Portfolio Analysis (Stocks, Bonds, Crypto, etc.)

We continue in our path of learning about analyzing. It is impossible to make any proper moves forward unless you can compare and contrast what your portfolio is doing for you, how it can improve, and what to consider when wanting to move forward. Make sure to brush up on Correlation and Diversification for this one. Chris certainly had to.

Tools for the toolbelt(box?). 

Transcript

Chris Holling: 0:00

If I if I was going to invest do I put it all into the space, which some have, and some have absolutely been, like a success with it so I you know it's it's not like it's impossible I it's it's just so it to me it's it's more of a dice roll, then some gambling would be this is the truth about investing back to basics podcast We want to help you take control of your personal finance and long term investments. If you're looking for a way to learn the why and how of investing, then you found the right place. Thank you for taking the time to learn how to better yourselves. Introduction there it is. The Welcome Welcome. Welcome. Welcome. Welcome. Welcome. Welcome. Welcome, ladies.

Sean Cooper: 0:57

A lot of welcomes

Chris Holling: 0:59

Ladies and gentlemen, to the next episode of the truth about investing back to basics. My name is Chris Holling.

Sean Cooper: 1:10

And I'm Sean Cooper.

Chris Holling: 1:11

And we are continuing on with our season four where the first stretch because now we're actually looking at the episode plan is addressing analysis is an analysi portfolio analysi. That's, that's the technical term, right?

Sean Cooper: 1:36

Yeah.

Chris Holling: 1:39

Because last time, we were able to talk about the differences between technical tech Whoo, man, technical and fundamental analysis, and kind of helping break down how to do both of those and how they work and what they are. And this time, we are doing portfolio analysis, whereas the following we're looking at stock portfolio analysis. And that's, that's because they're different. So Sean tells me

Sean Cooper: 2:08

Indeed they are.

Chris Holling: 2:11

Oh, right. And I have to guess things. So. So my guess when when I think of a portfolio, I think I picture a person walking around with this big the, I'm gonna say manila envelope that is large enough to need to be carried in a briefcase. And the Clark Kent looking figure that carries this briefcase will then pull out the portfolio and legal pad, and it has big

Sean Cooper: 2:46

That's a padfolio.

Chris Holling: 2:50

Well,

Sean Cooper: 2:51

just saying,

Chris Holling: 2:53

Okay, alright. So the Clark Cent looking figure it with the briefcase in the manila envelope, opens it on a port of the sea, and now has a portfolio and it says, on the manila envelope, it says port folio, and it's it's written with that Sharpie where you know, it's handwritten, but you don't know by who, because nobody's handwriting is that good. And it's, it's on there almost like a stamp. And then you open it. And there's graphs and pie charts in it. And these graphs and pie charts have lots of percentages in it, and they have names of other they have abbreviated names of companies that you partially owned, because shoot, no, that's a stock portfolio. You know,

Sean Cooper: 3:48

but you, you you brought up this important point, their stock portfolio, and that is the distinction that I'm trying to make stock analysis, which is individual security now, or individual security analysis, as opposed to portfolio analysis.

Chris Holling: 4:06

You lost me. It's a portfolio analysis but not a Stockport, but they're both. We opened it on a port, it's a portfolio. Okay, so

Sean Cooper: 4:17

right, but my point is that you're saying stock portfolio analysis. And that would fall under what we're covering today.

Chris Holling: 4:26

No, it says it says hello, hello, noise making phone. It's it. Okay. I've got I've got it says technical fundamental analysis then portfolios

Sean Cooper: 4:40

That was last week,

Chris Holling: 4:40

right then portfolio.

Sean Cooper: 4:42

That's this week.

Chris Holling: 4:43

And then stock portfolio analysis is the next one.

Sean Cooper: 4:46

No, The next one should just be stock analysis

Chris Holling: 4:48

Well, then my introduction meant nothing,

Sean Cooper: 4:51

or securities analysis is more accurate but

Chris Holling: 4:55

Alright. So you're on a port with a briefcase and it has stock, pie charts and you own shares in a pie company. And, and while you're looking at your pie companies on a port, then you also realize that you need to make sure that you pay the guys that are keeping your stuff safe. So you hire private security. And so that's that's how you have a security portfolio. stock portfolio that you

Sean Cooper: 5:31

The fact that you've kept this going as long as you have is credence to your improv ability. I'm impressed

Chris Holling: 5:37

if you should be one thing, you should be efficient. I okay. All right. Well, I'm glad that we cleared this up while we're recording that, that, hey, this next time that we're recording portfolio analysis is different than it's not different. How am I not drinking, this is ridiculous

Sean Cooper: 6:03

next time, we're talking about security analysis.

Chris Holling: 6:06

Whoa, whoa.

Sean Cooper: 6:07

Specifically Stock analysis, but security analysis is the general topic.

Chris Holling: 6:13

That's this time or next time.

Sean Cooper: 6:15

No, that's next time this time is portfolio analysis.

Chris Holling: 6:18

I'm changing this now. Security port folio, no security analysis

Sean Cooper: 6:26

no whipe portfolio from next week's all together, this time is portfolio next time is security or stock whatever you want to put their is fine

Chris Holling: 6:35

security analysis.

Sean Cooper: 6:37

Correct.

Chris Holling: 6:38

Okay, watch this reintroduction, I might even start the music again. Watch this happen, you know, now that everybody's watched mommy and daddy fight. Okay. Welcome, ladies and gentlemen. My name is, Chris, Holling right, that was

Sean Cooper: 7:04

I'm Sean Cooper

Chris Holling: 7:04

there you go say

Sean Cooper: 7:05

That was Sean Cooper, you're just going to do the whole thing for us.

Chris Holling: 7:08

I'm trying

Sean Cooper: 7:08

Fire away, fire awy.

Chris Holling: 7:10

And, and so we are we are addressing the the stock portfolio analysi series, where, where we are doing stock portfolio analysis today. And next time, we're looking at security analysis, which is unrelated.

