The Invested Dads are back with a follow-up episode to last week’s Fantasy Stock Draft. In this episode, Josh and Austin discuss owning individual stocks and what that looks like from an investment standpoint. They discuss stocks at a high-level, different types of shares, risk, over-concentration, and diversification. They also look at cost and time as factors in investing in individual stocks compared to ETFs and mutual funds. Of course, there was a dad joke of the week. Listen now!
Main Talking Points
[1:16] – Stocks At A High-Level
[6:50] – Voting Vs Non-Voting Shares
[8:20] – Risk and Overconcentration
[10:43] – Diversification
[14:44] – The Armchair Quarterback
[18:15] – Dad Joke of the Week
[18:49] – Cost As A Factor
[24:56] – Your Time Commitment
[26:23] – When Buying Individual Stocks Makes Sense
[28:13] – When ETFs or Mutual Funds Make Sense
[30:18] – A Financial Advisor’s Role
Links & Resources
Invest With Us – The Invested Dads
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, hey, hey, welcome back to The Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. Today, we are following up last episode, where Josh and I had a fantasy stock draft. And we’re going to talk about owning individual stocks.
Josh Robb:
That’s right. So, I own two individual stocks at home, chicken stock and beef stock.
Austin Wilson:
Really?
Josh Robb:
So, yeah, I’m all set.
Austin Wilson:
Those stocks?
Josh Robb:
Yep. I have them at home.
Austin Wilson:
Where’d you buy them?
Josh Robb:
At the stock market.
All right. So, we’re talking about stocks today. We’re following up on our fantasy stock draft, which was a lot of fun for us to do. And like we said in that episode, we’re talking about owning individual stocks. That does not mean it’s the right fit for you. Make sure you talk with your financial advisor, make sure it fits in your portfolio, and make sure you understand the risks before investing in individual stocks.
Austin Wilson:
Nothing we say is a recommendation. So, check first.
Josh Robb:
Yep.
[1:16] – High-Level Individual Stocks
Austin Wilson:
So, in all seriousness, different types of stock is what we’ll be discussing today. Not different animals where the stock is derived, different financial vehicles.
Josh Robb:
Yeah. So, let’s start high-level, right?
Austin Wilson:
I like high-level. I’m a high-level guy.
Josh Robb:
There’s different ways of investing. And if we go very high-level, there’s really three asset classes. There’s cash, which is just straightforward cash that you own. There’s bonds, which is debt. And then there’s equities, which are the stocks.
Austin Wilson:
Where’s crypto fall?
Josh Robb:
Crypto falls in the alternative section, which is, yeah.
Austin Wilson:
So, there’s more than three.
Josh Robb:
Yeah. So that we’re going high-level. We’re way up here, okay? Way up high for very simplicity’s sake. But when you look at debt, owning debt or owning bonds, it’s where you loan some of your money to somebody.
Austin Wilson:
You’re a loaner.
Josh Robb:
You loan, and you are promised a certain interest rate, a certain payment, while they have your money. Then at the end of whatever that timeframe is, they give you your money back. That’s debt. The easiest way of understanding that is a mortgage, right? So, you need to buy a house. The bank says, “We will loan you money to pay for this house. You’ll pay us back,” whatever the interest rate is, “three and a half percent,” whatever. So, every month, you write them that check, so you’re paying part of it back. In the end, they get all their money back plus the interest. And so, that’s an example of debt. Really easy.
Austin Wilson:
What they get, it’s crazy. Mortgage interest is crazy because it’s…
Josh Robb:
Compounded.
Austin Wilson:
It’s compounded and it’s three and a half percent. It’s a month’s worth of three and a half percent of the total outstanding value per year.
Josh Robb:
Yep.
Austin Wilson:
So, you’re paying that three and a half percent of your outstanding loan value per year. That is not what today’s about, but that, it blows my mind, how much the interest payments are.
Josh Robb:
It’s crazy, yeah. That’s a whole other tangent. Well, we can get on that some other time. So, that’s one way of owning or investing.
Austin Wilson:
So, debt, you are loaning money out and you are taking on the risk, but you are being compensated from your risk by getting interest payments in the meantime.
Josh Robb:
And if you do that with a very stable company or country, then there’s a pretty low risk of you not getting your money back or that interest paid to you. So, there’s less volatility.
Austin Wilson:
And you’ll make very little.
