The Basics. How to buy Stocks.

Episode 25
Reid Trego, the host of the Money Pig Podcast, is joined by Tim Goodwin, founder of GIA. They discuss investing basics and how to buy stocks. They explain why stocks exist and why some companies decide to go public. They also talk about the risks associated with individual stocks and recommend investing in mutual funds instead. Mutual funds are explained as a pool of money from multiple investors that is managed by professionals to invest in various securities based on specific objectives.
Tim discusses the two main types of mutual funds: active and passive. Active mutual funds are managed by individuals or teams, while passive index funds track an index. He explains that index funds are generally less expensive because they don't require individual management. Tim also talks about different indexes, such as the Dow Jones Industrial Average and the S&P 500, which measure various industries and sectors. He mentions that index fund changes occur based on the issuer's schedule and highlights the ease with which these changes can be made in a fund. Tim recommends having a diversified portfolio of broad-based funds with low costs for long-term investment strategies. He mentions that sector-specific investments can be considered but should not make up a significant portion of one's portfolio unless there is a specific reason for it, like excess savings or play money. Lastly, he emphasizes the importance of understanding investments before investing in them.

Transcript

Welcome back to the Money Pig Podcast, brought to you by Goodwin Investment Advisory, where our mission is to lead people to financial peace, independence and generosity. I'm your host, Reed Trigo, and today on the show, we're joined once again by Gia founder Tim Goodwin for a discussion about investing basics, how to buy stocks. So here's what's interesting. Almost 20 years you've been in business, goodman Investment Advisory. We've accomplished a lot. Right. 



It's been amazing. It's been a team effort. 



Yeah. We're going to go back to the very start. We're going to talk about, you know, what the deal is. Let me tell you what the deal is. 



Tell me what the deal is. 



You and I talk about I'm going to tell you the deal. You and I. This is frequently asked. Like, we ask sometimes a client. Do you know the difference between a stock and mutual fund or whatever that is? And they're like, no, but it's one of those things that people feel like everybody else understands. 



Right. 



And so they should, too, and they're afraid to ask. 



Yeah. I mean, they're not in the business. I get that. 



Right. 



We're dealing with it all the time. They're dealing with something else. But that's right. A lot of people have four hundred and one K, and there should be mutual funds in there, so it's probably good to get a good understanding. Maybe this episode will help. I don't know. Maybe it'll hurt. We'll see after we're done. We hope it's helpful. 



We don't know. 



No problem. 



This any better or not? But we're going to try. Okay. So nice to see you, Tim. 



Hey, it's good to see you, too. It's been a while. 



So let's just start with the start. I mean, the stock market, right? 



Yes. 



What's a stock? How do you buy one? Why would you buy oh, my gosh. 



So many questions. 



So many questions. 



Yeah. Okay. Well, I might even take it back a little further. Okay. We'll see how many listeners drop off at this one. So I guess you kind of have to think about why it exists. Like, why does a stock exist that you can buy? Right. And so, like you talked about, this company is about 20 years old. It's an entity. It's an LLC, but it's private stock. Right. I own it. My wife owns it. A lot of team members own part of the company. It's not traded on a public exchange. Nobody can just go buy shares of Goodwin Investment Advisory. We're not publicly traded. So why does a private company decide to go public? And there are a lot of large companies that are still private here in the south. Everybody loves Chick fil A, right? 



Okay, Chick fil A, you can't go buy shares of know, when I talked my girls about stocks and we're buying stocks and that kind of thing for them as a way of helping them learn about it, they've often brought up, I want to buy shares of Chick fil A. Can't do that. It's privately owned. So it's got to be a publicly traded stock. And usually either a stock goes public because you've got maybe founders that want a liquidity event, or maybe they're retiring and they kind of want to turn it over to a board that's got a lot of incentives. Sometimes a company wants to go public to raise a lot of money to expand as well. 



So maybe they're going to go into another country, or they're going to have more locations, or they're going to open up more product lines, that kind of thing, because that brings in new capital. Now that's called an IPO. Probably heard of that initial public offering. So the first time that stock goes from being private to public, or even a public stock that's already been traded can issue new shares to raise more money. But outside of that, today, if you went and bought shares of Home Depot is not getting that money, okay? You're buying it from somebody else that has the Home Depot. So the person that's selling it to you is getting the money. That's why they're called stock exchanges because you're exchanging it between the seller and the buyer. 



We're doing great. 



Okay. You've still got you with me. So it's like the NYSE. 



Hold on, let me check. 



Crickets, is that what's going on up inside of you? 



No, we're doing great. 