Sean Cooper: 7:33

I mean, they have their relation,

Chris Holling: 7:35

I knew you were gonna say that that's why I stopped and I whatever, what what the hell is a stock portfolio analysis, Sean, cuz clearly my description of having a security team out on the port of whatever isn't what we're after, anyway? I'll just up here. I'm over here. Just you go. I'm listening.

Sean Cooper: 8:01

Okay, so portfolio analysis, whether you're referring to stock portfolios, or bond portfolios, or your overall portfolio in general is what we're discussing today, as opposed to, as opposed to individual security analysis, which would be analyzing an individual stock an individual company or an individual bond, which again, is just analyzing the individual company and the offering that they're they're presenting, you could also analyze an individual security in the form of a you know, an ETF, although you're not analyzing the underlying securities, per se.

Chris Holling: 8:38

What Okay, well, hold on. What's an ETF though?

Sean Cooper: 8:42

exchange traded fund =

Chris Holling: 8:43

Okay, See,

Sean Cooper: 8:44

we've talked about that before

Chris Holling: 8:45

Yeah, well, that's fine. But you know, for I knew that. I was just seeing, if you knew that. No

Sean Cooper: 8:54

Yeah.

Chris Holling: 8:56

It's it's hard. You know, like, I

Sean Cooper: 8:58

no, it's a lot. And there's a stupid number of acronyms.

Chris Holling: 9:02

Yes. Sorry, continue. Proceed.

Sean Cooper: 9:07

So the goal is just to talk about portfolio analysis, which is a lot of what some of the things we've talked about in the past have built up to when we talked about correlation, technical and fundamental analysis, those things kind of feed into portfolio analysis. So the goal today is to give you some tools, as Chris likes to say tools for the tool belt to actually evaluate your own portfolio.

Chris Holling: 9:33

You know, I normally talk about a toolbox but I do like

Sean Cooper: 9:38

Oh tool for the toolbox. My bad

Chris Holling: 9:40

like the idea that, that when when you visualize my mottos, though, you picture me as like a big bad construction worker, though, you know, like, posing,

Sean Cooper: 9:49

absolutely.

Chris Holling: 9:51

This is safe, okay. I'm sorry. I was I was having a village people moment. Okay?

Sean Cooper: 10:05

Anyway, so give you some tools to kind of evaluate your own portfolio potentially means of improving upon it or building it differently if need be in the future.

Chris Holling: 10:20

Okay,

Sean Cooper: 10:20

so there's a couple different things when you're looking at your overall portfolio and, you know, building it out going forward. We've talked about diversification in the past how that related to correlation. So one of the first things that you can do when evaluating your overall portfolio is actually looking at the holdings that you are invested in, and how well diversified they are. So a couple different tools that you can use for that Morningstar offers, like their, what are they called, their style boxes. So it, if you're looking at a style box for stocks, they range from small cap to large cap, so small, mid, and blend, and that's the capitalization of the company, how large they are, basically, and then whether they are a value stock, a growth stock, or a blend somewhere in the middle. So you end up with nine different boxes in there, the Morningstar style box. So if you're trying to be diversified, you want to at least fill some of those boxes, and you know, branch some of the extremes in that box. With that said, You're, you're still just talking about stocks. From that standpoint, you're not talking about bonds and a variety of other investments. And you're also just talking about, potentially, you could just be talking about domestic stocks, not even talking about international stocks. So that's one level of diversification is that if you look at that style box, another would be what I alluded to earlier. So looking at the global investment universe, so as opposed to just investing in US stocks, you're looking at European or Asian or South American, Africa, stocks. And you get start getting into some emerging markets, even micro or frontier markets, which would be even less developed than the emerging markets. So some of those, you know, they become fairly risky as you you get down that line, but they also can potentially enhance returns, that's just along the stock universe. So then you could also apply that that Morningstar style box to each of those, those regions. So small cap large cap value to growth within each different continent, if you will.

Chris Holling: 12:51

And, and so then you

Sean Cooper: 12:52

go ahead,

Chris Holling: 12:52

sorry. So when, when we're doing this, and it's the, that's what we're working on, is we're working on the analysis of the stock portfolio. And we're,

Sean Cooper: 13:02

not a stock portfolio, just portfolio in general, whether it's comprised of stocks, bonds, what we've talked about so far is just stocks, I was about to jump into bonds, but

Chris Holling: 13:11

right, okay. But But when you're when you're looking at this, you're you're saying that, as you have these other options, you the way I was getting it was that you're talking about the different ways to do looking at correlation, diversification, type, type approaches. And the analysis portion of it is, is taking all those things in consideration and seeing where, where things are, should be diversified, where things should be offset, and where, where does, where does

Sean Cooper: 13:44

so far, we're just talking about evaluating your own portfolio and finding weaknesses in it,

Chris Holling: 13:50

okay.

Sean Cooper: 13:51

Or if you should be building a portfolio from scratch, these are some things you want to consider as you're going about it. So specifically, right now just talking about diversification, because we've already talked about correlation and how important that is, to a portfolio and the ability to potentially reduce risk or enhance returns, and the combination of those two factors via correlation and diversification. And so these are some ways that you can diversify your portfolio some of the things you might consider as you're going about diversifying your portfolio,

Chris Holling: 14:26

which is done due to your analysis, or can be done due to your analysis

Sean Cooper: 14:33

this, this whole thing is analyzing the portfolio? This is the analysis

Chris Holling: 14:38

I'm just tying little bows as we're, as we're moving forward, tiny.

Sean Cooper: 14:43

Has nothing. So when we talked about like technical and fundamental analysis last week?

Chris Holling: 14:48

Yes.

