Episode 24 - Building Wealth through Strategic Investments
Ready to transform your financial future? Hear a deeply personal story about Deb Meyer’s hard-hitting lessons gained from her first investment during the tech bubble burst. Learn the critical importance of diversification among other investment pillars and the hazards of emotionally charged decision-making. We'll dissect the pitfalls of market timing and the often misleading influence of financial media, emphasizing the necessity of maintaining a long-term perspective and a clear financial plan.
Determine how to craft an effective asset allocation strategy by understanding the diverse behaviors of equities, bonds, real estate, and commodities. With insights into the Federal Reserve's interest rate maneuvers and their effects on various financial instruments, this episode equips you with the knowledge to build a resilient and balanced investment portfolio.
Listen now to elevate your confidence as an investor!
Episode Highlights
08:07 - 09:32 The Risks of Individual Stock Picking
13:18 - 14:31 Fee-Only vs. Commission-Based Investment Advisors
17:21 - 19:39 Understanding Market Capitalization and Diversification
27:13 - 28:15 Impacts of Changing Interest Rates
Full transcript
Deb Meyer (00:03.416)
Have you ever wanted to become better at investing but aren't quite sure where to start? Then you're definitely going to want to listen to this episode. I'm going to share a little bit about my first investing experience, going all the way back to a high school economics class. Then I'll talk about my investment philosophy, some of the practical tools that I use when I'm working with clients one-on-one in advisory relationships. And I think would be really beneficial for you to hear as an educational tool as well.
And then we'll get into the alphabet soup of investing. Know there's a lot of terminology out there and it's confusing. There's a lot of misinformation as well. So just trying to give some positive frameworks for understanding the different terms and investing and really helping you become a more empowered investor. And then we'll wrap up with a little bit around bonds and interest rates. Okay, let's dive in.
My first investing experience was back in 1999 in a high school economics class. Our teacher, I remember her name Mrs. Weiss, she encouraged us to do a hypothetical portfolio of five individual stocks that we would track through that year of high school. And the idea was, you know, just to find some companies that appealed to us because we thought there were solid financials and had other good frameworks behind them. The hard part about it is that I'm a kind of nerd when it comes to money and I didn't want to just stick with the hypothetical portfolio. So I took $2 ,000 of my own money that I had earned through summer jobs and school year jobs and went ahead and invested in the same five companies in real life.
So I invested in some of the tech companies that unfortunately when the tech bubble burst later that school year, I was left with a pretty substantial loss on paper. At the time, I also didn't have a way to cope with the emotions I was feeling, right? I was feeling like I was stupid and had made a really bad mistake picking these companies in the first place.
Deb Meyer (02:28.77)
And I think part of it was my naivety. I hadn't invested in the market prior to that. Also, I really wasn't diversified because I had five individual stocks and most of them were in the tech sector before the tech bubble burst. Additionally, I let my emotions rule the decision making rather than thinking about it rationally and holding onto that investment so it could recover over time.
I just went ahead and sold when I was in a loss position. I lost about a thousand dollars or 50 % of my original investment. And as bad as that sounds and awful, especially being a financial advisor now, I will say it made me stronger because I learned from my mistake. I understood that when you are making investing decisions, you can't let emotions rule.
And that actually goes into one of my pillars of investment philosophy. It is important to try and drown out the noise because financial media is so prevalent today where anything that's attention grabbing is going to be front and center in the news. Whereas, in reality, we all probably still have roofs over our heads. We all know where our next meal is coming from.
If we're able to invest in the stock market, we're in pretty good shape in terms of just overall lifestyle, right? So all that to say, if you've made investing mistakes in the past, just because you did, it's okay. You can forge a new future now, and I'm gonna help you do that in sharing some education. From an investment philosophy, I think the number one guiding principle needs to be figuring out your bigger picture plan.
What are the financial goals that are overarching that are causing you to invest in the stock market or in bonds? What's your bigger why, in other words? Are you doing it for retirement reasons? Maybe you have some college savings goals for your kids. What are the overarching goals and why are you saving in the first place versus just sticking it under the mattress (which isn't a good investment)?
