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Read the Ingredients – Even on your investment funds

Read the Ingredients – Even on your investment funds

Ever wonder what’s in your index fund? Similar to reading labels in a grocery store, you are likely to find things that you either don’t recognize (erythorbic acid in your frozen blueberries??) or are surprised to find (cane sugar in jarred pasta sauce??). It would serve you well to delve deeper into the components of your investment vehicles, particularly index funds, to avoid potential pitfalls and misconceptions.

Join Matt Robison and I this week as we discuss the various labels you should be paying attention to in the stock market. One of the first label mishaps is not knowing the difference between mutual funds and exchange-traded funds (ETFs). These investment wrappers may contain similar assets but have distinct characteristics such as tax treatment and use in investment strategies.

In case you aren’t completely confused yet, let’s jump into another sticky subject that even has Wall Street scratching its head. You’ve likely explored the concept of value and growth companies, which are commonly used labels to categorize stocks. Growth companies are expected to expand and generate higher future profits, while value companies tend to have stable earnings and lower growth prospects. Understanding these distinctions when choosing investments is key as different funds may focus on either value or growth stocks.

Speaking of funds and Wall Street’s “whoops,” a popular value index fund, the iShares S&P 500 Value ETF (ticker IVE) includes Microsoft which is typically a growth company. Here is where knowing the ingredients of the fund is crucial. 

While it may seem laborious, it is essential to gain insight into the underlying assets and strategies employed by the fund. This knowledge enables you to make informed decisions based on your preferences and risk tolerance.

Stick to the Basics

Would you prefer to  avoid the intricacies of analyzing individual funds altogether? You would do well to stick to three broad categories of funds: 

  1. Total US stock market
  2. Total international market
  3. Total bond market

By investing in these diversified options, you can bypass the need to decipher specific ingredients and still achieve a well-rounded portfolio. (hint: use low-cost index funds that track the above)

In the world of investing, understanding the ingredients of investment funds is crucial for making informed decisions. While the complexities and nuances can be overwhelming, you have the option to either dive deep into analyzing funds or simplify your approach by focusing on broader categories. Whichever path you choose, the key takeaway is to be mindful of what you are investing in and align your choices with your financial goals and risk tolerance.

Transcript

Transcript
Matt:00:01

Read the ingredients is the enigmatic title of today’s show. I’m Matt Robison, this is financial life planning with my co-host, Mike Morton, Mike, you and I have this approach to doing these shows where you create great references, you have statistics, you have stories you have anecdotes to share, and you share them with me, but I don’t read them in advance. Today, you’ve taken a new approach to minimalism that I deeply appreciate. You sent me today’s show notes and you just said, read the ingredients. And then you put resources and there’s a link. Mike, what’s happening here? Why should our listeners care about reading the ingredients, is today a food show not a financial show. I don’t know what’s about to happen.

Mike:00:47

I love our notes that I put together for the two of us and that you don’t read at all until we’re live recording. And then you know, sometime halfway through the show you’ve scanned like what we had, a couple of nuggets. But today so today, I just put the title and that was it.

Matt:01:04

Is this like a joke it’s like reading the ingredients. You gave me a link and if I open this up, it’s your rick rolling me like the link or is that like…

Mike:01:06

Oh, it’s going to be a nutritional label just pops up for for stuff that we’ll put it we’ll put the link in the show notes. All right. This my friend, my good friend, slash co host of my show was the title from a Wall Street Journal article, which I can see now you’ve brought up in front of you. So you have some idea of what we might be talking about during this episode. And I say what we might be talking about, because many times I’ve put together the show notes, and we don’t talk about it at all.

Matt:01:39

Alright like Miss Cleo for entertainment purposes only. That was, by the way, a deep cut reference from the 90s that if you got that good for you, you’re middle aged.

Mike:01:49

Good. Congratulations. Welcome to the rest of us. This was from the Wall Street Journal and it’s all about investing. Another thing where it just reminded me that investing is not easy. It’s like yet another reminder about why investing is not what it says it is. And why when you see the title such as read the ingredients, and you’re thinking it’s a cooking show, you know, and you see the title of some mutual fund or index fund or ETF that says a s&p 500 Value Fund, and you think it’s actually a Value Fund? It might not be, you need to know what is actually inside of that fund, where the title is not telling you what’s in there. And it’s just another, it’s number 999 out of 20,000 things about why investing is not as simple as it should be.

