies lost 37%.

In 2013, Small Companies made 39%, and Emerging Market Companies lost 3%.

So you can see that it is essential to spread your money around. Nobody knows which asset classes will thrive and which will do poorly in any given year.

Also, don’t try to chase good returns.

For example:

In 2017, Emerging Market Companies made the most, and in 2018, they lost the most.

In 2018, small-cap companies were among the worst, and in 2019, they were among the best.

In 2022, tech companies were the worst by far, and in 2023, they were the best by far.

I hope that helps and demystifies investing a little bit. Don't make it more complicated than it is.

Be Blessed,

Dave

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