Josh Robb:
Yes. So then, the other side of things is owning what we call stocks or equity.
Austin Wilson:
So, as opposed to being a loaner, you’re an owner.
Josh Robb:
Yes, you’re an owner, not a loaner. Yes. And that way, you’re paying your money. You’re not loaning it. You’re giving them your money in exchange for a partial ownership in that company.
Austin Wilson:
Doesn’t that feel cool?
Josh Robb:
It is neat.
Austin Wilson:
Like, I own…
Josh Robb:
Yeah. So, high-level example again, let’s say there is a company out there and they have 100 shares.
Austin Wilson:
Josh Robb Corp.
Josh Robb:
Right. And you say, “I want to buy one share.” So then, I become a 1% owner of that company, because I own one of the 100 shares.
Austin Wilson:
You’re a small business owner.
Josh Robb:
That’s right.
Austin Wilson:
Or a large business owner.
Josh Robb:
Depending on what it is.
Austin Wilson:
Yeah.
Josh Robb:
But that’s how it works. It’s very simple. When you’re buying on the stock market, you’re buying or trading with people who have that ownership. So, you’re kind of on the second-hand market, because they’ve already, company’s already given those away. Now, people are exchanging them back and forth. But that’s what you’re getting. When you buy a stock, you have ownership in that company.
Austin Wilson:
So, that is, yes, those are two main ways to actually go out and invest. And historically speaking, investing in bonds, like Josh said, has been less volatile, since you’re loaning money with the promise to get paid back. It’s kind of a good, it’s a good store of value plus a little bit of interest on top of that, is kind of the way to think about it. On the other hand, you’re really limited to what you can earn. You can… In a perfect world, if you buy the bond and if it’s issued at par…
Josh Robb:
Yep.
Austin Wilson:
You will only ever get par back at the end, plus interest in the middle. Now, bonds, if you buy them at any other point, can be plus or minus.
Josh Robb:
And it’s hard to get par. Trust me, I’m a golfer. I know. All right?
Austin Wilson:
You’ve never been golfing with me.
Josh Robb:
No.
Austin Wilson:
So, we-
Josh Robb:
Par is pretty impossible.
Austin Wilson:
We want to see hard to get par.
Josh Robb:
Yes, it’s hard. But yeah, you’re right. So, fixed income, bonds, you pay a certain dollar amount. And then in the end, you get back whatever that original face value is of that bond.
Austin Wilson:
Yes. So, stocks, no guarantee. There’s no free lunch in stocks. You are not guaranteed a return. There is no promise of return. And actually, in a financial services industry, you’re not allowed to say there’s a guarantee.
Josh Robb:
That’s right.
Austin Wilson:
So, if any… That’s just a red flag, by the way, if anyone ever promises you a guaranteed return in stocks, specifically, red flag run.
Josh Robb:
Yes.
Austin Wilson:
Also, that’s probably a legal thing.
Josh Robb:
Yes. Yeah, definitely.
Austin Wilson:
So, anyway, as the company grows, your interest increases in value. That’s how stock prices go up, and it’s all based on people valuing today what they think is going to happen in the future, and things change on future expectations. And that’s why stocks are very volatile. But it’s insane that… It’s not insane. It’s just way, way more drastic the amount of growth over time that you can get, because you’re taking on so much additional risk. Risk is directly related to return. The higher the risk, the higher the return that the investor is needed, not guaranteed, but is wanting to get, to be able to hold that risk.
Josh Robb:
That’s right.
Austin Wilson:
So, yeah, that is stocks as opposed to bonds. There’s really no timeframe. You can hold a stock forever as long as the company is still publicly traded. And when the bond matures, that’s over. That bond is over.
Josh Robb:
You don’t have a choice. You can’t say, “I just want to keep it.”
Austin Wilson:
It keeps maturing. So, it’s different on timeframe as well there.
[6:50] – Voting vs Non-Voting Individual Stocks
Josh Robb:
Yep. And then also within stocks, there’s different types of stocks. All right? And we’re just talking about common stock today. We can get into other stuff later, but we’re just talking about, when you think of a stock traded on the stock market. That’s what we’re talking about today. There are two different types of that, voting and non-voting. A voting stock gives you exactly what it sounds like, the right to vote on company issues. So, every year, every publicly-traded company has a shareholders meeting.
Austin Wilson:
In a proxy.