Deb Meyer (04:48.98)
Because with any investment, there is a certain level of risk you're taking. As economists like to call us more of a standard deviation where you're taking on some level of risk and the more risky the asset, the more you could potentially gain from investing in that asset. But again, if you think about it in the simplest terms, just figuring out kind of what your broader why is, what some of your bigger financial goals are. And if you're married, you and your spouse together, figuring out what some of those goals are.
That's going to help really solidify what types of investments and get more into the asset allocation and other choices like that, which is like the mix of investments. I'll get into that a little bit later. The other thing that I want to point out is market timing because I know for a lot of people, it's just so prevalent right now, seen in the news, there's headlines every day of this company or that company.
it's almost exhausting trying to keep up with just financial news alone. And that's not considering the other news that we're privy to with, you know, what's happening globally, politically, all kinds of things, right? So if you can just kind of take the piece that you're able to actually control and in your particular instance, you can control when you decide to get into the market or not get into the market. Now,
For market timers, they're always trying to pinpoint the perfect time to get in or get out. And in the times where they're nervous, they might pull out of the long -term investment and put it into cash, right? If they're feeling good about things, they'll continue pouring money into a good, or what they perceive as a good investment. But the problem with market timing is they don't know when to get back in.
So if we take an example going back to 2007, 2008, I had a client at the multifamily office, just one, that really just could not handle the volatility. They saw the investment portfolio go down, down, down, and they just did not have the patience to wait. And ultimately, from a recovery standpoint,
Deb Meyer (07:08.522)
it takes so much longer to recover once you are sitting in cash. You take your chips off the table in a down market and move to cash, there's no good time to reinvest because you're always going to be fragile and nervous about making another mistake, right? Whereas if you just stay in the investment long -term, even if it goes down in value, as much as 20, 30%, which most of our client portfolios did go down that much and that great decline. Eventually those portfolios rebounded back to their normal levels and then they went on to exceed the prior levels. It's a long -term game with investing and the shorter that goal is or time horizon to reach that goal, the more conservative you have to be when you're considering these investing decisions.
I like to think of market timing more as like the magic eight ball, which some of us had when we were growing up, right? We had the magic eight ball turned over so we couldn't see the answers. We would ask it a question and then shake it up and turn it back over to see what this magic eight ball was telling us. I mean, no offense to the magic eight ball creators, but they don't really know what's going to happen.
They can't accurately predict the future. So they're coming up with pre -populated answers and that's kind of what market timing is, right? Like no one really knows what the stock market's going to do tomorrow, a year from now, 10 years from now. We don't know, it's a guess. And if someone pretends that they know, they're probably a liar to be frank. So again, market timing,
not a great way to live your life. And it gives you lots of extra anxiety too. Like if you're always trying to think moving in and out in short tactical moves, it's a recipe for more anxiety and distress. The other thing I want to emphasize is individual stock picking. And I'll get into some of this again when I explain the investment terminology. But individual stock picking is basically what I did in my high school economics class, right? I had five individual stocks.
Deb Meyer (09:24.342)
And those are the only things I invested in. I didn't consider bond funds. I didn't consider international equities or mid or small cap equity. Like I just, I struck with large cap U S stocks and that's, and even more concentrated, I was in the tech sector. So anytime you're thinking about the individual stocks, you have to understand that it's not diversified. It doesn't have enough breadth. Like if the tech sector goes down,
your portfolio of investments are going to go down. And then the other thing to be thinking about too is just knowing that there are other options when it comes to investing. So you can have mutual funds or exchange traded funds that have a breadth of individual stocks in them or individual companies that you're taking ownership in. So you can get exposure to
the large cap US stocks in a more broad level, or you can get exposure to international stocks at a broader level. And even within those, you can diversify into large, mid, and small capitalization. So again, when you're thinking about individual stocks, you're taking a gamble because you don't know if it's going to strike rich or not. You're just taking on more risk than you need.
