The Childfree Wealth Podcast, hosted by Bri Conn and Dr. Jay Zigmont, CFP®, is a financial and lifestyle podcast that explores the unique perspectives and concerns of childfree individuals and couples. In this episode, Bri & Dr. Jay discuss different investment options to help you understand what they are.
You’ll hear Dr. Jay give Bri a quiz on the different types of investments & gain a better understanding of your options. Whenever it comes to investing, you should always understand what you’re investing in. Investment options can include stocks, bonds, mutual funds, ETFs, real estate & other alternative investments. Understanding what these are & how they work for you is essential.
Podcast: Ep. 31: Investing 101
Course: Saving & Investing
Be sure to join the conversation by emailing us at email@example.com, following Childfree Wealth on social media, or visiting our website www.childfreewealth.com!
Disclaimer: This podcast is for educational & entertainment purposes. Please consult your advisor before implementing any ideas heard on this podcast.
Hey Childfree Wealth listeners! So in the last episode, we talked about kind of like basics of investing and we talked about a general rule, the only investment things you understand and investing in things you understand includes what you're investing in, how it impacts your financial plan, and where to keep it. So today we're going to about what to invest in.
And I didn't warn you of this before we recorded, so I feel bad for Bri, but I'm going to give her a little quiz. So, Bri, just passed the series 65 exam, which is the exam you need to become an Investment Advisor Representative in it. Like, it's like way too deep into all the rules and the regulations and what things are and all that.
But because she just passed the test, she's on the right place for me to give her a quiz. So I'm going to quiz her on what to invest in and see how she does. And you can all give her a grade in the comments, but I'm sure she'll do great. Is that okay, Bri?
Yeah. Let's do this.
If you’re not watching on YouTube because Bri’s smiling like, yeah, I'm going to do this, but I'm not so sure where we're going. Is that.
Yeah, I don't know where you're going, but you know, I passed my test a month ago yesterday, so hopefully I still still got it in my brain there.
And by the way, when you get to these tests, it gets into like the dates of the rules and all these other like stupid stuff that nobody really needs to know. But you're required because that's what the government says. Alright. So, Bri, we're going to talk about what we have to invest in. So the first one is what's a stock?
A stock is a part of a company, and it's just one individual company. So you're buying a little piece of ownership of it.
Okay. Okay. So we own a part of the company. Why? Why would I buy a stock.
Companies sell stocks because they need to raise money to help fund whatever they're doing. And people would buy them, because if you're buying an individual stock, you're more than likely saying, I think this company is going to go up in value over time and make me quite a bit of money. And you really believe in that specific company.
Okay. And with a stock, there are two things that we kind of like how we make money and that's, you know, capital appreciation and dividends. But can you kind of explain what those are?
Dividends is what the company pays out to the shareholders. So anybody who owns a stock, every quarter, it can be it just depends. They don't always have to pay them out depending on whether or not they have made money or lost money in that quarter. And then capital appreciation is just the value of the company overall. So let's say, you know, this company is a low-value company right now.
They're they're new. They're just starting out. But over time, they become a really big giant and the value of the company goes up. So that's capital appreciation because you can eventually sell it for a lot higher price than you bought it for.
Yeah. And just for everybody listening. So a couple of things to remember. Our parents, our grandparents used to love buying dividend stocks because they get that check it every quarter or whatever it is. And like that was like the thing, you know, I got my dividends and that's my cash flow. And now there's a lot of companies that don't even do any dividends, which there's a whole bunch of math.
And for my MBA, we had to actually do a whole course on determining a stock's value. And like this giant Excel sheet on dividends and figuring out price, it all really doesn't make any sense anymore. But like, yes, there's math behind it, but some of the high growth companies, they go up in value. That's capital appreciation. But on dividends now, the bonus is capital appreciation.
