 Personal Finance PowerPoint Presentation Stock Funds Prepare to get financially fit by practicing personal finance. Most of this information can be found at the Vanguard website, which you can find online at investor.vanguard.com. In prior presentations, we've been taking a look at investment goals, strategies, tools, keeping in mind the two primary categories of investments, that being the fixed income, typically the bonds, and the equities, typically the common stock. Also keeping in mind the different tools you might be using, such as mutual funds and ETFs, possibly in order to be able to diversify with less of an overall investment than if you invested in individual stocks, individual bonds. In prior presentations, we've been diving into the different kinds of mutual funds. Here's a quick recap of some fund types. We looked at the money market funds. We looked at bond funds. We looked at balance funds. Now we're going to be diving into the stock funds this time. International funds we'll look at in the future sector, and specialty funds we'll look at in a future presentation. Remember that as we are investing, the key word is typically going to be that diversification. We want to have some in the stocks, some in the bonds, and we typically then are going to want diversification within, of course, the stocks and the bonds. How are we going to do that? We could buy individual stocks, individual bonds, but that's typically not the best strategy for individuals. We're typically going to need some tools such as mutual funds, such as ETFs, where we're going to be putting money in, pooling it with other investors so that the fund manager can take that pooled money and put it over more diversified investments. If that's the case, if we're looking at mutual funds or ETFs to help us to diversify, then the question is, do I want to say get one fund? Can I just put my money in one fund possibly for saving for retirement? For example, as we saw in a prior presentation, looking at like a balanced funds, which invest in both stocks and bonds, which might even change the allocation as I get closer to retirement. That would be one of the easiest ways to go, although there are restrictions to it because you can't, you don't have as much leeway to then rebalance if you think a different balancing strategy would be better. Another way you could look at it is you could say, well, I'm going to use mutual funds, but I'm going to invest in different index funds, for example, or different bond funds, for example, and different stock funds in that way. And I'm going to rebalance. I'm going to have more control over my balance between them by investing still in mutual funds or ETFs, but doing so on a sector by sector kind of basis, different mutual funds for stocks, different mutual funds for bonds. And then within those sections, we could have a bonds fund that spreads over many different bonds. So we might have different bond funds that are going to go specifically towards US bonds or government bonds or international bonds, depending on how much diversity we want to put in place, still using, in essence, mutual funds and ETFs. Also, remember that when we're saving for retirement, we often use retirement savings accounts like IRAs, like 401K plans, for example. And those things you can think of as, in essence, an umbrella over the investment, which is typically kind of like a mutual fund. So the mutual fund still acts the same, but now it has this umbrella, this added restriction, because that's what you're doing typically when you put money into a retirement type of account. You're restricting your money, which you would not do unless you got a tax benefit. So that's why you do it. It's not a different investment. It's not a different kind of thing altogether. You don't have to think of a different whole vehicle that you're using. It's basically a mutual fund, typically, under like an umbrella of a retirement account, which has tax implications that you have to consider. Okay, so now we're diving into the stock funds. This is probably the most common kind of mutual fund that people think of when you say, hey, I'm going to put money into a mutual fund. We're typically thinking, okay, well, I can invest in individual stocks, or I can invest in a mutual fund, which is going to diversify, pool my money together so that the portfolio can invest in multiple different stocks. When we think about the stock funds, however, we have a huge array of different kind of investments within the stocks, because now we've got all these different kind of companies. We can classify the companies in different areas and so on and so forth. So now that we're on the stock side of things, we've still got to kind of dig in and say, how exactly are we going to diversify over equities, over stocks, even using mutual funds? So considering stock funds, if you want to increase your chances of growing your money over longer periods of time, so they're going to be more volatile typically than the bonds, more volatile than money markets, certainly, but over a long run, they typically have the higher capacity for earnings, for growth. So these funds expose you to more risk than typical bond funds. That's why you want the diversification between the two, but you can limit some of that risk when you pair stock funds with bond funds as part of a diversified portfolio. So there's the key term. Any financial planner worth their salt or worth whatever is going to use that term a lot. Diversification. You'll get sick of hearing it, but it's a key component. So what are equity or stock funds? So this is Vanguard talking here. So equity, mutual funds and ETF exchange traded funds invest in a diverse mix of stocks. That's going to be basically the point. We're trying to get