This episode, Mak & G are looking at Mutual Funds, how they can reduce the risk in your portfolio and why they should be in everybody’s investment strategy.
Picking individual stocks to invest in can be risky. What if something happens to that company and you lose all your money?
This episode, Mak & G look at how we can reduce the risk of our investments by investing in Mutual Funds, why they can be safer than individual stocks, and why they should be in everybody’s investment strategy…
“People save money and use it to buy something, for a mutual fund they share in the ownership.” – G
“The benefit is you have a team that picks the stocks based on how the fund is set up, they watch everything and charge a fee.” – Mak
02:45 – The challenge of picking individual stocks.
03:45 – What drives a stock price.
04:06 – What a Mutual Fund is and how it can help your investments.
06:12 – The different stocks and bonds a Mutual Fund can invest in.
06:45 – How Mutual Funds pick which stocks to invest in.
07:58 – How many stocks a Mutual Fund can invest in.
08:45 – How big Mutual Funds are.
09:39 – How Mutual Funds can help you set up your portfolio.
Connect with Ben Jones:
#1 Where are higher-income families more likely to do most of their Christmas shopping, compared to lower-income families?
A) At a pet store
B) At the North Pole
D) At a yard sale
#2 What are lower-income families more likely to use to pay for Christmas shopping?
A) Home-grown vegetables
B) Compliments to the store clerk
C) Monopoly money
D) Credit card
#3 How do 29% of Americans plan to pay off their holiday bills?
A) By doing the dishes for six months
B) By joining TikTok and hoping they go viral
C) Using their tax returns
D) With money from generous strangers
#4 How long did we calculate a typical $1500 credit card bill would take to pay off at average interest rates if you only paid the minimum amount?
A) 44 months
C) Ten years
#5 Prices today are around 50% higher than 20 years ago because of what?
A) 44 months
C) Ten years
MAK: Ok, we now know a bit more about setting up a portfolio of investments. It’s a recipe that reduces risk, but increases return. But, what kind of things can we buy?
GRANT: We already know a bit about stocks and bonds. But, sometimes I don’t see how you can pick one stock or just a couple.
MAK: Yeah. I like companies that sell stuff but which one? I love shopping at Target, but sometimes there are other companies that are really good too.
GRANT: I get it. There are so many other video game technology companies, but I don’t know whether Nintendo is better than Activision Blizzard.
MAK: Plus, you have to watch individual stocks much more. If expectations change quickly for a stock, I may not want to keep it then.
GRANT: Great point. Maybe there’s a way to buy technology stocks without buying 5 or 10 individual stocks.
MAK: Sounds like you might reduce your risk, because then you aren’t putting all your eggs in one basket and then you’re completely counting on that stock.
GRANT: What do you think? Should we?
MAK: Sounds good to me.
MAK/GRANT: DAD??? WHERE ARE YOU??
DAD: Hold on a second guys… Oreo, steady as you go buddy…
MAK: What is Oreo doing in the kitchen?
GRANT: Dad, is Oreo standing there holding a spatula?
DAD: Yep. Pretty awesome, huh? Look at him, stand there and work that stove, baby.
MAK: But, he doesn’t have thumbs, how does that work?
GRANT: And, is the stove on? What smells delicious?
DAD: You don’t know what pancakes smell like? Here come the eggs early.
MAK: Is Oreo actually cooking you breakfast?
GRANT: That is wicked cool dad.
DAD: Well, since I couldn’t get either of you to do it, I thought I’d teach him. He was very open to doing it after I gave him a couple doggie treats.
MAK: How’s he doing?
DAD: He’s struggling to stir the pancake batter, he’s dropped several pancakes on the floor, and doesn’t get the eggs quite right. But it’s a little hard to flip pancakes without thumbs.
GRANT: That’s so cool.
DAD: Yeah, pretty awesome. So, what can I do for you guys?
MAK: We’ve been going through our discussions on portfolios, and were wondering about the different investments we can buy.
GRANT: Yeah, I love technology, but I’m not sure about picking individual stocks. That’s hard.
DAD: WOW, that’s a big insight. Most people think they can pick great stocks all the time, but not true. And, what do we know about stocks?
MAK/GRANT: Stocks go up and down!!
DAD: Exactly. And, what if you had all your money put in one stock, that may work out AWESOME or….
MAK: It may work out TERRIBLE. All your eggs in one basket, I know.
DAD: Perfect. You get it.
GRANT: So, is there a way to buy a whole bunch of stocks, of companies I like, without having to pick them all?
MAK: And, is there a way to do it, where it doesn’t cost a lot.
DAD: Those are both excellent questions. Stock picking can be extremely difficult, and honestly few people do it really well.
GRANT: We talked about great companies, but how do you know they’re going to be great BEFORE they become great?
DAD: That’s difficult. Many people think they know, but many times they just get lucky. Plus, there are professionals who do it EVERY DAY, 10 HOURS A DAY.
MAK: So what do you do?
DAD: Let me ask the question about what drives a stock price.
MAK: Well, it’s expectations of future growth.
GRANT: And, earnings. Because the company has to make money.
DAD: Perfect, that gets on the right foundation. So, have you ever heard the word “mutual”?
MAK: Sounds familiar. Did we talk about it in another podcast we’ve done before? Why?
DAD: Well, because a mutual fund may solve all of your questions and problems.
GRANT: So what does “mutual” mean?
MAK: That’s a funny word. It sounds like a cow that first will MOO then CHEW ALL of the grass in front of him.
DAD: That’s funny MOO CHEW ALL. Well, mutual means something that you have in common. Almost like you share something together.