Okay. Lights should hopefully still be on. So the exchange, that's why they call them an exchange because it's creating a marketplace where buyers and sellers come together and exchange the stocks, the securities. That's why it exists. And that's how it exists. Sometimes when the market will tank like it did in 2008, for example, sometimes big groups of investors will go buy all of this public shares and actually turn a public company and bring it back to private. It's kind of interesting. So we can go back and forth. 



Wow. 



Yeah. 



All right, well, good. That narrows it down. Okay, so stocks are just ownership in a company, right? How many different stocks are that's? 



I always love to look this number up. 



I think I can count. Apple, Microsoft, Google, Tesla, Netflix, Amazon. That's kind of all of them. 



That's it? Yeah, well, about the seven of some of the biggest ones have done lots of the growth so far this year. But anyway, what's interesting is so if you think about stocks in the US. On US. Exchanges because there's international stocks. So I just looked this up. So according to Statista.com, the New York Stock Exchange at the end of March of 2023 had 2385 listed securities. So a little bit more than what you counted. But what we're going to lead this conversation into is there's other ways to buy stocks rather than just buying the individual, like Home Depot, Coca Cola, Amazon, you can buy a mutual fund. 



Okay. 



And we'll talk about mutual funds in a minute. But what's interesting is that another quote from Statista is at the end of last year, there were 7373 mutual funds. So there substantially again, I said there were two. What did I say? There was 2385 individual securities, but there's 7398. So there's more mutual funds than there are individual securities. There's more way to group those securities in a different way or a different weighting, and we'll go into that in a second than there are actually individual securities. 



I'm going back to 11th grade math. Permutations and combinations. A little exclamation point. 



I don't know. You can hit the crickets for me. Permutation. That's not mine. 



Yeah, I had a great math teacher. I do remember that. I don't know if that has anything to do with this, but there you go. 



Yeah. 



Okay, good. 



I don't know. You're on your own, budy. Sorry. 



Here we go. All right. 



Should we walk into a mutual fund? 



Yeah. How's it work? 



Okay, so the reason mutual funds exist is because selecting individual securities can be challenging. We just mentioned there's over 2000 of them just in the US. So it's like, well, how do I know which ones to pick? Do I just pick the ones that I've heard about, like the ones that you've mentioned? Sure. So it's hard to pick those. And if you just have an individual stock, there's a lot of risk. And so we talk a lot about risk as financial advisors. So we'll meet folks that are considering hire us, and they might have just a handful of individual stocks of companies. Maybe they got ten. Maybe they have 20. But even if you have 20 securities, if they're equally weighted, that means there's 5% of the portfolio. Maybe it has more percent of your portfolio. 



And so if that stock tanks or it's the next Enron or like, it can greatly hurt the value of your portfolio. 



And sometimes I think about the risks in just individual companies. You think like a huge company like Disney, right, but then they have a CEO turnover, and then the new guy doesn't work out, and the old one comes back and their stock is super volatile. You have a whole thing going on. You really do stuff you can't control at all as just an owner of a few hundred shares or whatever. 



And even if you were constantly looking up all the information, right, you're not going to be able to predict some of these things that will be said or decisions that will be made. Yeah. So there's a lot of inherent risk just in any individual security. The other risks on the other side that you're just, you know, I love Tesla, so I'm just going to hang on to it forever. And Tesla may be a bad example because it's been a decent performer here recently, but let's say you were just grabbing onto like, Coke or something like that, and you're just like, this is a great company, everybody's. I'm literally drinking coke, right? And but there have been long periods of time where Coke has underperformed the rest of the market as an average. 



So sometimes there's the risk of it losing value because the company does something that was not expected or it's just not performing as well. So you're not getting that good of a performance. So anyway, those are some of the reasons why individual stocks can be fun. I think they're a good way to learn. But as far as like, building what your future retirement is going to be depending on for performance, if you're trying to meet certain financial goals, you're trying to gain financial independence. If you want to be super generous with your money in the future, that's risky and could be underperforming to do it all individual securities. So as advisors, we really recommend that folks invest in mutual funds. And so a mutual fund is that it's mutual. So there's two or more parties. 



Usually there's hundreds, if not thousands of people invested in a fund. So it'd be an example like you and me, Reed. So you put $10,000 on the table, I put $10,000 on the table and we're both like, yeah, we want to invest in the stocks. We're like, yeah, me too. So here's $20,000 on the table. And then we're like, what do we do that we're going to buy stocks? Who's going to make that decision? Well, we don't know. 



We don't know. 



Let's hire somebody to do it. Right? And so that's what an active mutual fund will do. All these folks put money into it and then they hire an individual manager. Usually it's a team nowadays that's getting a small percentage, which is called an expense ratio, maybe somewhere around 1% rates have gone down over the years and they're paid to make decisions on how to invest that money. And then they often have this starts to get a little boring, but they'll have investment objectives and documents and prospectuses and all these things that will explain what their strategy is and what they're trying to do. Are they just focused on the US. And really big companies, maybe small companies, maybe they're just focused on energy, maybe they're focused on green energy. Right. 