diversity in multiple stocks instead of investing in, say, one company, for example. Give your money to a higher potential to grow over the long-term. Stock mutual funds and ETFs aim to provide long-term growth unlike bond funds which focus on income. So when we look at the bond funds, they're usually going to be less exciting. They're usually not going to be jumping up as the market goes up or anything like that, but we're looking more stable income there, which means that when the market goes down, the bond funds are kind of exciting at that point because you're like, I'm getting killed, but at least my bonds haven't gone down in the hole. So that's kind of the play there. The stock, of course, can have more volatility. On the upside, that can be fun. On the downside, it can be painful. So in exchange for more growth potential, however, you're likely to experience more ups and downs in the value of your investment. So you've got to ride the roller coaster. Remember that in the short term, you're going to see the stuff bouncing around like this and you've got to not have a heart attack because in the long term, you're hoping that it's going to be basically an upward kind of growth potential. So if you're saving for retirement, that's kind of where you're looking. You're looking long-term here, and if you make your decisions based on panicking, based on fear, you will usually make them at the wrong time. Unfortunately. So reduce your investment risk. So a stock fund could give you access to hundreds, sometimes thousands of stocks with spreads out risk more than owning individual stock. So how to choose a stock fund? Here are a few questions to ask yourself when considering Vanguard stock funds for your portfolio. Similar kind of thing could be if it's not a Vanguard stock fund, but this is our Vanguard information that we're getting this from. So how do stock mutual funds differ from one another? When looking at a stock fund, consider two characteristics. We got the investing style in general stock funds invest in value stock, growth stock, or a blend of the two. So now we're going to try to categorize and we might dive into this in a little bit more detail in future presentations, the different kinds of funds, right? So now you're in the world of stocks now, and now the question is, well, can I group these stocks? I can group them in different ways, like by sector or by the idea of stock funds of value, growth, or a blend, for example. So capitalization stock funds also choose investment based on the size or capitalization of a company. So we can also think, you know, in terms of investing, how big is the company? You would think the bigger they are, the more kind of established they might be, and that might have less risk oftentimes, but that's not always the case, you would think as well. So companies are considered either small, mid, or large caps. So these are other kind of classifications in terms of the size, which we might define a little bit more in future presentations. So how much risk am I comfortable with? So different types of stocks will expose you to different types of levels of risk. Now, when you're thinking about risk, obviously we have our risk tolerance and whatnot, but we're also trying to match the right risk level with the time horizon that we have. So if we're saving for retirement, we have a long time horizon. We should probably be taking on a diversified portfolio, but maybe more risk because we have potential for growth over that longer time horizon, and the idea being if we get closer to retirement, then we might be on more stable stocks, which might be more the larger cap stocks, right? The ones that are going to be more stable growth, ones that possibly give out more dividends at that point in time. So knowing the general terms used to describe specific stock characteristics can help you assess how comfortable you are with the risks involved with investing. So for example, you can choose stock funds and ETFs based on the average size or capitalization of the companies they invest in. In general, smaller companies' stocks can be riskier than larger company's stocks, but smaller companies can reward that risk with more potential for growth. So in other words, if you think about a growth cycle like this, you're saying, okay, this is a company's growth cycle if they kind of succeeded, right? It's going to look something maybe not exactly like that, but it's going to go up and you would expect that you're going to have this period down here with a huge increasing rate of return. So if you bought like Apple down here or something when they were growing, well, you're not going to get a lot of dividends at that point in time, but the value of the stock would go up greatly and you would be doing quite well, so many stocks are going to die, right? They're not going to get up to the top at this point. They're not going to be at the same level as Apple is at this point in time and so on. So you have the potential for growth, but you have the more risk that's going to be involved there. Once you get up here, like Apple's kind of up here, or typically like a utility company or something like that, then you would expect they made it. They're already huge. So if you're like a utility company, they've already invested for the phone company. They've invested in all the phone lines. They've won the monopoly basically, or they have the capacity. They're not building new phone lines and stuff like that, typically as much, and they're just kind of marching along and you would expect them to keep on doing what they're going to do, because they're basically stable at that point in time and possibly giving out more dividends. You can think of a similar kind of curve, by the way, with countries as well. So