The other part of my investment philosophy is around doing your research, taking more of an academic research -based approach to investing. And within that framework, when I'm working with clients, we actually have dimensional funds as a large part of our offering. That is something that's not available to a retail investor. So they have to be working with an advisor that's on Dimensionals platform in order to be able to buy those, buy or sell those funds.
Now with dimensional's philosophy, I won't get into it too much, but it starts with that broader index or diversified mix of equities or stock positions. And then it puts very specific criteria, both qualitative and quantitative around it to decide which companies they don't want in their portfolio. So with...
Deb Meyer (11:41.07)
a like Dimensional, they're kind of a mix between, I would say, active and passive investing. again, I'll explain that a little bit later, what the difference between those two are. just overall, knowing that with an academic research -based approach to investing, you're going to be really capturing not only your opinion on what you think may or may go well, but relying on other institutions that are doing
very effective screens to decide which companies stay in the portfolio or don't. And then the other big piece I want people to think about when they're investing is the taxes. So for some people, they can ledge the tax tail wag the dog. If you're in a tax deferred or a tax free account, like an IRA or Roth IRA or 401k, you don't really have to worry about taxes while you're trading.
within that account, right? The only tax that might be coming into play is when you actually withdraw it if it's a tax deferred account like an IRA or a 401k. But while you have that investment, you can make investment changes. It's not gonna have any tax consequences. The tax consequences do come in though when you're an individual brokerage account or a joint brokerage account. It's something that's outside of your retirement accounts.
And if you're fortunate enough, you've been saving a lot in retirement accounts, you have extra resources, you start saving in a brokerage or maybe a revocable trust account. Those do have tax consequences. So if there's income generated in the portfolio, you're going to pay income tax on that at the time. If you sell a position and there was a gain in it, meaning the value today is higher than what you bought it for, there's going to be some tax consequence there.
I won't go into taxes too too much, but I will just say you need to be cognizant of it, but you don't want to only let that be, or I'm sorry, I should clarify. You don't want that to be your only factor when you're considering whether to buy or hold a position or sell it. Perfect example here. So if you see something in your portfolio that is appreciated a little bit, but from a performance standpoint, when you compare it to other
Deb Meyer (14:05.274)
mutual funds for example. Let's just say when you bought it, it was a Morningstar rating of four or five, which is a good rating. And now it's been consistently like a Morningstar rating of two. But you have a gain in it. Well, you have to decide. Do you want to stay in the fund that's independently rated as a two when it could be up to as high as a five? Or do you want to perhaps switch into something that's a four or five?
and know that you're gonna take a little bit of tax hit, but hopefully you'll recoup that in making a better investment going forward. Again, I'm not saying let's make lots of tactical moves or shift in and out of positions, but I don't want taxes to be the only consideration when I'm working with clients. And there's ways when there are down markets to take advantage of taxes where you're harvesting tax losses when all the positions are down. You could be selling some positions and getting into
similar but slightly different positions while avoiding these wash sale rules. Okay, another part of the investment philosophy is just being cognizant of hidden fees. So I've mentioned this a little bit before, but I'm a fee only advisor, which means my only source of compensation comes directly from clients through a transparent fee. I don't have commissions, I don't have any kind of hidden sales charges, anything like that.
Some of the other advisors out there are commission -based salespeople. They're really focused on the investments and if they suggest an investment, it might earn them a decent amount in their own pocket, but it may not necessarily be the right investment for you. So I've seen it a fair amount with clients that come to me after they've already invested in annuities or expensive insurance policies and things like that, where I can tell that they've been with more of a commission -based broker.
And sometimes those annuities can be helpful for people who have very low risk tolerance or people that aren't willing to take a lot of risk in their portfolio. But for many cases, they can be extremely costly. And they're just, I would highly urge you, if you're not sure what kind of, if you're already working with an advisor and you're not sure how they're compensated, just ask them. And if they can't give a very clear answer, they're probably leaning towards that.
Deb Meyer (16:29.528)
fee -based or commission, whereas fee only is always going to be very transparent with fees and not earn an extra dime, regardless of what we recommend on the investment side. And then the other piece to be thinking about is just rationality winning. If you think about emotional decision -making, it's always very reactive, not proactive, right?
