Do You Really Understand Your Investments? - J.E. Wilson Advisors

Do You Really Understand Your Investments?

Words have meaning. Many investors believe that if their investments have names that include “balanced,” “total return,” or “diversified growth,” then this must be so. Unfortunately, what investments say they are often differs from what the investments truly are. As an investor, you need to understand your investments.

Today, there are almost 46,000 individual securities, along with almost 9,000 mutual funds and 1,100 Exchange Traded Funds (ETF’s). The breadth of investment choices can be overwhelming. This complexity often provides an opportunity for the transaction-based Wall Street brokerage firms, banks, and insurance vendors to take advantage of investors.

What are Mutual Funds?

Mutual funds are the most widely held investment, but mutual funds are really a method of investing. Mutual funds typically own dozens, hundreds, or even thousands of individual securities (stocks or bonds). These stocks or bonds might be actively managed, where the fund manager seeks to obtain performance from selection and timing. Or they can be passively managed, where the fund holdings are within a particular asset class or index.

True Diversification

Many investors think that holding an equity or stock mutual fund with many different securities means they have diversification. Some funds may provide broad diversification among different market segments (such as large or small, growth or value). But, most hold only large growth stocks. A fund that holds all the stocks in the S&P 500 index still has no exposure in about 85% of the stock market. By contrast, our clients typically own thousands of different stocks and bonds by holding a few distinct asset class (passive) mutual funds.

One of the key reasons we primarily utilize Dimensional Funds in client portfolios is the fund names actually correspond to what the funds hold. For instance, the U.S. Small Value Fund holds value stocks generally in the bottom 10% of the market-by-market capitalization (size). Typically, there are over 1,200 individual stocks in that single fund, providing substantial diversification among that particular asset category.

There is substantial value in owning a truly diversified portfolio that is appropriate for your circumstances. Add in “dispassionate discipline” and you have an excellent formula for being a smart investor.

Are your investments well diversified? Ready to make a change?

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