Josh Robb:
If you own a stock in that company, you are a shareholder. You have a portion of that company, ownership. You are then invited to participate in that shareholder meeting. You don’t have to attend. You can do it all online, you can do it by proxy voting, and they encourage you to vote ahead of time actually. It’s a lot easier, especially when you think about companies that have millions of shares. If they try to collect paper ballots on everybody that shows up, just a headache. So, they encourage you to do that all online.
But there’s also non-voting. And why would a company have that? Well, let’s say you want to give some sort of bonus or reward to people, maybe some of your employees. You can issue non-voting stock that doesn’t dilute those actual shareholders who have the voting, but it gives them a stake in the growth of the company.
[8:20] – Risk and Overconcentration in Individual Stocks
Austin Wilson:
And a lot of times, when companies go public and the founders take the company public, a lot of times, those founders get special issues of shares, whether that be super voting shares or just different classifications that… A lot of times, if you owned a portion of… I’m using, thinking of Facebook in my mind. Zuckerberg has a ton of shares, obviously, but he has insane voting power, beyond what his share level would be because of the special classes of shares that he holds there. So, yeah, there are different classes of shares within the stocks, but going back to what we had just talked about, risk. Risk is what you are being compensated for by stocks, having a higher long-term average return.
Josh Robb:
Yes.
Austin Wilson:
There are a lot of risks with stocks, but there are a lot of risks to holding individual stocks, as opposed to maybe holding some, a vehicle of equities, like an ETF that holds stocks or a mutual fund that holds stocks. So, I’m thinking of a risk such as overconcentration. So, Josh, what’s overconcentration?
Josh Robb:
So, that’s when you think really hard about… No, it’s where you hold, maybe let’s say I have $10,000, and $8,000 of that is in one company.
Austin Wilson:
Yeah.
Josh Robb:
I am too concentrated in one spot. I’m overconcentrated.
Austin Wilson:
Now, on some days, that’s probably really good.
Josh Robb:
If it goes well, there’s nothing wrong with that.
Austin Wilson:
But on some days, 80% of your portfolio goes down.
Josh Robb:
Yep. But that’s the thing is, you don’t know. So, although you may say, “I work there. I know what’s going on,” there’s some examples historically where I’ve said, “If it goes well, there’s nothing wrong with that.” Until it doesn’t go well anymore. Right?
Austin Wilson:
And it won’t always go well.
Josh Robb:
It won’t.
Austin Wilson:
It just won’t.
Josh Robb:
Nope. And so, you look at like GE, they had that. There was a lot of company ownership. Enron is a very big example of that. There was a lot of ownership within the retirement plan of company stock. And then when that went bankrupt and went to zero, a lot of employees lost their retirement money, as well as their job. So, that was two examples right there of just why being overconcentrated can hurt you.
Austin Wilson:
And that’s one example of why today, if you are offering, if your company is a publicly-traded company and you are offered company stock, in some form in your retirement plan, there are often very, very strict limits on what that can be. Because too many companies have had that too loose for too long, and their retirees have really gotten toasted.
Josh Robb:
It comes back to that fiduciary. So, the retirement plan, there is a responsibility there to make sure that those participating are not hurting themselves on some of those choices. And so, you’re right. So yeah, overconcentration is huge. And it may not even just be an individual stock. We’re talking about stocks today, but let’s say you own just U.S. stocks. You could be overconcentrated in an area. So, you just have to really watch how much is in any one spot.
[10:43] – Diversification in Individual Stocks
Austin Wilson:
So, the antidote to overconcentration is diversification.
Josh Robb:
That’s right.
Austin Wilson:
Another good word. And we kind of hinted about this in the last episode when we… So, Josh and I built… If you’re not familiar with what we did in the last episode where we had our fantasy stock draft, go listen to it. We’ll throw a link in the show notes. But essentially, we each took a hundred-thousand hypothetical dollars.
Josh Robb:
Not real.
Austin Wilson:
They are not real, unfortunately. And we each drafted 10 companies equal weighted in 10 different sectors of the market. Now, there are 11. So, we actually picked the same ten.
Josh Robb:
So, we just stayed out of utilities.