If you see a piece of news and you react on it, it's probably based off of emotion, not your rational brain. So I always encourage people, they are thinking of something drastic when it comes to the investments, just take a step back, let it absorb and see how that would affect the long -term trajectory before you make any drastic moves, especially when it comes to down markets. If you start to get scared, just...
try to put your rational self on and say, when do I actually need access to this money? Is it a year from now or less? Then yeah, you might need to be raising cash or something. But if it's five years out or 10 years out or 20 years out, no, you do not need to be raising money. In fact, you should probably be pouring money into the stock market when it's down, if your time horizon is much longer to draw on those investment assets. Okay, let's take a little bit of a break.
I do encourage you to forward this episode to a friend or a family member. Ironically, even though this is called the Beyond Budgets podcast, I know I haven't really touched on investing yet in the episodes and wanted to make sure I got at least one episode on investing and I will be getting more in the coming months. But I do think this is great education for anyone regardless of whether they're working with a financial advisor or not.
just to understand some framework behind it because again there's a lot of miscommunication and quite frankly bad guidance. Okay, so let's talk about the alphabet soup of investing. I threw around some terminology in the first half of the episode. I'm going to try to distill some of that down a little bit more specifically. So when we talk about stocks for example, those are
Deb Meyer (18:50.486)
also known as equities. And when you think about the stock market very broadly, that's what a lot of people, when they're looking at financial news and headlines, they're like, okay, how's the stock market doing, right? So in the stock market, you have ownership interest in a company or a basket of companies. That's it at its most plain level. And within equities, you can have US -based equities or you can have foreign -based equities.
So if you think about a company like Emerson Electric, which is based here in Missouri, they are a US based company. So they are on the US stock market. But Emerson happens to be a large cap, a large capitalization US based company, and they do business overseas as well. But because they their main headquarters is here in the US, we still consider them a US based company. Now,
a company like Nestle, which is based over in Europe, they're going to be considered part of the international companies or equities. So again, they get sales from all over the world, but because their main headquarters is based overseas, they're considered an international equity. And then on the market capitalization, I threw around some different terms, large cap, mid cap and small
And even within US and foreign, you can break down each of those into the large, mid, or small. Large capitalization companies typically have 10 billion or more in terms of market cap or size. Mid -capitalization are generally from 2 billion up to 10 billion. And then small capitalization companies are typically anywhere from 300 million up to 2 billion.
So if you think about those three buckets, you might have some companies that start off in a small capitalization, but because they're doing so well and growing so much, they might move into a mid capitalization and eventually they may make it up to large capitalization. I don't see too many times where you have a large cap and it's going down into mid or small, but I guess it's quite possible.
Deb Meyer (21:10.036)
Over the last several years, large capitalization US companies have done the best from a stock market performance perspective. Just because they've done the best of these last several years doesn't mean they're going to do the best going forward. So whenever you're thinking about investing, don't ever say, okay, because this happened in the past, this is what's likely to happen in the future. You always have to be thinking about it independently. And in fact, the
Some of the best investors look at the asset classes that haven't been doing as well, and they are pouring money into those asset classes because they know eventually those others are going to come around and perform better. The other main reason that you try to separate into these different buckets just within equities is because you're looking at some other assets for diversification. If the large cap US stocks suddenly go down, maybe there's some
benefit there where small US stocks are going to do well. Or if you think about real estate as another asset class or type of investment, that's something that again could be very independent of what's happening in the stock market. So hopefully that explains a little bit on market capitalization. And then even with an international investing, like I said, you can have different brackets there as well.
Most people when they're doing international investing will do like the larger capitalization companies and then they might have a little bit of a sliver in what's called emerging markets or some of the economies that aren't quite as developed. Individual stocks, that again is just having individual ownership in a company. So if you own a share of Centene stock or you own a share of Google or Apple like
Those are individual stocks that you're choosing to buy.