if you think of the United States, we're kind of up here, so you would think that maybe overall, there wouldn't be as much giant spurt in the growth. And a lot of times we think about those developing countries, which you would say, man, if they could just do a little bit, like if they were just able to use a little bit more of their human capital, for example, more efficiently, possibly becoming a little bit more capitalistic, then their growth would spike. And then if you're investing there, you'd have huge growth there. But again, just like with this individual stocks, there's also risk that that's not going to happen. That's not the way it's going to go. So you have the potential, but it may not completely play out. So would I prefer index or active funds? So this is going to be huge within the stocks as well, because this comes down to your thinking on active management. Do you think that an active manager can beat the index? Remember that the index is kind of like the average of whatever sector that we are currently looking at. You can think of that similar to a sample of a population. So for example, if we're trying to get the opinion of a population, we're not going to ask the whole population. We're going to ask a certain group that we hope are representative of the population and then take those results and basically apply them to the entire population. Similar thing with the index. We're going to take a sample of stocks within a certain sector that we hope are reflective of the entire sector and use that as kind of like the average. When we are investing, we could try to have our mutual fund tied to the index, which would be kind of tying the hands of the manager, which hopefully will be cheaper because now they just need to tie it to the index. We're betting on the average of the sector, or we could try to have an active manager that in essence is going to try to beat the index. So if you have an active manager that's managing within the confines of whatever sector that they are in, you would think by definition to justify their active management, they're going to need to beat the index, and they're going to need to beat it enough that they're actually justifying their salary to be actively managing. So whether you want indexes or active management will depend on your personal outlook about how well active management can perform in the long run oftentimes. So a combination of index and active strategies can help you meet your goals. Many people start with a core portfolio of index funds and then actively manage funds for certain market segments. And I think that's pretty much a good idea because the index funds means you're kind of investing on the average, on the market as a whole going up over time. And then you might want to be pretty picky about your actively managed funds because you want to pick the actively managed funds where you think someone can actively outperform for whatever reason, rather than just picking a general active manage fund that has some active manager that you don't know a whole lot about. You might want to be more picky about the types of active management funds you want to put in considering they cost more. So index mutual funds and ETS, you have a chance to keep pace with market returns because index funds try to mirror certain market segments, but not all index funds are created equal, actively managed funds. So or you can try to beat market returns with investment handpicked by professional money managers. So here's what they're trying to do. They're trying to beat the index within the certain areas that would be the general idea they're going to cost more to do so. So you may be surprised by our active funds performance. Discover our active funds quite success stories. So what to see a side-by-side comparison of the two types of funds. Compare index funds versus actively managed funds. So you could, they're going to try to give you the comparison side-by-side. Again, the question is, you know, they should be able to beat the index fund by a substantial amount after paying for the added costs in order to think about it. But remember that when you're looking at the actively managed funds, if you're trying to consider a particular fund manager, for example, that is saying that they can beat the market, oftentimes it's hard to determine that because you really have to look at their whole career to really determine if they're able to beat the market consistently over the long run because there are going to be winners and losers no matter what, even if we just randomly picked a bunch of people that were actively managing just because you have so many people, just that's the way the chance will work. Someone is going to look like a genius even if everybody was not a genius. We might have some situations where an active manager, whatever their investment strategy, whether it be conservative or very aggressive just happened to fit the market at that particular point in time 10 years later when the market changes and the other side of things would look better, that manager, the question is can they change to reflect the changes in the market appropriately? Again, that's kind of tough to tell unless you're looking at a very long time horizon. But in any case, do I want domestic or international stocks? Investing in both U.S. and international stock funds can add another level of diversification in an already well-balanced portfolio. So note that, again, if you're investing in the U.S., you can kind of think of the U.S. kind of like that business cycle. So the U.S. is basically up here. So you would think that you're going to get lesser potential for returns than you could in like a growth area of the world. Because again, if they just did a couple things and maybe became a