Austin Wilson:
We stayed out of utilities. So, that’s what we did. And you can see exactly what we picked and listen to the episode. There’s a link on our website where you can see visuals of our draft picks, it’s also on our social media. But anyway, that is an example of a diversification. We said, “Here’s the whole stock market, and there’s all of these different sectors.” And we wanted to have exposure to the different areas. Now, we’ve made it very simple for what our purposes were and said, “We’re equal weighting all of this because the market has very different weightings than 10% in each sector.” Or 9 if you do all 11 or whatever. But diversification is the antidote to overconcentration because in long-term investing through different market cycles, different sectors, different areas of the economy, different areas of the market are going to do better in different areas. They’re going to do worse at different times. That does not mean… Obviously we all want to be in the best performing thing all-in all the time, but that’s not prudent investing.
Josh Robb:
Yep. And-
Austin Wilson:
Prudent… Go ahead.
Josh Robb:
People always ask, how do I know if I’m diversified? And my answer always is, if there’s something that you don’t like in your portfolio all the time, then you’re diversified.
Austin Wilson:
That’s right.
Josh Robb:
Because if everything’s doing the exact same thing, then you’re not diversified. Everything’s going the same direction. But if there’s something always doing something different, then that’s a sign of diversification. Because what you want to see, and let’s take this year as a good example, right? When markets go up, you want to participate. But when markets go down, you also want to have something that’s doing something different.
Austin Wilson:
Right.
Josh Robb:
Because if everything was going up at the beginning of this year, chances are, everything went down when this market fell apart and everything dropped 35%. If you were diversified, things were reacting different ways. Maybe they all went down, but maybe different amounts. And so, that’s the whole key is, are they doing something different? The word there is correlation. How do they react to each other? Do they move in the same direction or differently?
Austin Wilson:
And that’s why, especially those who are a little bit older in the financial planning stages of their life, bringing in some fixed income into the equation really provides… While the markets are going up, it may feel like it’s providing a ballast. It’s kind of holding you back from going up. And it is a little bit. But when things happen, like we saw in March, and things fall apart, 35% in two weeks, it really feels good because you’re down a whole lot less because, in a lot of cases, fixed income works in a very inverse relationship to the stock market. And in those rare cases, it’s pretty much flat.
Josh Robb:
Yeah.
Austin Wilson:
So, that’s a good thing.
Josh Robb:
Yep. And if you look at statistics and numbers, from a percentage standpoint, it’s easier to limit the downside because you have less upside to capture.
Austin Wilson:
Yes.
Josh Robb:
In other words, the farther you go down, the more you have to have earned or a return to get back up to where you started. If you can limit that downside, it gives you less of a upside requirement for the long run. So, yeah, you’re right. Using some of those diversifiers and some of those to reduce the volatility helps over the long run.
Austin Wilson:
And this is another opportunity where, once things kind of change very quickly for a certain asset class, be sure that you’re working with your advisor to do some rebalancing. Because things can get out of whack really, really quick, and you can kind of lose that good relationship and good balance that you had initially set up, and that’s different for everyone. Everyone has a different risk tolerance and goals there.
Josh Robb:
Definitely.
[14:44] – One More Risk: The Armchair Quarterback
Austin Wilson:
So, Josh, what is one more risk that investors can have?
Josh Robb:
Yeah. This is one where there’s actually been a lot of research on it. I call it the armchair quarterback. So, if you think of back when football actually used to exist in the sporting world last year, there was kind of the Monday morning quarterback, the person who sat in his armchair and thought they were smarter than the people who are actually playing.
Austin Wilson:
That’s right.
Josh Robb:
And so, from an investing standpoint, what does that mean? It means you’re sitting there and you’re always chasing after what did well. You’re always second-guessing your investment choices. You could really hurt yourself by always changing things up and always chasing after what’s doing well. In fact, JP Morgan did a whole study on it, and they showed that the average investor barely kept up with inflation, and really underperformed the market, and the main culprit for that was emotional investing, chasing after those things.
Austin Wilson:
That’s because they’re buying… When you’re chasing after good things. So, buying when things are high, and you’re selling when things are low.
Josh Robb:
Yep.
Austin Wilson:
It’s the opposite of what you-
Josh Robb:
And you could just see that. If you pull up a chart and you’re also able to see the… What am I looking at?
Austin Wilson:
Volume?