Sean Cooper: 14:49

A lot of that will not apply to today. That that mostly applies to the following which the stock analysis now

Chris Holling: 14:57

Security analysis

Sean Cooper: 14:58

there are aspects of it that could potentially Apply to today. But for portfolio analysis, we're jumping back a couple weeks to the diversification, the correlation, and then we'll be bringing in some other aspects that you would want to analyze. When looking at your whole portfolio. It's a bit more basic approach, then what we'll get into next week as we start to tie in some of the more technical aspects of it. More the numbers when we analyze an individual security,

Chris Holling: 15:32

right,

Sean Cooper: 15:32

but it's something that anyone can do anyone should do when looking at their portfolio, because it's just important to have at least a base level understanding of how to evaluate your own portfolio, even if you've hired an expert to do it for you, understanding what it is that they are doing, and being able to spot weaknesses in their own knowledge base. So

Chris Holling: 15:57

I totally agree with that. I think that's really important.

Sean Cooper: 16:00

Anyway, so we've talked about that. Stocks and diversification among your this the stock portion of your portfolio. Then there's also the diversification, so diversification between asset classes, so stocks, bonds, alternatives. So we've talked about that first piece, the stocks inside the bonds, if you looked at like, again, that morning styles, Morningstar style box, it's gonna be quite a bit different for bonds, you're looking at the, the credit rating of the company. So ranging from what is it triple, triple A double A. Okay, so on the bond side, Morningstar style box, you're looking at the credit rating, so low, medium, and high, which is based on typically like Moody's s&p, they do credit ratings for different companies, ranging from triple A would be a very high rating down to B or B two, and then even below B or below B two. And once you get I think you cross the threshold of from triple B down to double B is where you break into the high yield what they classify as high yield or junk bonds. But again, you're looking at that spectrum of low, medium and high in terms of credit rating. And then you also have the the duration of the bond, which is really a combination of the length of the bond and the the coupons they're paying to calculate out the interest rate risk. So you've got as far as the interest rate risk limited, moderate and extensive. So typically, the shorter term the bond, the higher the coupon, the lower the interest rate sensitivity is going to be. So you could have a, again, it's a nine box style nine box grid, and you can fill each aspect of that grid with pieces of your bond portfolio. So it's just different ways to expand the diversification of your your overall portfolio. So you're diversifying between stocks and bonds. So equity and fixed income, you're diversifying in terms of style and internet region. On the equity side, you can do the same thing on the bond side diversify in terms of the style, or the credit rating and the the interest rate sensitivity as well as where you are geographically. So providing that diversification helps offset various risks that you might take on in the portfolio. Other ways, as you get beyond that, those are some of the traditionally speaking, if you look at the modern portfolio theory, MPT, which some people claim modern portfolio theory is dead, and I just think they don't fully understand modern portfolio theory because they believe it only applies to stocks and bonds. And I think they're, they're missing a big aspect of what modern portfolio theory was trying to get in the first place.

Chris Holling: 19:22

Sounds like they're not very modern to me.

Sean Cooper: 19:26

modern portfolio theory has been around for quite some time. So for the idea that it's modern is it's kind of silly at this point

Chris Holling: 19:33

When does something stopped becoming modern?

Sean Cooper: 19:36

I don't know. That's a good question. Is there a timeframe?

Chris Holling: 19:39

I don't know. That's why I'm asking you

Sean Cooper: 19:42

I don't know. At any rate, so, modern portfolio theory, when it was first introduced, was specifically applied to stocks and bonds and it goes back to that idea of diversification and having lower correlated asset classes. So traditionally The bonds offset the stocks, when stocks do poorly, the bonds did at least decent. Unfortunately, what we found is for diversification purposes, when things go really bad, like 2008, most things tend to do fairly poorly. Now, there were certain types of stocks that actually or excuse me certain types of bonds that actually did fine in 2008, or did well, relatively speaking. But there were other asset classes that actually did even better. So from my standpoint, modern portfolio theory is, should just be extended to expand additional asset classes that have come about over the years. So you start looking at alternative asset classes, alternative assets, alternative strategies, and start adding those into the portfolio and evaluating their correlation to some of these more traditional asset classes, to figure out how you can blend the portfolio to optimize the risk and return for your particular risk tolerance and your ability to assume risk. So some of the things that might come up as you're, you're building out a portfolio or enhancing a portfolio. After you've already covered these, these traditional asset classes. You might look at emerging markets, managed futures, some hard asset classes, so real estate, even natural resources, private equity, merger arbitrage, things like covered calls, convertible arbitrage, these are all alternative assets and alternative strategies that can be mixed into the portfolio to try to enhance that risk reward relationship via diversification and correlation. Now, I'm not going to jump into each of these asset classes today, because

Chris Holling: 21:56

That's a lot

Sean Cooper: 21:57

It would take hours. But we will talk about some of them in future episodes, especially if someone has one in particular they'd like us to delve into, we can do that just hit us up, let us know. Anyway, so when analyzing your portfolio, that's one of the first things you can do is evaluate your own diversification. Now, actually, calculating the correlation of your portfolio is a little bit more challenging, but you don't necessarily have to know the exact calculation. If you have Excel, you can plug in the historical returns annual historical returns of any two asset classes, and plug in a simple equation into Excel. And it will calculate the correlation between the two asset classes to give you an idea. Now, again, that that correlation from a historical standpoint, if you you go out, oftentimes, it's calculated for three years, sometimes five years, yeah, if you're using a tool to analyze these things, for you just understand what it is evaluating, if it's three years, five years, what have you. And know if it's incorporating some of the really important periods. For example, if it's incorporating, like 2008, yes, you might find two asset classes that are have not been correlated, over the last three to five years, maybe they had a low correlation of say, like point one or something along those lines close to zero. But if you look at 2008, their correlation jumped to like, .6.7, that's not as advantageous as something that might have a correlation today of say, you know, negative point one, and in 2008, had correlation of negative point eight, they actually went in opposite directions, that's fantastic. In a period, like 2008, so anyway,

Chris Holling: 23:49

well, and I'm just trying to, it's so hard I this is something that we run into several times when we're on here, where we have numbers that are just just auditory, and it's and it's difficult to not just write them down and such. So when, when we're looking at these things, and we're and I understand that, you know, it's best to go back and listen to the correlation, diversification type stuff, when you're when you're looking at all this when you're evaluating these different percentages of positive versus negative and, and such, but for, for just starting out and just starting to look at these things and just starting to evaluate like we are building a portfolio we've we've never built a portfolio before. And we're putting this all together and we're starting to keep track of some of these things. Then we are we putting these negative versus the positive, side by side to each other. Are they in different categories that you try to separate like bigger broad categories as you're doing this? Or is it all just one big list of positives and negatives in in the numbers? How do you how do you organize that

Sean Cooper: 24:59

You mean when you're if you're actually going into the process of calculating correlation,

Chris Holling: 25:04

no, when you're keeping track of the the different amounts that you have here. So like, let's say that you're paying, paying good attention to where the positives and negative percentages are, are happening.