So usually a mutual fund will have a little more narrow scope or moat that they're going after. And so there's two big types of mutual funds out there. Do you know what the two big types are? 



Yeah. 



Well, you mentioned one active mutual fund. What's the other one? 



Actively managed. And I'm thinking this other one is like that index fund. Yes, more of a passive exactly, right, yeah. 



So the big categories are like active versus passive, active mutual fund versus a passive index fund. So instead of we put this money back together on the table like I said, we just put $10,000, we got $20,000. Instead of paying an individual. What we do is we just want that $20,000 to track an index. Okay? So one of the most common indexes in the world is the Dow Jones Industrial Average. It's only 30 companies, so it's not always everybody's favorite one to follow. A lot of folks like to follow the S and P 500 because that's broader, it's 500 companies, but there are actually tens of thousands of indexes out there that measure every industry, sector, country, market, cap, and they have all kinds of strategies now, too. 



And so usually an index fund is considerably less expensive on the expense ratio because you're not paying an individual or team, you're really just paying software or company to kind of match the index. 



Do you think that's like, happening every quarter or whatever whenever the S and P 500 is reset and they just bloop bloop? 



Yeah, so that's a great question. So it depends on the issuer of the index. So Standard and Poor is a very famous one, and so Russell is another one. So they all have their own cadence on how often these kind of committees will meet and decide, do we drop a stock from the S and P 500? Do we add one? They call it reconstituting or rebalancing. And so there are different frequencies based on the issuer of the index. But yeah, whenever they make that change, then any of these index funds that follow them, they have to make the trade, the change, like, instantly. Do you have a button for that? Like an instant button? Hit a color and see what magically. That was perfect. Magically. Magically. Your fund just makes a change like the index makes a change. And so bravo, Reed. Bravo. 



Yeah. 



Round of applause for you, sir. We're trying to make indexing and investing fun around here. Yeah, well, we need all the help we can get. He's now almost hit every button on this soundboard, ladies and gentlemen. 



We're testing them. 



Oh, my goodness. All right, so the index funds have also become really popular, especially in the past couple of decades. They invented kind of a different version of index funds called exchange traded funds. There's a bit of a tax advantage there, too, but it's really kind of a subset of index funds where it's also tracking an index. So with Goodwin Investment Advisor, we feel like all those big types of funds, active Index, ETFs, all can have a place in a portfolio. But again, generally we're going to recommend that folks have a diversified portfolio of broad based funds that have a long track record and are generally we prefer the ones that are lower in cost as well. 



Let's kind of take this. Let's say I'm brand new, okay? And I think, oh, I'm going to buy a mutual fund. And I like technology and I like energy, and I like healthcare, say. And so I go and buy these actively managed mutual funds. One's healthcare one's technology and one is energy. I'm diversified. Right. Haven't I just taken care of that? 



Why, yeah, you're way more diversified than if you just bought three individual companies, one in each of those sectors, technically. Right. So buying like, a sector fund, they probably have 5100 or more securities in the technology or the healthcare or whatever. So you can do that and you can use screeners mutual fund screeners online, and you can kind of say, hey, I want a fund that's just technology. And you can start kind of filtering and rating, whether it's performance or risk or fees, to try to figure out which one you want. I will say for, like, we're offering model portfolios, right, that we custom model that we design with our investment committee and our institutional partners at fidelity. 



So we have proprietary models, and we wouldn't just invest our clients in only one or two or three sectors, so we would want to be a little more broad based. Sometimes we do have some extra sector exposure in the model just based on our own research, and what's happened and what we think might be happening in the future plays a role in that as well. So I think they can have a role in a well diversified portfolio. If you really have a good feeling about a sector or you want to kind of double down on that. But I wouldn't just be investing in sectors. You want to do more broad based. So, like, the s and p 500 is considered a broad based index. 



So if you're doing an index fund or a mutual fund that's benchmarking itself against it, you should be getting exposure to all the sectors. But you can also just go, hey, I really feel like energy is a good time. And so maybe you add a little bit more, but kind of like only buying one individual stock or a few individual stocks. I kind of feel like sometimes one sector can outperform, sometimes it can underperform. So to make sure you still have good exposure, that's pretty well diversified across at least multiple sectors is generally a better long term strategy. 



So I do, however, want to kind of confess my sins. 



Here it is. How long has it been since you've been to confession? 



Mutual funds and index funds, these are proven long term. This is how millionaires are made. Wealth building tools. 



Right, right. 



But they're kind of boring. Yeah, we have to agree. 



Hey, slow and steady wins the race. You heard of that turtle? 



It does, but it's also boring. 