Josh Robb:
The volume. Yes, that’s the word. The volume of a trade, as things go well, you see that volume increase because people are like, “Oh, I got to do that too. I got to get on that.” Well, like Tesla as an example, I mean, it’s had a very good couple of years. People are still buying it, and they still think it’s a good price. And who knows if it is or isn’t, future will tell, but the idea there is they missed out on that first 600% growth or whatever it was.
Austin Wilson:
You’re buying Tesla at a thousand right now.
Josh Robb:
Yeah. But that’s the whole thing is, there’s still people that are afraid they missed out and they want to get in. And so, we’re always showing what’s the solution to that. The solution to not being an armchair quarterback is having a plan and sticking to it. And so, when you have an investment plan, yeah, you change your investments periodically. Yeah. If you’re working with an advisor, they may switch things in and out. But you’re not doing it based on emotions, you’re doing it based off of a set criteria. Here’s what we’re going to buy, here’s why we’re going to buy it, and here’s how long we’re going to own it.
Austin Wilson:
Exactly. Another risk, I think, is the lack of real understanding of how efficient the market is. So, obviously I am, and this is probably another topic for another day, but I’m a proponent of active management. And I feel like there are some inefficiencies in the market over full market cycles to take advantage of. That’s a great thing. But I also feel like new data, news, stuff like that is digested very quickly in the markets. And you can see that as headline comes out that, trade war news happens, or something like that and the market, the Dow dropped 600 points.
Josh Robb:
Yes.
Austin Wilson:
It happens very, very quickly. And if you’re not a prudent news watcher or if you’re not getting all of the news updates on your phone because you’re working or whatever, or you’re on vacation, you can be stuck holding something that fell apart very, very quickly.
Josh Robb:
Yeah. And you think about earnings releases. I mean, we do this for a living. Austin listens to every earnings release of companies we hold. He is on top of it. That’s his job. How many of you at home listen to every earnings that comes out, read every earnings report, every K whatever that comes out?
Austin Wilson:
10-K, 10-Q? Yeah.
Josh Robb:
I mean, there’s so many. And that’s the thing is that’s what traders are doing to get an edge on the market. If you’re investing for fun, and we’re not saying you shouldn’t do that, we’re just saying, make sure you’re aware that why you’re owning something and what your criteria is for owning it. Because information moves fast. Information is a lot more available than it ever has been, which allows traders who are trying to pay attention to that, to digest it quickly and react to it.
[18:15] – Dad Joke of the Week
Austin Wilson:
Right. So, Josh, this is a pretty serious topic. I feel like we should lighten it up a little bit. Dad joke of the week.
Josh Robb:
Dad joke of the week.
Austin Wilson:
I’ve been thinking about, this is my Friday.
Josh Robb:
This is…
Austin Wilson:
Well, it’s not yours, but it’s my mine.
Josh Robb:
Not mine. Your Friday.
Austin Wilson:
So, I’ve been thinking this is a Friday joke.
Josh Robb:
Okay.
Austin Wilson:
So, it’s funny for me. It might not be funny for you.
Josh Robb:
All right, I’m listening.
Austin Wilson:
What did the dad who was scared of elevators do?
Josh Robb:
What did he do? I’m going to say he took the stairs.
Austin Wilson:
Kind of. I mean, he took steps to avoid them.
Josh Robb:
Took steps to avoid them. I like it. See, now that’s funny. Taking the stairs is not funny, but taking steps to avoid it.
Austin Wilson:
That’s a play on words.
Josh Robb:
I like it.
[18:49] – Cost as a Difference in Individual Stocks
Austin Wilson:
Okay. And we’re back, another discussion about owning individual stocks versus other vehicles, ETFs, mutual funds. Cost. Cost is a difference. So really, up until recently, whenever you traded a stock… Now, recently being, it’s 2020 now.
Josh Robb:
Yes.
Austin Wilson:
It’s middle of 2020. We’re recording this on July 1st if anyone is…
Josh Robb:
Keeping track.
Austin Wilson:
Wondering specifically. So, up until very recently, whenever you traded a stock, generally, a trading fee associated with that trade. Therefore, if you want to add a stock, sell a stock, trim a stock, add to a stock, rebalance your portfolio, there was a cost. And that added up, especially for smaller portfolios. Recently, however, even within the last year or so, many custodians… Now, custodians are, that’s the firm that holds your money. So, think of like the Schwabs of the world, the Fidelities of the world, those people who, you log-
Josh Robb:
E-Trade, Scottrade. All of those.