You pay taxes on that when you sell it. Dividends, you pay taxes when you get the dividends. The other one to remember just kind of one of those data points for what you're investing in with individual stocks in assets, which we'll get to the quiz question on them. And I'm just clueing Bri in that we're going to ask the question, but you have an option for what they call a dividend reinvestment program.
So when you get the dividends, it just buys more of that stock. Good way to set it and forget it rather than have a whole bunch of cash sitting in your account. All right, Bri. So what's a bond?
A bond is buying debt essentially, and you're buying money that will later be paid back to you and you're buying it at a discount.
Okay, so a bond, a debt. How do I decide which debt I want?
It's going to depend on your individual risk tolerance and your goals and what you need.
So should I just loan Bri 100 bucks and call that a bond?
Do not loan money to friends and family and call it a bond. It is buying from like the US government treasury system. Something like that is going to be an actual bond.
Yes. So a couple things on bonds. They are tradable on the market. They have interest coming in interest. By the way, technical term comes in as a coupon because it literally used to be a coupon book. You'd like rip off the coupon. These are all old fashioned terms that really don't matter anymore. Treasuries, you know, when you talk about, you know, the U.S. government in general, that's a safe one.
We're saying that now. We're recording in May when the the U.S. is still debating their debt ceiling. So who knows? This recording might be useless then. But the other thing you could invest in is corporate bonds. And depending on your age, you may have heard of junk bonds. Junk bonds are like companies that have high risk, but they give you a high interest because of the risk.
Usually the higher the interest, the riskier it is. And bonds are usually what is the safer part of your portfolio. So you don't want to be taking a whole lot of risk on bonds. All right. So we got bonds. We got stocks. What's an ETF?
Exchange-traded fund. And those are a group of different companies that can be exchanged at any point during 24 hours in the day. You can where other things. You'll put your order in and you won't actually buy it till the close of that day. Exchange-traded fund you can say I want to buy it right now.
So you buy it for the price at that time, during the day versus when the market's closed for the day.
Yeah. ETFs is its most simple. Just a basket of stocks. You can buy an ETF and pretty much anything you can buy the whole stock market you can buy just you know, I just want people that are working in the airline industry or what. There's all different ETFs. There are also some fun ones. We'll come back to ESG in a minute.
But there's some things around environment and social and governance. There's also the environment. ESG is kind of like, I want to save the world. There's also an ETF or I want to drill all the oil out of the world. There's also a fund for you know, we talk about influencers and tell you buy stock. Jim Cramer is very popular on CNBC.
He's got his Mad Money show. There's actually what's called the inverse Jim Cramer, which is the opposite of everything he stated like there are all different types of funds that are out there. The good thing is you're buying a little bit of everybody versus just one stock. The downside of buying an individual stock and I'm not going to today talking about any particular stock you should buy or don't. I’m just talking about understanding the categories and structure.
But if I buy an individual stock and somebody tweets in the price doubles or drops in half, that's really scary. An ETF says I buy a whole bunch of stuff that way hopefully, one thing does not drive the whole thing down. All right. So what about an ETF versus a mutual fund?
A mutual fund that is going to be more open-ended. So they're constantly adding more. But you have to go through some sort of financial advisor to purchase mutual funds. Those are actively managed.
Usually, they're actively managed. There’s some that they're trying to do some non so not so actively managed actively versus passively managed. But what that means is you're paying somebody to pick stocks in and out of that fund and you're going to pay a higher fee for mutual funds on average. Now, by the way, if it sounds like I’m caveating a whole lot of stuff it’s because it's not always 100% on any of us.
Like a stock is a stock, but a mutual fund, an ETF. There's some like movement there. You're mutual fund. You're going to find in 401(k)s because it pays for the fees for the fund. So like if you're like, “Hey, why can't I buy an ETF in my mutual fund?” It's because they need to get the fees from the 401(k).
But it also means you're paying more fees. You know, I’ve looked at some people's mutual funds and actually, I’ve got to give Bri a quiz question here before I go to the fees. What is like bips or basis points or like these fee numbers that I hear all the time?