Matt:02:39

Well, first of all, I want to really take a moment to appreciate the meta joke that you just pulled off on me. First of all, you have a show called read the ingredients and you sent me show notes that have no ingredients except they do have a link. So I tried to just now as you noted, I tried to read the ingredients, and it’s a link to a Wall Street Journal article. I do not subscribe to The Wall Street Journal. It’s blocked by the paywall, so I cannot read the ingredients at all, you double pranked me, there, good for you. Well done, Rick gasoline. I see what you mean, though. So just first of all, remind all of our listeners, an ETF is a wrapper around a portfolio, a portfolio is not the right word and group of investments. And it’s like a mutual fund but a little bit different.

Mike:03:21

So let’s, let’s get a couple of terminologies here. And then the point of this podcast is know what your buying. Okay, know what you’re buying, when you go and do investments. I mean, this goes without saying.

Matt:03:35

Because frequently what you think you’re getting buyer beware you’re not, and just because it has like a nice name on it you may not know.

Mike:03:44

Yeah, that’s exactly right. Okay, so mutual funds and ETFs. These are wrappers so you can buy you go to Fidelity or Schwab or whatever and you can buy one thing called the total US stock market, and you click Buy with your $1,000. And now you own the total US stock market. At least that’s what the title says, that you just bought.

Matt:04:05

That sounds like something I cannot do. Or it sounds like a scene from trading places. I’m trying to corner the market on frozen, concentrated orange juice. Wait, have I bought the entire US stock market or no, I find an index of the entire stock market. Okay. Thank you. Thank you for clarifying that.

Mike 4:21

I don’t think you’re you don’t seem to understand that investing, Matt. I don’t know what to do with it. So yeah, you buy you buy an index fund to a stock market. You own a piece of all 5,000 public companies here in the US by buying one single thing. Now, that single thing might be a mutual fund, or it might be an ETF. Those are two different wrappers. Okay, it’s like the ziplock bag versus the generic plastic bag, two different wrappers around those 5,000 companies. So you buy one single thing that has one little ticker symbol, and you own 5,000 companies. It could be mutual fund version could be ETF version I don’t really care. That’s not the point of this episode. But the point is, you’ve bought the total, you bought a piece of the total US stock market because that’s what the title said that you purchased. So those are ETFs and mutual funds. But we’re talking about index funds, the total US stock market indexes.

Matt:05:18

Before we get into the read the ingredients on what’s inside the fund, just a quick note on the wrapper, one of the things that you’ve clarified in a previous episode, it was actually a two part episode in the show was the set of differences between mutual funds and ETFs. We don’t have to belabor that here, people can go back in the feed and look that up it’s actually extremely useful. And it turns out that it’s a distinction that really matters. For example, I am now apparently part of a class action lawsuit settlement in Massachusetts, because I was in a Vanguard mutual fund and I was not given sufficient notification of the treatment of capital gains that were going to be applied in that mutual fund. If I had been an ETF, if I had been aware of the distinction, I might have avoided the massive capital gains taxes that I had to pay two years ago. And so now there is some kind of a settlement and maybe I will get some of that money back. But the point is, maybe you’ll get a buck fifty, but I would have been happier to just avoid the whole thing in the first place. But knowing the distinction at least a little bit like which one it is, and why one might be a better fit for your situation or not, that’s something that Mike can explain to you. And he does in that two part episode. So go check that out. But I get the sense that you don’t want to talk about the wrapper, you want to talk about what’s inside the bag.

Mike:06:47

Yeah, and I’ll give you the cheat sheet because people you should go back and listen to the episode, but I know you’re not going to so here’s what you do. Buy the ETF. ETFs guys, ETFs.

Matt:06:58

That is a cheat sheet. Wow. But I still want you to listen to the two part episodes. Yeah, go download the other ones. You know what your a great financial advisor but in terms of marketing our previous episodes, I got to say it leaves something to be desired. I’m not sure this co-host thing is gonna last with you. Also seven neat tricks that you can learn about why ETFs are better if you listen to the episodes. That’s how I’ll come in, Mike.

Mike:07:29

Oh, I see. I see. All right, it’s really trying to help people.

Matt:07:34

Right, right, right. But you want it so here we go contents in terms of read the contents.