Austin Wilson:
You log into… You’re managing your money or whatever, but you log into their platform to see it. That’s a custodian. Recently, many of these custodians did away with this. That was really a barrier for people who wanted to own individual stocks. And it was a good reason that a lot of people own mutual funds or ETFs. Now, there still may have been fees associated with the purchase or sale of these securities, but the management of those ETFs or mutual funds, they were paying for, on their cost, for the actual trading fees. And you were paying them for a management fee that was covering the cost of those little moves. So, I think that’s a big difference is that nowadays, owning and trading individual stocks, a lot more cost-effective than it used to be.
Josh Robb:
Yes, definitely. And it enables people who maybe wanted to but were just unsure. It just takes one more of those little barriers, like you said, out of there. Which is nice, but it also brought down the mutual fund and ETF costs as well.
Austin Wilson:
True.
Josh Robb:
You used to pay about the same for a stock in ETF trade, but obviously when you buy an ETF, you’re usually getting a basket of goods. So, efficiently, like you said, if I wanted to own the same thing, it would cost me a whole lot. But now, they’re on kind of an equal playing field, which is great.
Austin Wilson:
Management fees, we just kind of touched on. This is also an advantage nowadays for owning individual stocks. So, you, Josh…
Josh Robb:
Yes.
Austin Wilson:
Or you, listener, are really, you’re the manager of that portfolio, so you don’t charge a fee to yourself. That comes out of your performance. But both mutual funds or ETFs, both of these things have fees associated with them. Generally speaking, the more actively managed an ETF or fund is, the more work it takes to manage it, obviously. And the higher that management fee is going to be. So, something really passive, like the Barclays ETF, AGG, or the S&P 500 ETF, which is SPY, those are going to have very, very cheap fees associated with them because they’re really mirroring an index that’s already out there.
Josh Robb:
Very little. Very little rebalance. They do it just once a year, just very little maintenance. Yep. And on top of that, when you think about it too, the fees that they’re charging are there for them to manage that piece for you. When you’re managing it yourself, you remove that fee, which is great. That fee, you always want to compare after-fee costs. And so, if you’re saying, “Okay, I’m looking at some S P 500 funds, which one is better?” Well, look at it after the fees, because you need to factor that in. When you’re looking at any kind of investment results, make sure you’re taking your net results. That’s huge. Always look at net returns.
Austin Wilson:
Yes. I think another thing is share price barriers that, and this is something that’s changed recently as well. But again, up until recently, most investors who are just starting an account really couldn’t afford to own a share of A-Class Berkshire Hathaway in their account. Do you have $268,000 to start and get one share?
Josh Robb:
And talk about the share classes. So, that’s the A-share class.
Austin Wilson:
Right.
Josh Robb:
Which is the voting share class, and it’s $268,000. You could buy the Berkshire Hathaway B, which is a lot… It’s maybe 200 or something like that. And the idea there is you don’t get the right to vote, so they have a lower cost to it.
Austin Wilson:
The liquidity is there for investors. And that’s kind of why there are often different share classes, except for Google. Google has two share classes, they’re the same price.
Josh Robb:
Yes. But… Yeah, they’re weird.
Austin Wilson:
So, anyway, more on that at some other point. Amazon, another example, $2,700 a share. Google, $1,400 a share. If you’re opening up a trading account on the side, you’re not going to buy a share of that, but probably to start out-
Josh Robb:
Put in 50 bucks a month, you’re going to have to wait awhile before you’re buying Berkshire Hathaway.
Austin Wilson:
This really used to be a barrier for average investors owning individual stocks, because some of these companies are companies that you want to hold. You want to have Amazon in your portfolio, but do you have $2,700 just for one share?
Josh Robb:
Yep.
Austin Wilson:
Maybe unlikely, starting out. So, this is another reason that people would have, and still may continue to hold ETFs or mutual funds, in those kind of portfolios. But again, as of the last year or so, many custodians have begun to offer partial shares of these expensive names or really, any name. So, even though Apple is trading at more than $350 a share, you could say, “I’m going to buy $20 of Apple,” and they’ll give you proportionally $20 of Apple. So, with mutual funds, you’ve always been able to hold partial shares. That’s kind of the beauty of mutual funds. If you’re always putting in the same amount of dollars every month over time, as the price goes up and down, you’re buying fractions of shares that add up. Well, now you can do that with stocks as well. So, it switches-
Josh Robb:
It is a nice thing. Not all custodians do that. You, kind of barriers to some of those in rules.