GRANT: Could it be like a friend? Lilly is a mutual friend of Mak and I. Both of us know her, and so we have that in common.
DAD: Great example G. That’s right on the money.
MAK: What about mom and I. We have a mutual love for chocolate. We share a love for chocolate!!!
GRANT: I can do that. Luke and I have a mutual love for video games.
DAD: Perfect. You guys get it. So a mutual fund is a “fund” that is shared.
GRANT: So let me get this right. It’s when you share FUN. So, it’s like laughing, playing games and horsing around.
MAK: Grant, I’m not sure that is what dad is talking about. Not having FUN, F-U-N, like a party. There is a “D” on the end of “FUN”.
GRANT: That sounds like a “D” for downers.
DAD: Mak’s right. It does have a “D” on the end of it. It’s called a fun-D. And a fund is a bunch of money that is used for a specific purpose.
GRANT: Is this like the time I was saving money for a bike? You’d call that a bike fund?
MAK: Or, when mom and dad save money because someone in the family breaks their arm, and they call that a “Grant wiping out on his hoverboard fund”.
GRANT: Ha-ha. Funny. How many times do I have to tell you it was an accident?
MAK: Maybe, but how many times do I have to tell you that you shouldn’t have been on it!
DAD: Ok guys, your examples are perfect. Some people put money away for a house fund, a vacation fund, a video game fund or a Christmas fund. So, it’s money put together for something specific.
GRANT: Ok, people save money, and use it to buy something. For a mutual fund, do they share in the ownership?
DAD: That’s exactly what it is. Then the mutual fund will buy stocks, bonds or a mix of the two.
MAK: Which stocks?
GRANT: Can it be just technology stocks?
MAK: Or Candy stocks?
GRANT: Big companies?
MAK: Small companies?
GRANT: Foreign companies?
DAD: Yep. There are about 10,000 different kinds in the US, with about $20 trillion invested in them. And, about half of all the households in the US own one. You own some in your portfolio.
MAK: So, it sounds like it could have a lot of different combinations.
GRANT: And, so are there quite a few technology mutual funds?
DAD: Absolutely. There are several hundred of them. Depending on what you want, you have to read to see which one has the stocks you like the best.
MAK: So when you put in your money, how does that work?
GRANT: Yeah, who picks the stock?
DAD: Well, just like your bike fund or a vacation fund, someone holds the money and makes the decision on what to buy. For the bike fund, it was you, and for the vacation fund, it was mom and I.
MAK: So, does the money go to someone who makes those decisions?
DAD: First, just like a vacation fund, you pick where you want to go with your money. Each mutual fund decides what they will buy and how much of each tech company.
GRANT: Is there other information?
DAD: Yep, they tell you how well it did in the past and who will manage or make all the decisions. Portfolio manager is the person that makes the decisions. They’re very important!! But, they have a team to help.
GRANT: So, the team will look at each company, their earnings and expectations?
MAK: And that information is given to the main person who will make the decision?
DAD: That’s exactly how it works. So, you don’t always have to stay on top whether each company is doing well or not.
GRANT: That makes it a lot easier.
MAK: So, do they do this for free? And how many stocks do they buy?
DAD: Well, it’s not free. And mutual funds can hold thousands and thousands of stocks.
GRANT: So, if I give them $100 to invest, how does that work?
DAD: Let’s make it easy. If the mutual fund owns 2 stocks; Apple and Google, and the shares total $500, then you own $100 of the total shared fund of $500. You don’t own either stock, but part of the total.
MAK: So I would own $100 of the $500 or 20%.
DAD: Correct. Let’s say you and G bought a bicycle for $100 and you both put in $50 each. You would share the bicycle. You don’t own the front wheel and Grant the back wheel, you just own half of it.
GRANT: Ok, I get it. I own a part, but you don’t own any particular piece. Are these funds big?
DAD: They are. A mutual fund can be hundreds of billions of dollars. Yes, I said Billions. So if you bought $100, you would own a very, VERY small part of it.
MAK: So the benefit is you have a team that picks the stocks based on how the fund is set up. They watch everything and charge a fee.
GRANT: And, we don’t have all our eggs in one stock.
DAD: You got it.
MAK: How cool is that? And, we can own a bond fund, a stock fund or a mixed fund too.
GRANT: That should really help us out when trying to put together our portfolio.
DAD: You guys are seriously getting this. And, it makes a dad proud.
MAK/GRANT: Thanks Dad.
DAD: You’re very welcome. Time to get back to training Oreo!!
Ben’s 2 Cents
Building a portfolio can be really easy with mutual funds. You don’t have to pick stocks or bonds. You can simply use mutual funds. As we discussed, mutual funds are pools of money that are put together to obtain investments that meet a desire or need. You may really like certain types of stocks, like technology stocks, or blue chip stocks that are big and have been around a long time. Or, you may want some bonds. Mutual funds can give you the exposure you want easily.
As we spoke about in the construction of a portfolio, you can create the right risk and return by using various assets, and the mutual fund can be a low cost way to do that. And, you get a professional who will manage the funds. When put together the right way, it lowers your risk and increases your return. I know I’ve said this several times, and by understanding the goal, and the tools we use, it will make us much better investors.
How cool to finish up another season. We wanted to cover a few lessons with the Stock Market Crash, the portfolio and a tool to reach our goals. We’re so excited to move on to our next season. It’s all about taxes. And, even though it may not sound like fun, as someone beginning your journey, taxes are so important to understand. They can have a huge impact on your long-term growth.
Thanks for being here. Remember to subscribe, like and give us your comments. And, we’ll see you very soon for our next season on Money With Mak And G. BYE!!!