Episode 26: Portfolio is to assets (as junk is to Grant’s stuff)

GRANT: Hey, Mak.

MAK: What’s up G?

GRANT: Do you know what happens when you start early?

MAK: I do G. You go wealthy.

BOTH: It’s time for Money With Mak and G. Finance for you and your family.

MAK: Grant the stock market crash was a whirlwind, more like a tornado wiping out everything in its path. There are so many things happening at the same time. But dad did say it was the biggest crash ever. And there was only one great depression. Plus, it led to some really good changes, bank insurance protection for stocks and more.

GRANT: True but dad did say there were other times that stocks dropped quite a bit for one reason or another.

MAK: I wonder if there’s a way to protect yourself against stock risk? Do you think you can protect yourself by wearing a helmet when you ride a bike?

GRANT: Not sure. But it would make sense that people would want that.

MAK: Well, last week I heard dad talk to grandma about her investments in our portfolio, and how she shouldn’t be scared about risk.

GRANT: Did you just say Piccolo? What does that mean?

MAK: Grant, I said portfolio. That’s the word you use for all the investments you own. Just like the word junk describes all the stuff in your room.

GRANT: Ha ha funny. That’s new to me. If it’s about investments, it sounds like something that dad knows.

MAK: It does. Are you ready?

GRANT: Sure. Dad!

DAD: Hey, hey, keep it down. Shush. I’m playing music to the flowers. These orchids are going to be beautiful.

MAK: What did you say? You’re playing music to your orchid.

GRANT: Dad, I think that might have been the strangest thing you’ve ever said.

DAD: Whoa, wait a second. Stop right there. I’ve done my research. There’s a guy in India who did studies on how plants respond to music. One study showed a 20% increase in the rate of plant growth.

MAK: You’re not serious. Are you? How do you do that?

DAD: Hey, I just read the data Makadoo. Oh my gosh. Did you just see that orchid dance?

GRANT: No, I didn’t. I’ve never seen that.

DAD: Oh, okay. Maybe it was the fan blowing.

MAK: So you’re playing music to make them happy and grow faster?

DAD: It sure does something. Did you know In a different study, it showed that crops were more than 25% larger when playing da reggae man.

MAK: I just say every day is a learning experience with you, dad.

GRANT: I agree. I never would have thought that music would change a plant that much. How about rock and roll? Pop music techno grid them in blue?

DAD: I bet you can taste the difference in your fruits and vegetables. Depending on the type of music you play. Maybe a little extra wiggle in your carrots with rock and roll I bet.

GRANT: Maybe something that pops in your mouth for pop music?

MAK: That’s disturbing. Well, let’s try it.

GRANT: But before you do, Mack was talking about portfolios.

MAK: Dad, I think you need some schooling on it.

DAD: Nice job, Mak. Do you know what a portfolio is?

MAK: Well, it’s a word used for all the investments that you own.

DAD: Very good. Mak. Grant, do you have a portfolio?

GRANT: Well, I have stocks, bonds and some mutual funds. Those are investments. So I guess I do have a portfolio.

DAD: Excellent. Of course you do. Gee, man. We’re all excited to start building a house now. And I think you think about it every day. Do you think we have a plan or put together a plan before they start talking?

MAK: Absolutely they wouldn’t know how to make my room the biggest.

DAD: Nice one Mak. And do you know what those plans are called?

MAK: I know this one isn’t called Green prints?

GRANT: Too funny Mak. You are so close. They’re called blueprints right? Dead. I love blue. And Uncle Steve works with a lot of architects who designed buildings and I heard him say that.

DAD: Nice job G, they are called blueprints. It shows where all the walls go, all the pipes, the heating and cooling absolutely everything.

GRANT: So I could see where I’m going to play video games on the blueprints?

DAD: Sure can and because you’ll know where all the pipes go. You’ll also know where all the poop and pee flows through the house.

MAK: That’s absolutely disgusting. Dad. Make sure none of those pipes go near my room.

GRANT: Me too. Dad, so where are these plants called blueprints instead of green prints like McKenna’s thought,

DAD: Well you know my favorite color is green like money. But a long time ago the entire plan was printed in the color blue. Now it’s white with blue lines. Pretty crazy, huh?

MAK: It’s always interesting to know where stuff comes from. But what does this have to do with investing?

DAD: Well, we spoke about risk and our last two podcasts, right? The stock market crash hit everyone. And sometimes you can’t hide from all the risk. But that was a very special case.

GRANT: So does this have something to do with reducing risk?

DAD: It sure does. Just like building a house.

MAK: What risk is there of building a house?

DAD: Well, do you remember when we took several decks of cards? We laid them all out? And we built houses made of cards?

MAK: Yeah. Grant stole all the aces, kings and queens.

GRANT: I did not, I only steal the aces.

DAD: Do you remember how you had to put down a good base, you created several cards, or you put those several cards and triangles, and then we put more cards on top. And then you could build on top of that?

GRANT: Yeah, I got up to three stories, I would have gotten five knocked down.

DAD: So your houses weren’t really that strong? What if they were going to build our house with cards instead of concrete, steel, wood and other strong things? The house just wouldn’t stand up, right?

MAK: That’s silly dad.

DAD: Sure is. But even if you had the right materials, the house could fall down. That’s just like building your house out of cards. If you didn’t build it, right, it wouldn’t stand now, would it?

GRANT: No, it wouldn’t. We had lots of them that fell off. So you need to have the right plans to make the right base?

MAK: That makes sense to me. So are you saying that you build a portfolio like a house?