It just tells you the percentage of fee you're paying, but they're written in like eight basis points or ten basis points or different things like that. And all it really is is what percent you're paying in fees.
Yeah. So just to make this clear, because this is one of those confused me when I first like read it. If you're paying 1% in fees, that's 100 basis points. If I'm paying .10%, that’s a 10th of 1% it’s ten basis points or bips. And if you got to fund this paying, you're paying 1% in fees. That means you're giving up 1% of your money, whether you make money or not every year for the honor of having that fund.
My goal when I'm helping people work on, you know, buying ETFs and other things I want with the standard ten basis points, which is 1/10 of 1%, and you can usually buy pretty much about the same thing in a passive ETF. Now an active mutual fund, people go, well, maybe these mutual funds will beat ETFs. Well, if we go back to our last episode, we talked about the monkeys and the chickens that keep winning on the stock picking.
Warren Buffett has historically had a bet they said, hey, if you can beat the S&P 500, you know, regularly with an active fund, I will give to your charity. And he's yet to have given a donation because nobody needs it in the long run. They might be a year or two years, maybe three years, and then they have a bad year.
You know, it's just one of those games. So. All right. So we had stocks, bonds, ETFs, mutual funds. Oof! Now we then get into the other stuff. Now when we talk about investing, you have to share what you're investing in. Keep in mind real estate is an investment. So I probably don’t have to describe real estate is like property, but what I will say is that you there is an option.
You can buy what's called a real estate investment trust which is called a REIT which essentially says, I buy what the other people are buying and they manage it. And the bonus there is you can invest in like residential, commercial or self-storage or health care or whatever you want. You can invest in more things. So that's the way to get access to real estate.
There's also what we would consider a kind of blanket thing called alternative investments. So what's crypto?
That would be an alternative investment.
But what the heck is it?
Oh, I don't really understand crypto well enough. I just it's, it's what the crypto bros are talking about buying. I don't know.
But that's a perfectly fine answer. Okay. Like, okay, Bri’s over here thinking I tricked her. Okay. Crypto you're buying ones and zeros that are in a crypto coin or value. Now there's some things the blockchain and other things. There is something there in the technology you're buying. Is it an investment? Well, you buy money and it goes up.
Actually, right now the SEC is having a big argument on whether or not it is a security or investment. I don't know. It's an example of an alternative investment. Does it mean I should invest in it? I don't know. If you are, we're going to do a very small percentage. Yeah. Like crypto that you'll see a lot of the experts talking about keeping 1% of your portfolio in crypto.
So if it goes down to zero, who cares? And if it goes to the moon, awesome. I'm okay with that. Like, do you want to take 1% of your money and like take it outside money and light it on fire, I’m okay, with that. Same with your investing alternative investments could be anything. So I think we get into gold and silver depending on which news station you watch, you'll see a lot of you need to buy gold because of inflation hedge and all that. Okay.
The thing I'm at is if you really think we're getting to a point where we're trading gold and silver, probably whiskey and ammo and tampons will have more value than gold & silver. I'm just saying because we're talking about like end of the world type stuff like food has more value than gold. I don't know. I have some gold and silver just because it's fun.
But it's not part of… it's not part of my investing strategy, you know, it's just like I have a couple of coins. So that's another alternative asset. Some of the other alternatives are art. Now, the hard part with art is you've either got the really good art that goes up in price or the rest. There's nothing in between.
You can also do thing with like really high end cars are an investment. Cigars. I don't know. Like random things are investments. In theory, they're not all managed by, you know, Security Exchange Commission or regulated or that the other one we get alternate that's what you talk about private equity they get into hedge funds and all that all right.