Sean Cooper: 25:14

What do you mean positive and negative percentages?

Chris Holling: 25:17

Isn't that what you just said? That you haven't?

Sean Cooper: 25:18

Yes, I was referring to correlation specifically.

Chris Holling: 25:20

Yes. So when you're keeping track of your correlation, how do you maintain the organization for that? Where Where do you? Are? Is this just you keeping those numbers in mind? Do you when you're when you're building a portfolio? Because that's what we're doing here? Is this something that you are? I have no, never built a portfolio before? Like, I have no idea. I have a general, I have a general idea of of that. I'm sure I'm not describing it very well. I hope that that made sense. What I'm trying to ask, not at all

Sean Cooper: 25:51

kind of, so let's say for example, if you're just getting started,

Chris Holling: 25:59

right

Sean Cooper: 26:02

As a hypothetical, something you could do would be to take a standard asset class. So state take the returns of the s&p 500. Okay, that's an index, you can there's lots of different ETFs, and even mutual funds that track that index that you can invest in.

Chris Holling: 26:20

Right,

Sean Cooper: 26:20

that would give you broad diversification. for domestic large cap stocks,

Chris Holling: 26:25

yes.

Sean Cooper: 26:27

If you were taking that as your basis, and then you wanted to diversify from there, you could take these various asset classes that I'm talking about, and calculate their correlation to the s&p 500.

Chris Holling: 26:43

Okay,

Sean Cooper: 26:44

so you could take the Barclays Capital aggregate bond index, and calculate the correlation. And a lot of this stuff is going to be available, depending on what tools you're using, what investment group you're using, or application that you're using, it may already have this calculated out, there's a good chance that it will at some somewhere. But you can calculate the correlation of those two asset classes. The lower the correlation, the more it's going to diversify the portfolio, the more it's going to reduce the perceived risk. And here we're talking about risk in terms of standard deviation.

Chris Holling: 27:31

Okay.

Sean Cooper: 27:32

And that strict standard deviation, not just downside standard deviation, that a lot of people utilize, or skew or kurtosis, or anything like that, just standard deviation, which we can talk more about. But you can do that with any any asset class, you can evaluate that correlation. And again, any any of the lower lower correlation. Provide has more potential to provide enhancements to the portfolio in terms of reducing risk. Now, the long term rate of return of each of those asset classes, also impacts the portfolio obviously. So for example, if you're adding asset classes, an asset class that has a lower rate of return, you're blending in those those two rates of return, which, depending on the blend, depending on the correlation, may potentially reduce the return if we're just talking about two asset classes, then it's most likely going to reduce the rate of return. If you add in a another asset class that is lower. As you start to build out multiple asset classes, you can add in asset classes that have higher rates of return and lower correlation. Typically, they're going to be very risky on a standalone basis. But when blended into the portfolio, you can actually mix and match these to potentially enhance returns while also simultaneously reducing risk, or maintaining the same risk while enhancing returns or keeping returns the same while reducing risk. So you can start to mould the portfolio as you add in different asset classes based on their rates of return and the correlation from your to your other asset classes that you're comparing to or your overall portfolio. Does that make sense?

Chris Holling: 29:31

I think so. Yeah. Because I mean, the the understand the analysis is the is the base level of understanding in order to make those things happen. And that's, that's what I'm trying to say is like, we we know that we want to create an analysis we want to look at, at all the possibilities of taking in a variety of asset classes as this is being built. And I was more saying a like, Hey, I I'm building a portfolio today. I've got this legal pad in front of me. Now what do I do was kind of was kind of what I was asking, essentially of like, how do you even organize that from the get go at all, which I think you've touched on some of that. And that's, it's to have?

Sean Cooper: 30:10

Yeah, I mean, that's kind of what I'm trying to get at is. When I'm talking about an analysis, I'm talking about analyzing or evaluating your overall portfolio. And if you're starting from scratch, then it's a matter of checking off all of these boxes. When I was talking about diversification, I was talking about that stuff, those style boxes, those are all different types of stocks, or bonds or asset classes that you can invest in, that are going to provide some level of diversification for your portfolio. So if you're, you're, you've got a blank page in front of you. And you've got the, the style box, you're trying to fill in a bunch of those different style boxes with your investments.

Chris Holling: 30:56

Right. Right. I think I'm beginning to understand that. Now.

Sean Cooper: 31:02

Okay.

Chris Holling: 31:02

I was just trying to make sure that there was a bottom up, here's what we're doing, here's where we're going.

Sean Cooper: 31:07

Right.

Chris Holling: 31:10

Okay, good.

Sean Cooper: 31:15

So other ways that you can continue to enhance or evaluate your portfolio. We've talked about exchange traded funds versus mutual funds, and active versus passive investments, those are another way of diversifying even within the same asset class. So you could have potentially an ETF that invests in large cap growth companies. So that's one of the style boxes, large cap growth. So you could have passive ETFs that invest in those so you could have an active mutual fund that invests in those same companies. But even that is going to provide some level of diversification. Now, whether or not it's sufficient diversification to warrant the cost and warrant the effort is debatable. But my point is that even the difference between active versus passive investing can provide a level of diversification and choosing how that fits into your portfolio goes into this overall analysis of your portfolio,

Chris Holling: 32:19

which we also touched on in our active versus passive.