Mike:07:38

And I do want to say one other distinction, because we’re gonna get into this because this is the article from The Wall Street Journal, value versus growth, there’s different ways of slicing and dicing companies, okay, so we can think about big and small companies, you can invest in very big companies, or small companies, you get that right now these are massive companies, Apple, Microsoft, Netflix, whatever, Walmart, whatever, really big companies, or you invest in little tiny companies, local pizza shop down the street that’s in the public stock market. So you can slice and dice big and small companies. There’s also what we call value and growth, or these are very common terms. So the growth companies are companies that you think that people think are going to grow a lot. So think about again, those are some of the big names, especially in technology, we expect Google is growing, they’re creating new products and services, and people really want them so it’s growing, and we’re gonna pay quite a bit to own Google, we’re willing to pay quite a bit, not for today’s profits but because we expect they’re going to make even more profits down the road. Because they’re growing, they’re going to come up with some cool new stuff, versus, say Exxon Mobil, big global oil company. They’re not getting like tons of new customers, they’re just they’re year in and year out getting sustainable profits every single year. They’re doing a lot of stuff, a lot of investments in R&D, and other things, but they get very sustainable profits. So those are what we call value companies, you don’t expect them to grow a lot. It’s like they’re going to double their customers in the next five years. But they’re going to keep their margins, whereas some upstart could come along and suddenly undercross them. So that’s the difference between growth companies and value companies.

Matt:09:17

Are the growth companies, would you more typically find the smaller kind of riskier bets in that category versus the established Mom and Pop stocks, like you buy stock in an electric utility. It’s, it’s almost like buying a bond. It’s like is its rate of return regulated? Like you’re going to just tick off a pretty stable profit margin, nothing spectacular.

Mike:09:41

That’s generally Yeah, a good way of thinking about it, and you pay and what I was saying before is you generally tend to pay more to own the growth companies because you expect them to grow. So if they don’t suddenly like the stock price and get crushed because they’re not growing, where’s the value? You’re not going to pay a whole lot for it. And so therefore it’s not as volatile.

Matt:10:02

It’s a volatility variability. Got it?

Mike:10:06

Yeah. So that’s growth versus value. Okay. So now we can take, let’s take the s&p 500. Alright, so the 500 biggest companies here in the US, s&p 500. Alright, you can buy ETF version of the s&p 500, you will own a small slice of all 500 companies. And that’s great, cool. I own small slice of those 500 companies. Now, we could divide, those are all big companies. So they’re all going to be really big companies, but we could divide them into value and growth. Okay, we could take those 500 companies and divide them, okay, are you a value company or a growth company? Alright. And there’s different metrics, but someone makes a decision, in this case, Standard and Poor. That the s&p says okay, you are a growth company. And just decides you’re a growth company. Alright. And you know what they do? There’s ticker symbols. I don’t have them in front of me Matt, but there’s an s&p 500 Growth and there’s an s&p 500 value. So you can buy the s&p 500 growth or you can buy the s&p 500 value. We buy just the s&p 500. Okay, I mean, there’s a million different things you can buy. Right.

Matt:11:14

So can you explain to me why one of the names in s&p is poor? I mean, isn’t that crappy marketing? Shouldn’t it be like standard?

Mike:11:24

Yeah, standard and very rich? That’s a good question. Alright. Look that up.

Matt:11:29

So there’s Okay, that’s good. So I did not know that.

Mike:11:35

Yeah, so the 500 companies Standard and Poor’s. Somebody in there that means, it’s a company that does this kind of stuff. They decide, are you a growth company, look at the metrics, there’s all kinds of metrics you look at, for companies, are you a growth company or value company, they take all 500 and split them in either growth or value. But as you can think there’s probably a bunch of companies that’s maybe somewhere in the middle, they have some growth components, without thinking Microsoft, because this is the example I’m going to use, oh, that’s a growth company. But also, they’re a massive company, they have a lot of just prop revenue that comes in, they have business services, Microsoft has a ton of business services, where businesses just pay yearly annual fees for like, hey, all the services, cloud computing, think of Amazon with their like Cloud computing is just like, that’s more value, right? It’s every year in and year out, people are using the services paying the contract, like a utility kind of thing. So s&p splits all 500 into growth, and they have the s&p growth index. And that sounds good. We’re saying like, I want to make some bets, I’m going to buy the s&p growth index. Or you could think I’ll buy the s&p value index, because value historically does a little bit better than growth, which we don’t have to get into it today. But research and academics look at value companies, and they tend to do pretty well. So you might think, I’m gonna buy the value. Okay, that turns out Microsoft, which creates a lot of new products, a lot of growth is in the value the s&p 500 value. That’s where it sits in the s&p 500 Value. Why would it sit there because they had to make a choice. It’s either growth or value, it’s got to sit in one or the other. So the s&p 500 value index is crushing the s&p Pure value. Index. Right. Totally lost all of you. Yeah.