A lot of that stuff looks cool. It sounds cool. It's kind of sexy, but I don't understand it. Like I understand appropriately how it works and I understand I watch Shark Tank and that's kind of investing in companies. I get that you have to be in what's called an accredited investor to work in some of that. So you have to have a certain amount of money if you want to do it for the fun of it with a little bit of money, I'm okay with that, but you need to understand it. I think the hard part is people go, “Well, I saw this, I need to invest in it.” And I'm like, maybe like give you an alternative investment. Actually, it works out well. So right behind my house, there's hundreds and hundreds of acres of woods. And John Hancock, which an insurance company owns most of it, and all they do is timber, cut trees, plant trees, cut trees, plant trees, cut trees, plant trees. They make a whole lot of money off it. Does that mean you should be doing that? Probably not.
Okay. But it works as an investment. Stocks, bonds, ETFs, mutual funds. That's gonna be your workhorse. So those are what you're buying. We're going to talk about “how.” Kind of like percentages in different things. But I want to talk about kind of just this concept of passive versus active investing and what you can invest in.
So passive investing, I buy it and then I forget about it. And I mean not literally. You have an account somewhere like you check it twice a year and I sell it when I need it. If that sounds boring, that's because it is. That's passive investing. And you know, we had given some book recommendations. But if you look at either The Little Book of Common Sense Investing or A Random Walk Down Wallstreet, that's kind of where they're talking. Buy the whole stock market, set it, and forget it.
You know, as we go down the Bogle path, down the Vanguard path, you'll see a lot online about a simple three-fund portfolio, the whole U.S., the whole world, and some bonds. It works. Set it, forget it. Now we can have some separate discussions about rebalancing. And is it worth it or not? I don't know.
But boring works. So if you're getting excited by your investments, that's a gamble. Have you gambled with your investments Bri?
Just using the one app I did a little bit, but honestly, it's probably 1% of everything I had. If I can do quick math in my head, yeah only 1% got rid of it. Once I realized that that was not the way to go and I was getting ridiculously high fees and doing it and getting hit with taxes because I had no idea what I was doing at that time.
I just went for it and now my things are boring.
Yep. And when it comes to taxes, we're going to discuss that when we talk about where to keep your money, because that's a big part of that. The one other kind of spin on this I want to swing back to is ESG.
An ESG, there's something that they're saying, environmental, social and governance kind of saying we're going to do the good things and this is an option for you in your investing and interesting enough, there's a political debate on this one on whether or not financial advisors can even talk about ESG right now. We still can, but they're trying to outlaw it because… I… politics. In ESG, there's lots of different ways to do this.
You can pick which companies you invest in by their values. There's two different ways to do this. One is the ESG kind of opt-out, which I call kind of the naughty list. They're like, “Hey, we're not going to invest in oil and guns. And anyone that's like child labor or the U.N.,” like there's a guidance & there’s like a whole list that's like companies really shouldn't invest in. Got it.
I happen to invest in ESG. I'm not saying you should or shouldn't. It’s just how I happen to look at it. That's one way to do history. The other way to do ESG is active managed, where they literally go into every single company and say, what is this? What are they working on? What's the composition of their board?
Do they have good women representation? Do they have these products? Are they sourcing that carbon neutral? The problem is we can get so far down that path that we can only invest like two companies. And for anyone that's ever watched a show, The Good Place, The Good Place and ESGs go hand in hand. In my mind, if you haven't seen The Good Place, I'm going to give you a spoiler.
So you might not want to listen to this, but at the end they have a scoring system that says whether or not you are good enough to go to the good place or you go to the bad place and they found out that nobody's going to the good place in forever. Why? Because everything we do in life then connects to something that's not so good.
I buy somebody flowers. Well, in order to do that, they had to plant them. They had to put the chemicals, they had to transport them. You know, the labor was a bit… Even though I my wife flowers, it's going to get marked as a negative because of the downstream effects. That's the problem of the ESGs is you have to figure out where you're willing to do the cutoffs for the clients I work with usually kind of a naughty list is a good place to start going.