Sean Cooper: 32:24

Exactly,

Chris Holling: 32:25

yeah. Okay, full, circle. Look at us go. Good. I like it.

Sean Cooper: 32:28

Yeah, exactly. So another thing to evaluate, and this one is probably just as important as a lot of these others, and that is the cost of your portfolio. How much is it costing you to build out this portfolio, and you want to evaluate everything. There was actually a report conducted by or a study conducted by Morningstar, I brought them up a couple different times today. And they evaluated a variety of different factors trying to assess which assess which factors influenced your rate of return the most. Now, we've already covered the idea that, you know, Harry Markowitz viewed diversification as the one true free lunch. And I would say, it's not necessarily free, but it's a relatively cheap lunch, if you will. And that that absolutely impacts your your rate of return,

Chris Holling: 33:21

I enjoy a good burger king run every once in a while.

Sean Cooper: 33:27

But this study evaluated a number of other factors, things that most investors would assume create could potentially greatly impact your your rate of return, the one thing out of everything they evaluated that had a positive correlation to your rate of return was the cost, meaning the lower the cost, I guess it would be an inverse correlation. The lower the cost, the better your rate of return, it was very, very simple. Even their own Morningstar star rating classification had no correlation to future returns. It was actually a slight negative correlation, not a huge one, but a slight negative correlation. So the one thing that actually could predict future returns was the cost of the portfolio.

Chris Holling: 34:17

Interesting,

Sean Cooper: 34:17

lower the internal, the lower the internal expense ratio of the fund that you were investing in, the better the returns. So if you apply that to the thinking of your overall portfolio, cost is one of the things that you can easily control is within your control, and that actually impacts your rate of return. So keep a very close eye on cost. And there are multiple levels you can control that cost. If you're hiring someone, know what they're charging, you know how they're charging you. If you hire someone that tells you they're not charging you anything. A they're lying to you

Chris Holling: 34:55

That's true.

Sean Cooper: 34:56

But B they're. It's most likely The way they're kind of getting around it is the fund itself is paying them. So they personally are not charging you the fund is charging you and then paying them so or paying their broker dealer and then paying them. So it's kind of roundabout. But anyway, the point being understand what what you are paying your professional if you choose to hire them, either they are fee based or commission based if they're fee based, it means they are billing you directly. Know what they're billing you if they are commission based, know which funds they are using, and what those funds are billing are charging you. Which brings me to the second level of the fee structure, which is any funds that they're using, most likely have their own fees. And we talked about mutual funds, typically around that one to 2% annual fee depending on which class they're using. So one of the most common, especially among commission based advisors is going to be an a share, mutual fund. a share mutual funds typically charge about 5% upfront, meaning you invest$100,000 5000, of that instantly gets taken out as not invested, that's their fee, most of it gets paid out to the broker dealer which gets paid to your advisor. That's what they're getting paid so only 95,000 of that initial 100,000 is actually

Chris Holling: 36:19

wow, being invested. Now that's that's average, some A shares charge more or less. But that's that's pretty typical is 5% upfront. And then the mutual fund is still going to charge something on the back end, annually, roughly one 1%, some of the more expensive ones get up to two on the A share a share side. And a portion of that is going to be a 12 b one fee or a sales and marketing fee, which is normally about 25 basis points or one quarter of 1%. And that is also getting paid out to the broker dealer which is getting paid to your advisor. So they are getting paid. It's just a matter of how they're getting paid. So you've got in this in the on the commission based side, you're not actually necessarily looking at what the advisor is getting is billing you because they're not necessarily billing you directly you're looking at what the the share class they're using is charging you, if they're using B shares have basically gone away, if they're using C shares, it's typically a little there's there's no upfront fee, there's no, that initial fee isn't there, like with the A shares, but their annual fee is going to be higher. So probably closer to that 2% range. If somebody is using ETFs, or exchange traded funds, those, those funds typically have much lower internal expense ratios than the mutual funds that we've been talking about. So maybe around the 30 basis points. So that's point three of 1% 1% would be 100 basis points. So 30 basis points, point three, those, those are just averages. So you want to look up what those actual fees are for the funds that you're utilizing, in some cases, they're even utilizing fund of funds. So especially target date funds, any type of retirement date fund or target date funds, those are fund of funds and there are other fund of funds out there as well. But the it's it's literally a mutual fund that is made up of a bunch of other mutual funds, so it's gonna have its own internal expense ratio, and then all the funds that it holds have their own internal expense ratio well. Okay.

Sean Cooper: 38:33

And so you have to dig into it and determine what the additive expense is that you're actually charging what you're actually paying. If you're in a retirement fund, like a 401k, sometimes the fund it's or the the program itself will have a fee that you're being billed as well. But that's kind of getting into the weeds for general purposes, your advisor fee, the internal expense expenses of the funds. And then one of the things that most people are not familiar with when it comes to fees, is the fees associated with trading the the turnover in that those funds. And oftentimes, that's at least historically, that's been disclosed in the statement of additional information. So it's not even in the prospectus where most people might look, although, I think they've started to shift to disclose that in the prospectus now, as well, but it's not included in that internal expense ratio, because it changes so much year over year, they're not required to disclose in the internal expense ratio, it's an additional fee that you have to go hunting for it, on average increases the fees of your funds by about 40%. So if

Chris Holling: 39:46

Jeez

Sean Cooper: 39:47

your internal expense ratio is one now it's one point you're most likely paying closer to 1.4. If it's two you're paying closer to 2.8. If it's only point three, then you're really paying closer to What is that point 42

Chris Holling: 40:03

That's a lot.

Sean Cooper: 40:05

Yeah, anyway, so they start to add up, if even if you're buying just individual stocks, or in the case of the exchange traded funds, the broker dealer may be charging a transaction fee. So there may be a fee associated with every single trade you make. So every time you buy or sell, you want to know what those are, if that fee is only $5, it's not a killer, but it's still going to add up if you're doing a lot of trading. If that fee is $50 per trade, it's really going to eat into your returns if you're doing more trading.