little bit more capitalistic and have a little bit more use of the human capital, you would think that the growth would be huge. But again, they might not do that. And so there's going to be more risk involved there. So typically on the U.S. market side of things, you usually have more trust and whatnot in the system, some more transparency. And so that's why a lot of times the money still floods into the U.S. exchanges and so on because of that more transparency, even though there may not be as much potential for that rapid kind of growth. So then the question is, well, how much more exposure do I want outside of the U.S. possibly? And what are the tools that I could use to get exposure, to get exposure to other areas of the world to add to diversification and possibly getting access to some higher returns? So in any case, get a list of Vanguard U.S. stock mutual funds and Vanguard international stock mutual funds. So as individual investors, if we're investing in mutual funds, our options could be, we might say, hey, I want to get, say, one mutual fund that covers all bonds, all stocks and so on, or we might try to break out the bonds from the stocks. And then on the stocks side of things, we might try to get a mutual fund, for example, that covers all the U.S. stocks, for example, or multiple mutual funds that cover different segments of the U.S. stocks. And then we might want mutual funds that cover all of the international stocks, to give us exposure there. Or we might want multiple index funds that are going to help us or mutual funds or ETFs with exposure to the international market, depending again on how much complexity and how much control we want in our investment strategy. So we've got the Vanguard U.S. stock ETFs as well. We're not going to get into the difference between the ETFs and the mutual funds here. We've talked about that in prior presentations. Vanguard international stock ETFs. So should I focus on a specific industry? You could choose a fund that invests solely in a specific sector of the market like healthcare technology or telecommunications. So we've talked about breaking out our investment strategy in the stock side of things. So we're going to break out, we could think about bonds and then we're going to think about stocks and then on the stock side of things, we can break out by the size of the company, for example, or we might want to break out by a specific area like healthcare technology, telecommunications, and so on. Now remember, you don't want all of your money typically in one of these areas as your sole kind of place to be, even though you're somewhat diversified within that area because if there was a downturn within a particular area like healthcare or telecommunications, then you would have exposure to that. You wouldn't have diversification to safeguard against that. But you might want some more leeway to put money into say these particular areas if you think that would be the best thing to do within the current market situation. So you might be saying, hey, I think healthcare is the safest place to be in this particular environment. I would like to be more heavily weighted in healthcare at this point in time. So whatever my other strategy is, if I have a balanced portfolio or I have different index funds that are covering my stocks, maybe I also have this healthcare fund that's going to be betting on this particular sector because I think that would be best for this particular point in time, allowing you a little bit of leeway to more heavily invest in one area or another, for example. But remember, these funds have a very narrow focus and expose you to more risk, meaning if you just invest in them alone, you're not diversified, and therefore you're exposing risk in that case. You want to use them in conjunction with other strategies. Sector and specialty funds should only be used to supplement an already diversified portfolio. Get a broad exposure to stock markets. You can use just a few funds to complete the stock portion of your portfolio. Each of these investments give you access to a wide variety of stocks in a single diversified fund. So we've got the Vanguard Total Stock Market Index Fund. Holds more than 4,000 domestic stocks. We've got the Vanguard Total International Stock Index Funds. Holds more than 7,500 non-U.S. stocks. So your strategy could be, I want to have a diversified portfolio. So I could try to get one index fund that has both stocks and bonds and diversifies over everything. But that's going to be somewhat restrictive, although the easiest thing to do or I might want to have different funds, say for the bonds and for the stocks. And then on the stock side of things, maybe I want to have one mutual fund ETF that's going to cover all of the total stock market, say U.S. stock market, for example, giving me diversification, hopefully a broad diversification there, and then another one for international. So now we're breaking it out a little bit, but not too much. Or we can get more specific still and say within the Vanguard stocks for the U.S. stocks, maybe I then break out by caps. And so I'm going to say the size of the company. Maybe I invest based on the size of the company, for example, and use those index funds or mutual funds. Or maybe I try to get more specific into different segments or industries, for example. So there's questions on how, even using the mutual funds, on how much strategy we want to give to one specific fund and how much ability do we want to vary things up by having basically multiple funds focused more narrowly on specific areas. So Vanguard Total Stock Market Index Fund, so Stock Market ETF, I'm sorry, Vanguard Total Stock Market ETF holds more than 4,000 non-U.S. stocks. We got the Vanguard Total International Stock ETF.