July 23, 2024
Hello everyone, welcome! You're watching Money Fundies. I'm Matt Stearns, and you're here at Millennial Money Management. Thank you for joining me. If you missed our last episode, it was our first episode of this blog series. I used it as an introduction of myself, my company, and our philosophy of what we do here at Millennial Money.
So, in this following video, we're gonna go over some fundamentals of investing, as the blog title implies, because I believe that if you don't get the fundamentals right, as you know, you can't get the more advanced topics of investing right either. So, we're gonna start out with the basics today. We're gonna talk about the equity portion of portfolio building.
We're going to start talking about mutual funds, including index funds and ETFs. Okay, so all these things represent ownership in companies, a stock being an individual security of an underlying company, and mutual funds or ETFs being a basket of stocks. So, it could be dozens or even thousands of different stocks.
Okay, so there are advantages and disadvantages to each. When we talk about mutual funds or ETFs, the advantage that they give us is diversification. We can own one product and essentially be owners of thousands of different companies, so it basically protects us from both the upside and downside of these individual stocks. However, if you own an individual stock, there is potentially more upside and more downside, so it's up to the particular money manager or personal investor which is best suited for them. But when we talk about retirement portfolios and things of that nature, that's why you've heard of mutual funds and index funds—because they give us nice diversification, and they're easy to use.
Okay, so a little bit about stocks, mutual funds, and ETFs. We're gonna talk now about the fees, because this is really important. So, ownership: you own one company. Mutual funds: you could own potentially thousands, and the same with ETFs. Okay, how they're managed: obviously, with the stock, you're basically the owner of that whole share. There's no work to be done; you can buy it and hold it forever as you please, so it's self-managed.
Alright, mutual funds—they have an active manager on Wall Street, so we call this actively managed, and that means we have a person sitting at a desk making decisions about what stocks to buy and sell out of these thousands of stocks. Okay, and with an ETF, we have what we call passive management, generally speaking. There are exceptions to both of these, but in general, ETFs are passively managed, and that basically means that there's a computer that sets a formula for how the particular fund is going to be traded. It could be, for example, the 50 largest tech stocks in the country, and so you know exactly what you're going to own. You're going to own basically 2% of each one of the 50 largest tech stocks, and then it depends, obviously, on how many shares of that ETF you buy.
This has a person making decisions, so you don't really know what you're getting, though you have some sort of idea. The stock, obviously, is dictated by the company—how good its own stock is. So, we'll get rid of that right now because there isn’t really any management there.
Now, we should talk about expenses and fees. Okay, so with stocks, mutual funds, ETFs, bonds—you always have a trading fee. There's always a transaction fee; that's what you see on television when it says E-Trade: five-dollar trades or Scottrade: seven-dollar trades. That's just to buy and sell. That's standard across the board; it doesn’t matter what sort of security you're buying. But they do have different expenses. When I talk about expenses, it's going to be a percentage.
So, a stock does not have an expense. A mutual fund, because it has a person on Wall Street who earns a salary to manage this fund, also makes millions of dollars in bonuses. These expenses can typically be, on average, around 0.75%. Okay, so that means if you have $1,000 invested, you pay $7.50, which goes to this person on Wall Street. And with ETFs, it's typically lower—about 0.15%. So, you can do the math there. But this is because we have a computer setting the formula instead of a person on Wall Street.
A part of our strategy here at Millennial Money Management is to avoid mutual funds. In addition to these large expenses, they're the only category that has an initial sales charge. So, when you go to purchase a mutual fund, it may also charge you—the maximum is 5.75%. Okay, so now we're talking about an extra $57.50 leaving your pocket, going up here to this person, and also going to the salesman in the form of a commission. Okay, so we have money flying out in all different directions with a mutual fund.
Rather, with an ETF, we get a set formula. We can know what we're investing in, and I’m able to understand exactly how this fund is going to be managed. I can build a portfolio with different funds and know exactly what holdings my clients have within them. So, that's a big advantage. Also, I don’t have to pick a person. I’m not picking, Oh, is this guy smarter on Wall Street? Is that guy smarter? Rather, I can just trust the formula.
And the real kicker is we have a much lower expense ratio, and we have no sales charge. So, we're talking about several percentage points, potentially, which can be tens or even hundreds of thousands of dollars over the life of, let’s say, a Roth IRA for a young person. And really, this is a new model of investing when you go to see an investment manager, and that’s what we're doing differently here at Millennial Money Management. Because I don't sell any products and earn commissions. Rather, we're utilizing ETFs. By the way, ETFs first came out in 1993; mutual funds came out a few decades prior to that.
But we know that index funds, which are passively managed funds, have outperformed mutual funds over time—about 95% of the time. So, when people make the argument, Oh yeah, we pay extra for these mutual funds, but these people on Wall Street earn it and make up for it, yeah, history shows us that 95% of the time, they don't. So, we basically get outperformance with a cheaper product, and it's more calculable to know exactly what sort of holdings you have in your portfolio. So, that's a big advantage of ETFs, and it’s our strategy here at Millennial Money.
If you have any questions, please comment below. I’d be happy to do additional videos if there’s high demand for them. Otherwise, tune in next time. We're going to be talking about bonds and the debt portion of the portfolio. I hope you enjoyed it. Thanks again for joining me, and please like and subscribe below. We'll see you next time. Thank you.