Deb Meyer (23:07.244)
Not what I would necessarily suggest, but they can be a good starting tool, especially if you're looking at like a teenage son or daughter that wants to get some investing experience. You could have them start with individual equities just so they can get a framework for what it's like to research the company before they buy it, try to figure out some of the metrics that go into investing decisions. But again, generally speaking from a...
long -term investing perspective, just having some of the diversification that a mutual fund or an exchange traded fund, also known as an ETF, those can offer more breadth and they're not going to be as dependent on a single company performing well or not doing well. So with a mutual fund and exchange traded fund, they're similar, but they do have some differences.
On mutual funds, you can only buy or sell them at the end of the trading day. You can't do it throughout the trading day. And then oftentimes with mutual funds, they're going to have some level of active management where they have a person sitting and evaluating each of the individual companies before they decide to bring them into the portfolio. That same person's also monitoring to see the positions that are in the portfolio, the individual companies that it's already composed of.
make some decisions on whether to keep that position in or if it's been underperforming, if they need to be getting rid of it. Sometimes, and I'll go into a separate episode on faith -based investing, but with faith -based investing screens, they might have a company in and then realize it's doing some practices that are contradicting the Christian or Catholic values. So they may put it on a watch list, have discussions, try to get the company to change their tune on.
where they're deriving the revenue, but they might eventually push them out if the company's not responding well to it. The nice part with mutual funds and exchange rate of funds is as an investor or even as an advisor to investors, you're essentially delegating some of that day to day looking in and out at each of the individual companies. So you're not having to take on that role yourself of tracking and seeing how it's performing.
Deb Meyer (25:28.416)
On the exchange traded funds though, it's a little bit different for mutual funds and that you can buy and sell them throughout the day. One of the, I guess, downsides of it is there might be a premium or a discount associated with it because of the net asset value and depending on where that stands relative to the fair market value. And then also with exchange traded funds, those are typically a lower cost and they're also often what's called passive investing. So they're going to...
mimic the index. If you think of like the S &P 500 index, which is the main benchmark for evaluating the performance of large cap US equities, an exchange rate of fund that's US large cap is going to try to mimic the S &P 500 as much as possible or have very similar positions. So again, you're getting exposure to the market, but you're not having an individual manager
select as carefully what stays in or what goes out. And they also have these very specific dates that they can recapitalize the portfolio where they decide if changes need to be made. Whereas the more active mutual fund managers can decide whenever they want. They don't have to go on very specific dates. Asset applications, another term. I've been talking about it a little bit here and there, but
Again, it's just essentially the mix of equities, bonds, real estate, commodities, like some of these different assets that should hopefully behave differently. If there was a stock market downturn, bonds shouldn't behave the same. If there was a stock market downturn, commodities shouldn't behave the same. Even within equities, if you have large caps down, you might have small and mid -cap equities still do well.
Again, with any of these, it's just balancing out the risk and trying to make it so there's less overall risk that you're taking when you're investing. Some people choose to do a very heavy portfolio in equities, and that can be great when the stock market's doing well, but when it's not doing well, they are hurt the most, and they're the ones that see the biggest decline. So, you know, there's some magic around getting the right ratio of
Deb Meyer (27:51.992)
more risky assets to less risky assets and that's where I come into play as an advisor. All right, let's talk about bonds just for a minute. So we spoke a lot about equities, that's having ownership in a particular company or a basket of companies. With bonds, you're essentially doing the opposite. It's like a promise to pay. So if you think about lending money to someone, you're creating a relationship where
you no longer have the money, they have the money, and then you're expecting to get paid back at a certain time. Same kind of thing with bonds. So there's different ways you can invest in bonds. You could do US treasuries or municipal bonds, which are basically like state and local municipalities, corporate bonds, high yield bonds, inflation protected. There's a lot of different options and variations.