Austin Wilson:
I think that it’s more on the individual side. So, retail accounts typically have that option. I believe that Fidelity and Schwab both, the two that come to mind-
Josh Robb:
I think so.
Austin Wilson:
Have that on the retail side. But if you’re working with an advisor who uses those custodians on the institutional side, I do not think that that is the same option.
Josh Robb:
I’m not… Yeah, possibly.
Austin Wilson:
So, that is another barrier that has changed, and I think has changed for… A lot of these things have changed for the better for individual investors. They are bringing down the barriers for people to own stocks.
Josh Robb:
Yep.
Austin Wilson:
And I think that’s great.
Josh Robb:
Yeah.
Austin Wilson:
We want people to be able to feel comfortable and invest in their future.
[24:56] – Time’s Involvement in Individual Stocks
Josh Robb:
So, one more, it rhymes with stock.
Austin Wilson:
Ooh.
Josh Robb:
It’s clock.
Austin Wilson:
Clock, tell me about clock.
Josh Robb:
So, there’s time that’s involved. There’s a lot of work that’s involved in choosing what stocks to own. Because again, we talk about being diversified, making sure you’re understanding the risk, making sure you understand the company. There’s a lot of work involved. So, that’s why I said clock, rhymes with stock. And that is really the piece that you got to make sure you understand is there’s going to be some work involved. It’s going to take some time. So, as an investor, if you’re buying an ETF or mutual fund, you’re paying that expense, that extra expense, for somebody else’s time to do that research and that management. If you’re going to do it yourself, you got to be willing and able to do the research, and understand what you’re owning and why you’re owning it, and what criteria will cause you to sell it.
So, that’s very important to understand. This is not a onetime event you need to… Once I buy it, I don’t just forget about it. We can talk about that. Like, set it and forget it. 401ks and things like that, that’s a great thing to do, because you’re adding money in. Find a good allocation. Let it go. If you’re buying individual stocks, especially, like you said, news changes a lot.
Austin Wilson:
Oh, yeah.
Josh Robb:
You need to understand what’s going on. If something happens within that company, there’s a change of CEO, something happens within what they’re building or whatever they do, you need to know and understand, and then be able to digest and say, “Do I still want to own this?”
Austin Wilson:
Right.
Josh Robb:
And so, you want to be willing to spend that time, spend the energy, and continue to monitor after you purchase it.
[26:23] – When Buying Individual Stocks Makes Sense
Austin Wilson:
So, Josh, what are some examples of some cases where buying individual stocks makes sense?
Josh Robb:
Yeah. I would say, to me, one of the ones that makes the most sense is from an educational sense. If I want to learn more about this, what better way than to go through that process, and choose owning, having an ownership in a company. To me, that makes one of the biggest cases for owning individual stocks. Now, again, when we’re talking about overall plan and the recommendation from a financial advisor like myself is make sure you understand, and if something goes wrong, it’s not going to totally mess up your plan. For a lot of people, that may just be what we call a play account, just having a little bit money off to the side where you can do that. So, if you make a mistake, it’s not going to derail your whole plan. You’re going to lose out on a little bit of money, but it’s not going to financially devastate you. But what cases make sense is if you like to spend that time and do it.
Austin Wilson:
Right.
Josh Robb:
If there is a reason why you feel like you have an advantage. Let’s say you are an expert in a field and you really understand that, you may be able to see trends as they are happening and be able to get into companies early. So, those are two easy ways. Austin, what do you think? Anything else?
Austin Wilson:
Yeah, I think maybe this is an example of something where you can invest in something you’re passionate about too. So, if you have a play account on the side and there’s a couple of dollars in it here or there, and you’re really passionate about something and you’re like, “Hey, that’s publicly traded. I use that all the time.” Regardless of whether it helps your financial picture long-term out or not, you could have a little bit of vested interest in it a little bit more by being a shareholder in it.
Josh Robb:
And I do know some companies, if you own some of their stock, give you discounts.
Austin Wilson:
That would be great.
Josh Robb:
So, that would be another… I know there’s some car companies that if you own a certain amount of shares, you actually get like the employee rate when you’re buying a new car.
Austin Wilson:
Think about that.
Josh Robb:
So, weird. Little perks you didn’t even know about.