I just don't want invest in the bad stuff. If you really don't believe in capitalism or any of that. Well, I got nothing for you because it just it is what it is. There's some points where, like, I understand and appreciate your values. There's not much you can do in investing to match that. And they're trying to get better at that.
But even the companies that are the best, you can usually find something wrong about them. So it's kind of a balancing act between how much money you want to save on what you want. On the flip side, there are literally non-ESG. You know, there's one for just I just want to do oil and drill. That's an ETF.
The downside is last year, now we're in 2023, last year, oil stocks did very well. So if I'm investing in ESG, there are no oil. I'm losing that. Yeah, but then I'm also polluting the world and, you know, carbon footprint and all that. I don't know, like you have to make those choices to figure out the balance between what you're investing in and what and how it fits.
I will tell you in your 401(k), you're probably not going to have as much choice. You're going to have what's called target date funds. Those are very simple mutual funds that say, I'm going to retire in 2055. I want to buy some stocks and bonds. I want more stocks when I'm younger, less when I'm when I'm there. And we're going to talk more about that and how it impacts your financial plan.
But you're probably not going to have ESG options in your 401(k). That's the one they're actually fighting about in the politics world. So you can only do that in your IRA brokerage or other things. So Bri, we kind of like went over what to invest in. Any general rules you want to share with people are like watch outs or like, hey, here is the biggest thing I learned.
Yeah, don't buy something because of an Instagram post. I did that once. It was dumb move. That's all I have to say. Real dumb move.
We call that you did something stupid. You pay the stupid tax and move forward. Like just by the way, I don't know that anyone on here can go. I've never bought anything because the social media now it might not be investments, but I bought some stuff on Amazon. I'm sure that I'm like, yeah, I got sold garbage. Cleaning products are actually the one I usually do wrong because like I see on social media, like this cleaning product is awesome and then I'll buy it because it's like socially conscious, you know, non environmental doesn't destroy everything.
And I'm like, and then this cleans nothing. I have two bottles of it right over there, actually, whatever the heck this garbage was. But like, that's the same thing. But now we're doing it with our money.
Yeah, thankfully I am young enough that recover from that, but… That was dumb. That was real dumb.
Yeah. And what you're noticing is Bri and I just talked about what to invest in, and we never talked about exact stocks, ETFs, mutual funds. You should buy this. You shouldn't buy that. Why? Because you have to understand it yourself and make those choices. You know, that's that's the point. If you're an influencer out there is telling you buy this, remember, you're the product.
They're actually selling your stuff. You know, they do influencing for free because they want to sell you something.
And honestly, it's very irresponsible because they have no idea about your goals, your risk tolerance, your financial situation, anything like that. And so to say, buy this or buy that is kind of scary.
Yep. That's why there's a few influencers that got hit by S.E.C. for crypto with some good million dollar fines because they didn't do the due diligence on what they were selling. Yeah, you know, I mean, the generic concepts, you should have a diversified portfolio. Yeah, we can talk about that. That's like saying I should buy everything. That makes sense.
If I said buy XYZ stock, by the way XYZ actually is not really a stock, I'm just making it up. That's where the problem is. So you got to watch the advice you're getting. If you have no clue what to buy and you dove in, you read the books, you can always pay for advice. Only a Certified Financial Planner to help you work on a financial plan and with simple passive anything you set it and forget it and update it when you're ten years older or whatever.
Now you're paying for advice. See the difference is, if you pay for advice, you know, if you come to me as a client, I can tell you buy this, don't buy that because you paid me for advice. We have a piece of paper that says, I've looked at your portfolio, I've looked at your risk, I've looked at your life, I've looked at your financial plan.
And here's my recommendation. Is my recommendation to be perfect? No, but here is a recommendation from a professional for you. And that's the difference versus I got paid to do a brand endorsement for whatever and say you should buy that stock.
Yep. Or the courses from people who have no education in finance and then they sell them and say, buy this, buy that.