Keep the hairs. 



And it is more fun to kind of think about, I'm going to buy a nike or a stock or something that I use or I like. And people this is a good way to get young people interested in how this works, right? 



Yeah. 



Do we kind of stick with this idea that, okay, yes, you can play with some individual the wise way to do this is the slow and steady way, but maybe you can play around if you want. No, you're gambling, but you can play around with what percent of your investable portfolio? 



That's a great question and I totally agree with you. So with my girls, they have brokerage accounts and they're saving and then I help them buy an individual stock because it's way more fun. I don't have them pull up a mutual fund screener and let's pick a sector or broad based fund. Like it would be so boring for them. Boring? 



Buy Monopoly. No, wait, not Monopoly, but Mattel or whatever. 



Yeah, you mentioned Disney, and my youngest daughter Eden is ten and she was the happiest place on earth. 



Right? 



Disney. But my other daughters, they bought Target and Starbucks and some other securities that over that time had really appreciated. And I went around the table like a couple months ago and was telling them how their securities had performed. And when Eden found out that Disney was down, shed like a little tear. Place on earth did not give her. 



The return, let her invest in. 



I mean, I was just trying to get them to buy something that was fun that they like to use, you know what I mean? So I agree that it can be volatile, it can be fun, it can be a good way to learn. So you said what percent of the portfolio can be individual securities? I think it depends on the reason for the money. It all starts with why, right. So if this is what you're putting in your four hundred and one K, and it's rolled over to an IRA rollover, now you're in a brokerage account and you could buy individual securities. I'd be like, 0%, you can put 0% of that money. 



If the why of that money is so that you can retire one day and not have to work because you have to, but because you want to and pursue more meaningful things in your life, that should probably stick with that's in Tim's opinion. Ito there, but as far as like, well, this is some excess savings. You know what is something this is just kind of play money. Sure, you can do some individual stocks there. It really depends on the why. Like if it's just like, well, this is what I'm saving to pay for taxes later, or this is to save up for my vacation at the end of the year or next year, I wouldn't be doing individual stocks. And so as part of your overall portfolio, maybe 20% or less should be individual securities. 



You're even more I know. Than I would be. Ten max, maybe five. 



Okay, well that's good. Yeah, but that's what I'm saying. If it's your retirement portfolio, I just wouldn't recommend a whole lot of individual securities. You either have the risk that you can lose that value or you have the risk that it's not keeping up with the market, not compounding your money quick enough to get you to help you reach your goals quicker. 



Well, you saw all this stuff with Robin. Wait. What am I thinking about? Robinhood. The Robin Hood app. 



Oh, yeah. 



And like GameStop and BlackBerry and all. 



These it's wild what it's done. It really is for wild. Yeah. 



And I mean, who wouldn't have wanted to throw a little bit of money? 



Absolutely. So fun. This is not to pay your bills or to pay for your vacation or your taxes or your retirement. This is some excess savings you have, and you want to give it a shot. So, I mean, it's like going to Vegas. You go to Vegas with a in return with any part of that budget. 



You'Re up plan for your entertainment. My accusation earlier about Disney and letting your daughter invest in it, that's why we don't do that. Right. That's why we do it for instructional purposes, not for long term investment return and retirement and stuff like that. Tim, this has been great. I want people to know, like, if they're listening to go, okay, I can ask all the questions because this is one that people are afraid to ask because they don't understand how this all works. You can ask it no judgment zone here. We're not going to judge. 



Yeah. And I know clients are like, well, we trust you, and that's what we want you to do, but we certainly want them to understand what they're invested in to whatever level of understanding they really want to have. But you never really want to invest in anything or let anybody else invest in it for you unless you've got a decent grasp for many going on. 



Yeah. Many years I was a client here and I was like, I don't care. 



I just trust you. We appreciate your trust, but it is good to have some kind of good grasp of it. I think you're doing all right now. 



Doing okay. 



Like, you're like a licensed financial advisor over there. 



Came around. Came around. I got interested. Hey. As financial advisors, we manage and rebalance portfolios, but the unique value is that we work to understand our clients'individual goals so we can help them understand these things and have these types of planning conversations that are so personal and unique to each individual. Thanks again for being here, Tim, on your podcast. And remember, if you're enjoying the show, rate and review us wherever you get your podcasts. If you have a question you want us to answer on the show, email it to us at moneypig@goodwininvestment.com. We will see you next time. 



The MoneyPig podcast is hosted by Retrigo, a financial advisor at Goodwin Investment Advisory. This podcast is intended to share information and perspectives, but should not be interpreted as legal, financial, or tax advice. The opinions shared by participants are not necessarily endorsed by the company. Goodwin Investment Advisory is regulated by the SEC, and the company operates in compliance with applicable securities laws and regulations.