Chris Holling: 40:39

Is this is this stuff? The the different transactions that occur? The the percentages that are sometimes involved in the upfront or? Or during? Or are these all relatively easy to find? If you're talking to somebody that that is running these, say, a mutual fund or something like that? Like is, is it is it easy to track down the information of where these transactions are? Or where, where these fees

Sean Cooper: 41:09

Not always no

Chris Holling: 41:10

Okay,

Sean Cooper: 41:11

some of it is, so the internal expense ratios, those are pretty well disclosed, if you're using a trading platform, they're going to have it typically disclosed, you know, on their summary page, the additional fees that are associated with the trading and things of that nature, typically are not. I've actually gotten into arguments with wholesalers of mutual funds that said that they didn't have any additional fees, and then I had to show it to them in their their own company's statement of additional information.

Chris Holling: 41:39

Oh, wow.

Sean Cooper: 41:40

So even some of the professionals in the industry are not familiar with all of the fees associated with investing.

Chris Holling: 41:47

Okay. Wow, that's, impressive

Sean Cooper: 41:50

But again, it is one of the things that you can control, it's one of the things you want to be aware of

Chris Holling: 41:55

Sure. Which is super important. If you're, if you're taking this on whether whether you're bringing somebody on or you're you're doing it yourself. That's

Sean Cooper: 42:04

right,

Chris Holling: 42:04

I think that's very valid,

Sean Cooper: 42:05

oh, some trading platforms. Maybe they're not charging, like trading fee. They're a lot of the newer ones, the Do It Yourself ones, because they have a lot of clients that have very small investments, they're actually charging like a flat monthly fee. Maybe it's $1. And maybe it's a few dollars, you want to evaluate those fees. I've talked to people who had, you know, just a few $1,000 invested. Or even less than that a couple $100 invested on these platforms. And they're paying it's like 12 bucks a year. But if you only have a couple $100 invested, that's actually a very high percentage fee that you're paying, and your ability to offset that via gains in the market becomes incredibly difficult your your returns, your potential rate of return is hampered a great deal

Chris Holling: 43:04

Gotcha.

Sean Cooper: 43:05

So you want to evaluate the fees. In terms of your overall investment. don't just look at it and go, Oh, well, they charged me 50 cents for this or they charged me a buck for this or something along those lines. How does that actually impact your potential rate of return? If you're investing 100 bucks, and they charge you five bucks $5 for it? That's 5%

Chris Holling: 43:33

Yeah,

Sean Cooper: 43:34

that's not insignificant.

Chris Holling: 43:35

Absolutely. That's a good point.

Sean Cooper: 43:38

If you invested$10,000, and they charge you five bucks, yeah, that's probably no big deal. But this is one of the things you can analyze, evaluate, when you're looking at your portfolio, or when you're building a portfolio is the cost.

Chris Holling: 43:55

Okay, yeah, but that makes a lot of sense. And then it just depends on what you are and aren't comfortable with and what is available to you. Because some of these also sit as as programs that you automatically get placed into through through your employer as well. If it's

Sean Cooper: 44:11

correct,

Chris Holling: 44:12

if it's through However, it's the the several different retirement options that are available to you if you're if you're looking into it if you don't look into it, but you know, say say so I have a 457 that I have that I know that there are options to to look into have go through this amount for this fee, and somebody will manage your stuff. And I think I've glanced over what that amount was but I don't think I thought too hard about it. And so I think it's going to be a good opportunity for me to go in there and and have a look at that personally.

Sean Cooper: 44:51

Yeah,

Chris Holling: 44:51

because really to me all I saw it as initially is very much a Oh, well. You know this. What do you mean you want me to keep track of this stuff. I don't want to keep track of this stuff here. Yeah. Oh, it's it's it's $5 Yeah. $5. Okay.

Sean Cooper: 45:06

Right.

Chris Holling: 45:06

So I'll be interested to see where mine sit. And so I was, I was really just addressing that because that's, that's something that in case, whoever's listening hasn't considered that, then it might not just be a matter of Oh, well, I need to consider these fees, or I need to consider these percentages. If I go and I talk to somebody, if somebody approaches me, if I decide that I might try to take on one of these funds, or I start doing some of this stuff actively, it might already be part of your day to day as it is currently. And it might be something that's worth evaluating, like, I need to go and evaluate on my own. today.

Sean Cooper: 45:48

Yeah. So anyway, those are the kind of the big three that you can do to start evaluating your own portfolio is diversification. evaluating your decisions between passive and active management, and controlling the cost of your portfolio, those are, those are the big three that you should, should be doing kind of on a minimum. Beyond that is where we start to get in the weeds, it becomes more of a numbers intensive game, where you're actually evaluating your overall portfolio. And it's, it's about its performance to a degree, but it's also about it's the risks associated with the performance that you're you're getting. So

Chris Holling: 46:46

I think that's reasonable. I just, I just think it's great that we, we covered on a couple of subjects that happened previously, that we're, we're addressing today, as if you knew that these were building blocks that were important for a future episode and a future season. Once upon a time. It's like

Sean Cooper: 47:03

that was the idea.

Chris Holling: 47:04

It's like you planned this out. And I and I showed up and got confused a couple of times along the way.

Sean Cooper: 47:14

Yeah, so if you do want to get more into the weeds, plot out the performance of the the portfolio, you could do a monthly or quarterly most likely annually, look at the average return, calculate the standard deviation. And then what you can also, I alluded to this earlier, you can take just the negative returns and calculate the negative standard deviation. So the negative volatility, and see how wide those swings are to evaluate the portfolio. You can do this when evaluating even like mutual funds, or ETFs. If you're comparing multiple to one another, comparing that average return the standard deviation, the negative standard deviation, you can even start to compare skewness or kurtosis, which like I said, that that's not something that we're going to delve into deeply today.

Chris Holling: 48:16

Good because I can't even spell that.