[28:13] – When ETFs or Mutual Funds Make Sense
Austin Wilson:
I know. So, Josh, what about the other flip side of the coin? What are some examples where ETFs or mutual funds make sense?
Josh Robb:
Again, the diversification. So, if I have $50 to spend, finding a stock I could buy $50 worth is kind of hard. If I have $50 to spend on a mutual fund or ETF, I’m a lot more diversified.
Austin Wilson:
Right.
Josh Robb:
And so, diversification makes a lot of sense. When you talk within retirement plans, most of the time, you don’t have the option for individual stocks. Some do, but most don’t. So, you’re going to be buying those diversified mutual funds. And then also, if you don’t want to spend the time, again, and you don’t have a financial advisor who’s choosing individual stocks for you, buying some ETF and mutual fund is less burden on you because you’re, again, paying the expenses to have somebody else to take care of it.
Austin Wilson:
What about both? Holding stocks and ETFs or mutual funds.
Josh Robb:
I think that makes a lot of sense. Yeah. Again, it comes back to the diversification and what your long-term goals are. Holding stocks, whether it’s individual or in ETFs or mutual funds, that’s the growth piece. We’ve talked about that in the past, what they’re there for. I think it makes sense to hold a little bit of everything in there because you get different things from it. You can be very selective in your stocks, and then you can use that diversification then to safeguard the long-term and the volatility through ETFs and mutual funds.
Austin Wilson:
I think a lot of it probably also goes to account types. So, a lot of different people have various, you might have a Roth IRA and your company 401k and a play money account on the side, and you can use different… You can use a mutual fund for your 401k because you’re putting money in every month and it’s buying proportional shares and all that stuff. You can have individual stocks in your play account, and you can manage your other account or your Roth IRA or whatever, with ETF or something like that. So, I think a broad approach, being open to those different things, for the different types of accounts.
And it really probably goes down to the different, the level of funds in each account where it makes a lot of sense. So, I know personally, when I look at it on my picture of all of my accounts and stuff like that, I use all, I have different, I have mutual funds, ETFs, stocks. I use them all because they all have different purposes for the different types of accounts they’re in. So I think that that it’s a reality for a lot of people.
[30:18] – Get a Financial Advisor!
Josh Robb:
Yeah. And if all this seems like a lot to you… We’ve talked about stocks. You can tell we have a passion for it. If this seems like a lot to you, that’s why we keep mentioning about having a financial advisor, because there’s somebody there to help you through this. Again, we’re here for you, but we can’t answer all the individual questions. And so, we encourage you to find a financial advisor that you enjoy working with, that is knowledgeable and understanding of your situation. If you need help with that, you could check us out on our website. There’s a link with Invest With Us. You can send us an email, talk about us and see if we’re a good fit for you. But high-level, whoever you choose, make sure you trust them, make sure they’re knowledgeable, and make sure they understand your situation so they can give you good advice. But overall, please reach out to us if you do have questions. We can help you out as well. You can email us at hello@theinvesteddads.com. And we would love to hear your questions as well as topics.
Austin Wilson:
Yeah. And as always, check out our free gift to you, a brief list of eight principles of timeless investing. These are just overarching investment themes meant to keep you on track to meet your long-term goals. Long-term is the key there because whether you’re investing in ETFs, mutual funds, stocks, whatever this is, keep the long-term focus. And it takes out a lot of the noise of what, especially, I think about what we’ve been dealing with for the last six months or whatever. Let’s just keep long-term focus and everything is work towards those goals together.
Josh Robb:
Yeah.
Austin Wilson:
So, that is a PDF. It’s free on our website, so check that out. Josh, how can people grow this podcast or help us grow this podcast, help more and more people?
Josh Robb:
Yeah. So, subscribe, especially if you’re on Apple Podcasts. Also, leave us a review there. It’s great. The reviews are fun for us to see, but it also helps us in searches. That way, if more people are looking for a podcast like this, they can find us. Like I mentioned, email us at hello@theinvesteddads.com. And if you think someone would be interested in hearing this episode, send it to them, share it with your friends or family.
Austin Wilson:
All right. Well, thanks for being with us this week.
Josh Robb:
Yep. Have a great weekend.
Austin Wilson:
Bye.
Outro:
Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe, and don’t miss the next episode.
Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin, or any podcast guests are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.