The other important thing to emphasize on bonds is duration. So that's a measurement of the interest rate risk, which I'm going to talk about a little as well because that's a pretty timely topic, interest rates. But it's a measurement of interest rate risk and it does consider the maturity, the yield, the coupon rate, and the call features. And I'm not going to go into too many details on bonds and explain each and every one, but if you think of maturity, that's like, okay,
when is the payment gonna be due? In the example of I made a loan to my friend, if I say, okay, in the next three years, you need to pay me back, then that's my maturity. Three years and I can expect full repayment. And during that time, I'm not gonna just get paid what I lent, I'm gonna also get paid interest back, right? So as we talk about interest rates, know, bonds,
are very heavily influenced by interest rates. And what we saw, post COVID, we had some pretty significant interest rate increases in early 22, or I'm sorry, 2022, all the way until late July of 2023. And the main reason behind that, the Fed was very concerned about inflation, right? COVID, everything was shut down for a few months and then the government said, hey, let's pump lots of money into the economy.
Deb Meyer (30:11.18)
Let's get things going again. But they took it a little too far and inflation became a very big issue. So the Fed who decides whether interest rates stay the same increase or decrease in the US, they decided to start raising the rates to try to combat some of this inflation. Then they started essentially taking a rate pause. They haven't risen rates since July of last year.
This whole year, there's been some speculation, okay, we're gonna have some rate decreases here in the coming months. And we thought it could happen as early as January of this year. It just kept getting postponed because the data just was showing continued inflation and the job market was still doing really well. That's not the case as much today. So I always like to give content that can be useful for many years, but I'm also gonna share a little bit about current day and what's going on with interest rates.
So Tuesday, September 17th and Wednesday, September 18th, the Fed is going to meet again and they'll likely cut rates. The main reason for that cut is because they are seeing that inflation isn't as much of a problem and they're also seeing that the job market's not doing quite as well, especially when you compare it to earlier this year or even last year.
When we saw the interest rates increase though, over these last couple of years, that had two different impacts. One was on money market and savings accounts, which if you went to a place like Capital One or Ally or Synchrony, you were able to get some really great high interest rates on your money market or savings accounts. But you also saw if you decided to buy a home or refinance a home during this higher interest rate environment that the mortgage rates were high.
We just moved after a lot of back and forth on the right timing and we got what was competitive for our credit score and everything else, but we're still at a 7 % 30 year fixed rate, which is relatively high compared to where we were at just a few years before. So our house in Florida, when we bought that and got our interest rate mortgage locked in, we were at, I believe, 3 .5%. Just to put it in perspective, very substantial change in the mortgage rates just over a fairly short time span. And we bought that in 2020 before the interest rates started increasing. So again, we've been in this rising interest rate environment, and then we've been at the pause more recently. Now we're likely to see the decreases.
And what that's going to do to rates like the money market rates, the mortgage rates, we should start to see some decreases there as well once the Fed starts officially lowering rates. Now with bonds, those actually move indirect opposition to interest rates. So when we start to see some rate decreases here, we'll see that the value of the bonds is going to go up.
Bonds haven't done very well from a performance standpoint these last couple of years, but I would expect towards the end of this year, going into 2025, bonds will do well, especially if you move towards some of these intermediate or longer term duration bonds, because those again have more interest rate sensitivity. So with the yields increasing, those are going to be more attractive. And it's gonna be hard if you have a shorter duration bond or a shorter maturity. Those are going to be coming due at in quicker time periods when we're seeing the the rate cuts.
So you want to lock in some of these? Better interest rates for the longer term. At a practical level, if you have cash that you've had in the money market and haven't really needed or have been using but you just like having that security you might want to consider putting something into a Certificate of Deposit or something with more of a specific time-bound amount that promises a guaranteed interest rate because those interest rates on like the money market accounts are going to go down once the Fed decreases rates. Or you might want to consider getting something into a bond fund, especially like an intermediate term bond fund if you're not already.
But you have to be careful with cash and just knowing like when you're actually going to need access to that cash or investment. If it's something super short-term and you're going to need it within a few months, probably not worth making any move. But if you won't need it for another three, four years, you might want to consider putting it in something a little more that's going to earn a little more from a return perspective. Okay. I threw a lot of information at you and hopefully it
was helpful and gave you a little bit of additional insight. But yeah, happy to share any additional thoughts. If you have questions, feel free to email me, podcast at worthynest .com. And I'll also be recording an episode here soon on values -based investing and hopefully bringing in some other guest interviews where we can talk more specifically about investing. Thanks.