Sean Cooper: 48:21

But those are things you can use to evaluate your overall portfolio. And when when you're using those, what you're you're looking for. And the reason that I like the standard deviation, you take a an asset class and you calculate out its average return, there's a difference between it's it's the geometric return and the average return. So the average return is just the average return that you might expect to see on any in any given year. Okay, or whatever time period you're evaluating, but that's average return, you might expect to see in any given year, the geometric return accounts for that standard deviation, and is the annualized rate of return that the investor is actually experienced. So you could have two asset classes that have the exact same average rate of return call it 10%. So each asset class average rate of return 10%, any given year, you'd expect each one to be about 10%. Now, obviously, there's going to be a variety of returns that happen, and that's where the standard deviation comes into play. But if one of those asset classes has a standard deviation of say 5%, and the other has a standard deviation of 15%, the geometric return, so the return that you actually experience on an annualized basis for the one with the 15% standard deviation is actually going to be lower than the one with the 5% standard deviation.

Chris Holling: 50:04

You lost me.

Sean Cooper: 50:07

Ah, it's just the way the math works out. average return exact same higher the standard deviation, the lower the geometric return lower the standard deviation, the higher the geometric return, geometric returns always going to be lower than the average return. But to what degree depends on the standard deviation, the volatility of the actual returns?

Chris Holling: 50:27

Okay? Okay. I mean, I'll take your word for it.

Sean Cooper: 50:35

I mean,

Chris Holling: 50:36

it doesn't make sense, in my head

Sean Cooper: 50:37

without showing it to you. It without showing it to you in a spreadsheet or something that it's a little bit challenging. Basically, the negative returns on the higher standard deviation. If you let's say you had a, you start with$100 investment and it loses 15%. Now you're down to 85 bucks. Now, if you get a 20% return on your $85, you're at back to $102. So you lost 15% gain 20%. But you're only up 2%?

Chris Holling: 51:13

Actually, that makes sense. And I feel like because it actually just the only reason it makes sense is it was actually a different description that I came across at another point where it it's, it was using the same percentage as as just an awareness so that you weren't having the wool pulled over your eyes is kind of the the demonstration of it where if you have you know, X amount in a fund, and say just just for the easy math, it's$100. And the $100 exists, and you you lose 50% into your into this fund. And so now you have$50, but then an increase is 50%. Well, now you have $75. So it's dropped, and it raised the same percentage. But that doesn't mean that there wasn't a train, like a change in the actual monetary value itself. And that,

Sean Cooper: 52:05

right, so the average return in that example, is nothing like what you actually experienced,

Chris Holling: 52:11

right?

Sean Cooper: 52:12

Your geometric return,

Chris Holling: 52:13

right?

Sean Cooper: 52:14

That's exactly, that's exactly what I'm getting at there.

Chris Holling: 52:16

Okay. That's, I don't know why that was a hard concept for me to. I promise

Sean Cooper: 52:22

No, that's okay. But you can see that in standard deviation, the standard deviation gives you an idea of how much that is going to impact your actual realized rate of return.

Chris Holling: 52:32

Right. Okay. That makes far more sense.

Sean Cooper: 52:36

Yep. And that's something you can evaluate on an entire portfolio basis. So you can actually evaluate your entire portfolio or a comparable portfolio. So if you have a portfolio and you want to build a new one, you build it out, and then you can compare. Okay, does this make a difference for me, in terms of my average return my geometric return my standard deviation, does it actually move the needle? The other aspect of that that standard deviation that most people don't consider, and this is what hurts most investors is the psychological aspect. The higher the standard deviation of the portfolio, the more wild the swings are, the more likely most investors are to make poor decisions. I've talked before about the idea that the average equity fund investor earns only in over the course of a decade, only about 3.5% annualized, while the s&p 500 annualized earn somewhere between eight and 12%, depending on the decade that you're evaluating. That's a very wide gap between equity returns and what the average investor is actually receiving. And that's for psychological reasons they're buying at the wrong time and they're selling at the wrong time. And it's because of the emotional roller coaster that goes on. When investing and the an easy way to try to control that emotional roller coaster is to minimize that standard deviation minimize the inputs that actually cause people to make poor decisions.

Chris Holling: 54:19

You know, this is all making sense to me now because within our title of us keeping track in our episode plan on what we're touching on next within stock portfolio analysis, analysi. We also have in parentheses, crypto currencies, question mark. And and

Sean Cooper: 54:39

yeah, we can talk about those.

Chris Holling: 54:41

Well, I mean, the fact that to be completely honest I think, I think we're we're probably running short on time on this on this stretch but it unless you have a different opinion about it, this fits exactly into what you're talking about. In this in the stretch of the the wide swing With volatility that,

Sean Cooper: 55:02

oh, yeah,

Chris Holling: 55:02

I tend to see cuz that's, that's some of the most volatile space that I've seen, ever.

Sean Cooper: 55:08

Very.

Chris Holling: 55:09

And so when you're talking about you have these wide swings and let emotions get involved into it anyway, then it fits right into what you're talking about, which is, I just, I just thought it was funny that, that we're we're hitting on that somewhat naturally, but specific to, to cryptocurrencies.

Sean Cooper: 55:27

Right.

Chris Holling: 55:28

And I think I've talked to you about crypto in itself, but I, my, my own humble opinion into the into the crypto world, because that's, that's something I get questions about all the time, is, you know, should you at all get involved in the in the crypto world to me, and I feel like you said something similar. So if I'm speaking for you, please correct me. But to me, it's so volatile that I certainly wouldn't hang my hat on any of it. But it's also volatile enough that I think it's kind of fun. So I find some stuff where I go, I'm, I'm comfortable with losing X amount. And if it turns into something great, then Hooray. And if it doesn't, then Oh, well. And, in theory, for me, if I if I get a big volatile swing, which I've only seen some minor ones with, with how I have mine set up. If it gets to a point where it's, it's a volatile enough swing, I'll probably pull out my original investment, and then just let whatever I gained as a profit margin in there just play on its own. But I haven't, I haven't made that back yet. Currently, personally. But that's, that's where I sit on that, where if I had to make a decision between whether I was if I if I was going to invest, or I put it all into the space, which some have, and some have absolutely been, like, a success with it. So I, you know, it's it's not like it's impossible. I it's, it's just so it. To me, it's it's more of a dice roll than some gambling would be.