Matt:13:18

There’s, there’s value and there’s pure value. This sounds like oh, yeah, virgin olive oil and olive oil can actually be like the same. Like, and by the way, if you’re already one, how can you be even more so but anyway, go on.

Mike:13:32

Yeah. So the s&p 500 Value I told you they split all 500 companies into growth or value. The s&p 500 Pure value, or the s&p 500 Pure growth. They sound so similar. Yeah. Login to fidelity. I want a growth index, s&p growth, boom, I’m gonna buy that, well, did I buy the growth or the pure growth? There are two different things like Gosh, and they own different stuff in them. And if you didn’t buy the s&p one, maybe you got the Vanguard Value Fund. And that’s going to own different stuff in there. So this is where and then you look at historical trends, what do people actually do Matt, log into fidelity, I heard from my coworker values where to be, I’m going to get a value fund. And so I’ll look and log into fidelity or Schwab or TD or whatever. And I’ll just go do the research and I’ll look up value funds. And see what did really well in the last year or two and I’m gonna buy that one. Right? Because obviously, it’s done better than the other one. So I’m gonna buy that one. You don’t know what you’re getting like the s&p 500 Value crushed the s&p 500 Pure value. Why? Because Microsoft and others like it, which are more kind of growth companies are in the s&p value fund, but not the pure Value Fund. And so it makes it like doubled the gains of the other one. And so if you’re looking up and say I want a Value Fund, I’m going to buy that one even though it’s not really that much of a Value Fund. Are you ready to create your ideal lifestyle? Let’s discover what’s most important to you and design a plan to have more of that in your life. Go to meet Mike morton.com. All one word meet Mike morton.com.

Matt:15:17

That’s interesting. First of all, it’s not just Buyer beware but it is interesting that a lot of these things are marketing labels that that are put on things. And it’s if you buy like the eco friendly, if you buy the heart healthy omelet, it’s okay. That sounds great. What’s in it? Is it partially De-weaponized plutonium? Is it like light cheese? What is in the heart healthy? It’s De-weaponized, well, you wouldn’t want the weaponized that’s the pure value omelet, extroverted olive oil. So I can see. Let me ask you this, though. Reading the ingredients on an actual label is laborious. And it’s also confusing in a way because when you read the label, look, I love government. I’m a government guy, I spent a lot of my professional life working in government. So you know, when they put more mandates on companies, it sounds like a good thing. You got to say this, and you got to say this until you get the legal ease with the Apple iTunes agreement, and you’re like, oh, my gosh, I don’t have an entire afternoon to read what’s in the agreement, which is also hilarious Southpark. Like reading the ingredients on food is actually quite confusing because inside their its like well, this one’s higher in sodium, but has less sugar. But it also has polysorbate 80. I’m not sure if that’s good. Now I have to look up in Google how carcinogenic is that. I imagine that it’s the same thing when it comes to what’s inside these index funds. It’s you look at this company now I need to understand the meta on each of these companies and why do I need to read their 10Ks? Is there a hack for any of this? Is there a shorthand? Or do you have to really read the ingredients?

Mike:17:10

So if you want to know what you’re investing in, you do have to read the ingredients. So like, I’m going to answer this in a couple different ways. First of all, listeners, sorry to confuse you with the value and the pure value. I told you up front, it’s super confusing. Investing is more confusing than you think. But I’ll give you some hacks about what you can do. I like value. Alright. I have a lot of my clients in some value funds, what do I have to do, I have to know the landscape of value and what’s inside of these things. And it’s not that easy. Luckily, once you learn some stuff in pay attention and read some labels, like to your point, Matt, you can Google some things start to learn, okay, this might be better than this, or this is what I’m trying to go for this kind of thing, I want to eat more fiber. So I’m going to look at the fiber content of each of those and do that, whatever it is. So I do evaluate 10-20 different value funds, and use the ones that fit into the portfolios that I’m trying to design. For the listeners at home, you could do all that. That’s great. If you love that, go for it. It’s awesome. I’ll give you some resources in the show notes and things that I love. But you don’t have to. And this is why when I just talking to other people about investing, stick with the basics guys. Total US stock market, total international market, total bond market, those three. Okay, you can have just three different investments total US stock market, total international market, total bond market, Okay, forget the value growth big small, don’t worry about it. Okay. That’s, that’s an approach. It’s very reasonable because it’s way easier to fit in at home, rather than trying to learn and figure out every single ingredient.