DAD: That’s exactly what I’m saying. And before you build your house, you know what you want? Right?

GRANT: Yes, a baseline for us to play video games. My own room and my own bathroom.

MAK: Same with me. With my room far from Grants my own year, and I don’t want to share a bathroom. Yes, it’s very important to have a plan.

DAD: And I bet your mom needs a big closet, so she can get away and hide from both you guys.

BOTH: Not funny.

DAD: Okay, but it was a little funny. Anyway, if you wanted to build a really strong house, what materials would you use?

MAK: Concrete.

GRANT: Steel.

DAD: You’re both right. But do any of your friends just have a house made of concrete and steel?

MAK: No, because they have windows to let light in.

GRANT: And they use wood too, because concrete and steel is really hard and it can become cold.

DAD: Exactly. So you could build a house with something super strong. But it might be cold, it wouldn’t let light in and it would be hard to walk and stand on.

GRANT: So if you’re going to build a portfolio, you might not want to use all the same investments.

DAD: Excellent Grant. That’s exactly what I’m saying.

MAK: Each investment like material in the House House to create a portfolio you want, like building a house.

DAD: That’s exactly the point. Now, we spoke about the risk of stocks. Let’s think about stocks like concrete.

GRANT: Okay, I got this, you probably need some concrete credits, not the only thing you should use.

MAK: Even though it’s super strong, you need some wood and Windows

DAD: Couldn’t have said it better myself. So if we don’t use all stocks in our portfolio, what else could we add?

GRANT: Could we use alternative investments like things that you could collect? For instance, action figures, paintings, video game boxes and stuff like that?

DAD: Sure, you can.

MAK: And can you add bonds? Those are different from stocks, right?

DAD: Absolutely. And do you remember what we said about bonds,

MAK: Less risk and less return.

DAD: The funny part is that bonds do better when stocks don’t do as well.

MAK: So by putting them together, you can build a stronger portfolio?

DAD: Yep. And I know you both love to bake cookies. Do you remember what happened when we put too many chocolate chip cookies in our last batch?

MAK: Dad, there’s no such thing as too many chocolate chips. Remember that it was a big pool of chocolate, very little cookie. And it was hard to hold and you had to eat it with a spoon.

DAD: You’re right. Maybe a nice chocolate bar, but not a great cookie. And what about the baking soda?

GRANT: That stuff tastes nasty, but when we forgot to put it in the cookie, mix the cookies off.

DAD: Exactly. G A portfolio is also like a cookie recipe. Some ingredients aren’t good on their own, but when you mix them all together, it makes it great. Plus, too much of a good thing can be bad too.

MAK: Okay, you know, I love stocks, but there is risk. Maybe too much sometimes. So are you saying we have to mix in other investments?

DAD: Mak that’s exactly what I’m saying. And that’s what makes a great recipe.

GRANT: So, dad, if you mix things together the right way with stuff you may not like by itself. It may make a better recipe like baking soda.

DAD: Exactly. Some people don’t like this either, stocks go up and down. They get nervous that they’re losing money. But what do we know about investments? They go up and down, you got it. But with a little baking soda in your portfolio, those downs won’t be as bad and funny enough, you can earn more with less risk.

MAK: Could you just say you can earn more with less risk? Is this like your stinky blue cheese? What are you talking about? You know, Dad, I can’t eat that stuff straight. But sometimes when you put a little in sauce and cook it, it’s really good.

GRANT: So I may not love a risky stock that goes up and down like crazy. But when I have it in my portfolio, the total of all my investments won’t go up and down like crazy.

MAK: Adding some bonds to the recipe, like a little blue cheese really helps. Wow, I’m starting to get hungry. Chocolate chip cookies and blue cheese. Yum. Greer, I can’t believe you actually put chocolate and stinky cheese in the same sentence. You’re amazing.

GRANT: I know I am. But thanks for letting me know.

MAK: You’re welcome.

DAD: Last season, we really dove into stocks, bonds and alternative investments. Thinking about how to put all those investments together is where you construct your portfolio. Most people would say that cayenne pepper by itself is way more than they could handle. However, if you put a little bit into a recipe for chili, it makes all the difference. The key is to make sure not to put too much into the recipe to overwhelm or ruin it. But if you put just enough and mix it with all the other ingredients, you have a great bowl of chili that meets your tastes. It’s the same with a portfolio, you may not like all the investments on their own, because they may go up and down more than you want. Some investments may make you nervous, but if you add them together in the right way, it meets all of your goals and needs. Okay, so maybe I’m thinking about food just a little too much. Getting someone to help you set up your portfolio. Maybe the best financial advisors use fancy words like standard deviation, alpha, beta and other things. The key is that normally a portfolio can generally benefit from a mix of investments that on their own may not be your preference. And when done the right way it reduces risk and increases returns. Oh, that is the most important line to understand. A good portfolio reduces risk and increases return by mixing in the right investments, just like a recipe. As parents, we’ve all baked cookies or cupcakes with our kids. Sometimes the inputs don’t necessarily make sense on their own. But when we follow the steps, it tastes delicious. Yum, yum, yum yum your portfolio is the same, increasing your knowledge of investing and the construction of your portfolio will help you add value to your overall wealth. So it’s a great lesson to learn. And here’s a snippet from our next episode.

MAK: Okay, we now know a little bit more about setting up a portfolio of investments. It’s a recipe that reduces risk but increases return. But what kinds of things can we buy?

GRANT: Well, we already know a bit about stocks and bonds, but sometimes I don’t see how you can just pick one stock or just a couple.

DAD: Thanks for being here. Bye!