Family Update
Chris has officially moved into Southeastern University. His dorm room looks more like Army barracks than a college room, and I honestly don't know how anyone sleeps in there, but he's eighteen now, so I guess that's just how it goes.
Everyone on campus is remarkably chipper and happy. It's a conservative Bible college, so there's no drinking, and even the thought of a girl peering into your dorm room is treated like a serious offense. We agreed the cafeteria food is average at best, but there's a lot of good support built in for freshmen, including the option to sign up for a freshman mentor to help them get involved.
That leaves us with two kids still at home. The biggest change we've noticed is the grocery bill and how much cheaper it is to eat out now.
I still remember being a freshman myself. I was so stressed and nervous the whole time. I guess that's just part of it for everyone.
There's my Chris (on the right). He now has a mustache.
Sometimes I forget that many of you don't know the basics of investing. It's easy to lose track of that when I've been managing money for twenty-five years, and my dad spent his career doing the same thing. Did you talk about stocks and bonds with your parents around the dining room table?
Probably not.
So let's break this down as simply as possible. I often assume readers understand certain concepts, and if you don't, the rest of what I write can be hard to follow.
**Mutual funds: the basics**
When most people invest, they don't buy individual stocks. They put their money into mutual funds, which hold hundreds or thousands of individual stocks or bonds inside one investment.
When someone tells you to have a "diversified portfolio," they simply mean you should spread your money around instead of concentrating it in one place. Mutual funds are a simple way to do that.
I recommend against buying individual stocks. They're volatile and unpredictable. The stock market as a whole has a long, fairly predictable track record, but any single company can do anything.
A company's age or reputation doesn't guarantee it will keep making money. Enron, Lehman Brothers, Washington Mutual, WorldCom, Circuit City, Blockbuster, Toys "R" Us, Pan Am, Borders, Radio Shack, Eastman Kodak, Sears, Hertz. All bankrupt.
Guessing which company will rise or fall in a given year is nearly impossible. Even the Harvard Endowment, a fund worth over $50 billion, can't reliably do it. The dozens of professional stock pickers it employs haven't outperformed the plain old S&P 500 over the past decade.
**How mutual funds and ETF's work**
Every mutual fund trades under a ticker symbol, which you need to know in order to buy it.
Say you walk into Charles Schwab or Fidelity and ask to buy $100,000 of SPY. What are you actually buying? SPY holds the 500 largest companies in the U.S. in one package. As of this month, a $100,000 purchase would roughly break down like this:
| Company
| NVIDIA | $7,940 |
| Apple | $7,010 |
| Microsoft | $5,410 |
| Alphabet (Google) | $5,470 |
| Amazon | $3,920 |
| Broadcom | $2,580 |
| Meta Platforms | $1,810 |
| Micron Technology | $1,590 |
| Eli Lilly | $1,530 |
| Tesla | $1,490 |
| JPMorgan Chase | $1,440 |
| Berkshire Hathaway | $1,380 |
| Advanced Micro Devices | $1,150 |
| ExxonMobil | $1,030 |
The list continues until it reaches $100,000, spread across all 500 companies. The bigger the company, the bigger its slice.
**Beyond large American companies**
There are other categories to invest in besides big U.S. companies:
- Small-sized companies ("small cap")
- Medium-sized companies ("mid cap")
- International companies (from developed nations)
- Emerging market companies (from developing nations)
You can also invest in bonds. As I've written before, a bond is simply a loan. For example, you loan Walmart $10,000 to help fund a new store. They pay you 5% interest for ten years, then repay the loan.
Common bond types:
- U.S. government bonds (you loan money to the federal government)
- Municipal bonds (loans to local governments)
- Corporate bonds (loans to companies)
- International bonds (loans to foreign companies and governments)
A "diversified and balanced portfolio of stocks and bonds" might look something like this:
- 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 only an example. I'm not advising you on how to invest your own money. Don't invest this way.*
**Why diversification matters**
Different asset classes move in different directions in different years. A few examples:
- In 2007, emerging market companies gained 40% while small companies lost 2%.
- In 2008, U.S. Treasury bonds gained 5% while large companies lost 37%.
- In 2013, small companies gained 39% while emerging market companies lost 3%.
That unpredictability is exactly why it pays to spread your money around. Nobody knows in advance which asset class will thrive and which will struggle in a given year.
Along the same lines, don't chase last year's winners:
- In 2017, emerging market companies led the pack. In 2018, they lost the most.
- In 2018, small-cap companies were among the worst performers. In 2019, they were among the best.
- In 2022, tech stocks were the worst performers by far. The following year, they were the best by far.
I hope that helps demystify investing a little. Don't make it more complicated than it needs to be.
Be Blessed,
Dave
I don't usually give hot stock tips like this, but if possible, I suggest you buy NVIDIA two years ago.