Matt:18:48

Well, just to extend the dietary analogy, because I think it’s actually a pretty good one. There is a lot of research on first of all, there’s some new research that you can count calories, or you can just do intermittent fasting. And you can just say, you know what, I’m only going to eat between noon and 8pm. You get the same result, essentially, and taking these kind of shortcut, or you can use the author Michael Pollan, who writes about food. He wrote The Omnivore’s Dilemma. And he writes, look, eat real food, mostly plants.

Mike:19:29

Not too much, not too much.

Matt:19:30

Not too much. And another friend of mine who’s a dietician said, avoid crap, where crap is an acronym for calorie rich and processed. Like if it comes in a package, and you look at the calorie count, that’s a pretty good proxy. I do think what you’re suggesting is there’s not really a shortcut through actually reading the ingredients. If you want to know what’s in a fun, but there is a shortcut to just show use certain kinds of things, and not even mess around in the first place. If you want to figure out if like a candy bar is okay, or if it’s like, kinda healthy, it’s like retro yums. Is it neutral? Or is it more Yum, you can read the ingredients on every single thing. Or you could just say, you know, what? Not going to eat the package stuff. I’m just going to you know, eat a plant.

Mike:20:23

Well, I love the analogy, actually. Because it is exactly that. Because if we’re going to eat the Nutri-yums, what are you going to balance it with? Right? If you’re really into nutrition oh, yeah, I do want to have some ice cream at night. What am I going to balance that with, I’m going to balance it with intermittent fasting. So I’m not eating too much, right? So you have to know a bunch of different things, or skip all of it and just eat only healthy stuff. And that’s the great part about investing is you can skip all of that stuff. Just invest in a couple of very simple, straightforward things and call it a day.

Matt:20:52

Right? You don’t have to read the ingredients if you’re buying a head of kale. And we’re going to do all show on like, the eating at some point, because you and I both talked about this.

Mike:21:03

There’s a new book I’ve just read called, you can’t possibly screw this up. And it’s by far the best such a great nutritional book that I have ever that I’ve read

Matt:21:15

Okay, good. All right, then you know what I’m going to do? I’m going to invite the author onto my show on the beyond politics, we’re going to talk about you can’t possibly screw this up. That’s fantastic. Yep. That’s great. Yeah, it’s really good. Look, I do think that again, just to build the analogy, you can shortcut this by just, I love to read the ingredients. If I’m, if I’m eating a kale salad, like, you know, kale, I know what’s in it. If it’s not coming out of a package, it’s fine. And that’s essentially the index funds are. Or you could take an approach of like, Alright, I’m going to super balance lots of different things, which is like, I’m going to do intermittent fasting, I’m going to do some of my own research. You know, I’m going to know what’s in the contest. But then you have to do the work and know what’s in the contents and know what’s in the plan.

Mike:22:02

You got it exactly right, man. So stick with the total US stock market, total international total bond. And those target date funds do a pretty good job in your retirement accounts. So the target date funds are a good one stop in the retirement plans.

Matt:22:16

Great. All right. Well, you know what, we somehow made it through all this. Even though I didn’t know the ingredients of this show we somehow managed to land on getting the ingredients to the shelf. All right. Mike Morton, my co host of financial life planning. Thanks so much.

Mike:22:33

All right. Thanks, Matt. Thanks for joining us on financial planning for entrepreneurs. If you liked what you heard, please subscribe to and rate the podcast on Apple, iTunes, Google Play Spotify, or wherever you get your podcasts. You can connect with me at LinkedIn for Morton financial advice.com. I’d love to get your feedback. If you have a comment or question, please email me at financial planning . Until next time, thanks for tuning in. This recording is for informational purposes only and should not be considered for investment advice or opinions expressed as our of the date of recording. Such opinions are subject to change. We do not guarantee the accuracy or completeness of the data presented here.

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Read the Ingredients – Even on your investment funds

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