Sean Cooper: 57:20

Right,

Chris Holling: 57:20

like at least you can count cards somewhere on the street? Like, I don't

Sean Cooper: 57:27

no, I mean, it gives you an idea of what we're talking about when it comes to analyzing your overall portfolio. Yes, there are at asset classes out there, like cryptocurrency that could that are definitely have very low correlation to other asset classes, some of your traditional asset classes, they can most definitely provide diversification on a standalone basis. They're very, very risky. Could they be a piece of a portfolio? Potentially? Could they enhance the portfolio? Again, potentially, it's a matter of evaluating how it fits with your portfolio? Does it improve it in a way that fits your risk tolerance, your ability to assume risk? Because there are certain asset classes that quite frankly, if you're investing in them, and I use the word investing very loosely In this scenario, it should be money that you don't care about ever seen again.

Chris Holling: 58:24

Sure. I think that's valid. That's totally valid. It's, you know, is the juice worth the squeeze? See, I'm getting all kinds of quips, toolbox, juiciness, and I think we need to wrap this up. Otherwise, I'm just gonna come up with more quips. It's just

Sean Cooper: 58:45

I agree. I agree. That was pretty much what I wanted to cover.

Chris Holling: 58:47

Okay, good. Well, I like it, I like that we were able to, to touch on the analysis I have of overlooking everything. And and talking about, you know, addressing these these building blocks that we're looking into if, if you haven't taken the time to poke around into our, our correlation, diversification and passive versus active investing, which both were right towards the end of our third season, then go ahead and take some time really, really go into those because we we did touch on that here, but not not in the way of really expressing how those all function and in that stretch to me and In comparison, I think we we had a much more thorough explanation happening in those rather than.

Sean Cooper: 59:36

Oh, yeah, absolutely.

Chris Holling: 59:37

But you know more

Sean Cooper: 59:38

today was about aggregating them into a means of evaluating your overall portfolio. So

Chris Holling: 59:45

right

Sean Cooper: 59:45

your your aggregate investments

Chris Holling: 59:48

and we will continue with the ag Agra aggregation ness. My words are on point today.

Sean Cooper: 59:57

I think you added an extra syllable there

Chris Holling: 1:00:00

You Shut your mouth aggregate, the the aggregationness of the analysi continues moving forward, where we're going to continue to adjust on some of these. And just just to keep you sorta interested. We've got security analysis that we're looking at next, where you're, we're talking about some alternative investments, perhaps precious metals might get addressed. Because I know that's it's kind of interesting. And then we'll, we'll talk about some more active investing where maybe we'll interview me later. We're we're still we're still discussing that. Because because you haven't had enough time talking to me. But yeah, is there is there anything else that you want to throw into our analysis eyes before we wrap this up here?

Sean Cooper: 1:00:52

No, I think we're good.

Chris Holling: 1:00:53

Okay, good. Well, thank you again, for coming out to learn more, and getting deeper, we really are getting into some pretty deep, dense stuff. And, and so if you're,

Sean Cooper: 1:01:05

yeah, wait till next week,

Chris Holling: 1:01:06

oh, you shut your mouth with. So really kudos if if you're getting into this, because I think this is, you know, a bigger separation than, than even just the base level stuff that we've been doing before. And so we appreciate you coming out here and really just wanting to learn more, because, like, like we've said before, we appreciate you taking the time to want to learn how to better yourself. And in this way, it's it's bettering yourself and, and keeping the others honest, that you might be, you know, working and doing your investments for you. I think it's just a good, good tool tool for the toolbox. So thank you again for joining us on the truth about investing back to basics. My name is Chris Holling.

Sean Cooper: 1:01:52

And I'm Sean Cooper,

Chris Holling: 1:01:53

we will catch you next time. podcast disclaimer disclaimer. The disclaimer following this disclaimer, is the disclaimer that is required for this podcast to be up and running and fully functioning and moving forward. This is going to be the same disclaimer that you will hear in each one of our episodes. We hope you enjoy it just as much as we enjoyed making it. All content on this podcast and accompanying transcript is for informational purposes only opinions expressed herein by Sean Cooper are solely those of Fit financial consulting LLC unless otherwise specifically sighted. Chris Holling its me is not affiliated with Fit financial consulting LLC nor do the views expressed by Chris Holling, me again, represent the views of fit financial consulting, LLC. This podcast is intended to be used in its entirety. Any other use beyond the author's intent distribution or copying of its contents of this podcast is strictly prohibited. Nothing in this podcast is intended as legal accounting or tax advice, and is for informational purposes only. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel. Prior to implementation. This podcast may reference links to websites for the convenience of our users. Our firm has no control over the accuracy or content of these other websites. advisory services are offered through Fit financial consulting LLC, an investment advisor firm registered in the states of Washington and Colorado. The presence of this podcast on the internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. follow up or individualized responses to consumers by a particular state by a personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant to an applicable state exemption for information concerning the status or disciplinary history of a broker, dealer, investment advisor or other representatives. A consumer should contact their state securities administrator amen engage number one you know actually I guess I get to be the captain in these because I'm, I'm leading leading this and then you your your Spock.

Sean Cooper: 1:04:45

Okay, I'm fine with that. You saying you're Kirk.

Chris Holling: 1:04:54

Yes. That's exactly what I'm saying. We need to discuss the numb rs just a little bit longer. Di cussing numbers at this time wo ld be illogical. We should ac ually just be crunching the nu bers, but there's no time to cr nch numbers when I have such a ong narrative. Nothing Spock, no hing,

Sean Cooper: 1:05:25

Nope you know, you are flying

Chris Holling: 1:05:30

Han Solo. See how much hate mail we get for that? hat'd be funny if like all two to 20 of our listeners are all b g time. Star Wars S