Fundamentals of Investing
Investing opens up a wide range of opportunities, giving you plenty of options to put your financial plan into action. Ultimately, saving and investing are key steps toward reaching your financial goals and gaining more freedom to focus on what really matters in life.
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The best part? Your advisor is here for you every step of the way. They're dedicated to guiding you through the planning process and providing the knowledge you need to stay focused on what's important as you work towards your goals.
Before building a portfolio to help you achieve your plan, you’ll want to understand the choices you have. The basic levers in portfolio design are stocks and bonds. They are the two main investment options available to investors, as well as the primary methods through which public companies raise money to invest in their operations.
When buying shares of a company, you hope to capture a share of their future profits, but when buying bonds you’re counting on being repaid the money loaned, with interest.
Stocks
Stocks, also known as equities, represent ownership in a company and a stake in its success.
Because future profits can vary widely, investing in stocks is generally riskier but can also offer higher potential rewards.
Bonds
Bonds, also known as fixed income, are essentially loans you make to governments or companies. In return, you receive interest payments or added income.
Because bonds typically have predictable cash flows, they're often seen as less risky compared to other investments.
Time has proven the value of investing
When you invest, your main goal is to grow your accounts so you can reach your financial goals. Over time, both bonds and stocks have beaten inflation. However, stocks, despite being riskier, have provided much more growth in the long run.
Hypothetical Growth of $1 (1927-2023)
For illustrative purposes only and not indicative of an actual investment.
The Ebb and Flow of Stock Market Investing
Stock returns can be impressive, but they’re not always consistent.
Investing comes with its share of ups and downs, and even in the best years, there are rough patches. On average, stocks decline one month out of every three, and you can expect a 20% or more pullback every four years. This is called volatility, and it's why the journey to portfolio growth can be a bit bumpy.
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That’s why we believe it’s all about time in the markets, not timing the markets. Discover why this approach matters.
Seeing the Whole Investment World
When you see the financial news, they are typically reporting on the Dow Jones Industrial Average (DJIA), the S&P 500 or the NASDAQ—what does that really mean? These are key indexes, or proxies for the overall “market”. The DJIA comprises only 30 stocks that are considered core to the U.S. market activity while the S&P 500 consists of the largest 500 companies in the United States. The NASDAQ tends to focus on more technology-focused companies.
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While the U.S. boasts the largest stock market, overlooking other global markets may present missed opportunity. There is so much more to investing than the S&P 500—and lately a few large companies have come to dominate the index. The top 5 names in the S&P 500 account for nearly 25% of the overall index (as of December 31, 2023).
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No. America 62.2%
4,268 companies
Source: Dimensional Fund Advisors, as of December 31, 2022.
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These well-known indexes generally only track larger companies. For example, the S&P 500 tracks the largest companies in the U.S., and most of those have done relatively well over recent periods, meaning they’re more expensive than other companies that you can buy.
This is the concept of investment style and is a key component in your overall strategy.
However, did you know that in addition to the roughly 500 largest stocks, there are over 3,000 other companies you can invest in in the U.S.?
Although the S&P 500 is a good proxy for how stocks have performed in the U.S., there’s a world of opportunity beyond those large companies. And it’s hard to predict which types of stocks will have the best returns, especially over the next year.
S&P 500The Rest of the U.S. Over 3,000 more companiesOther Developed Countries Over 6,400 more companiesEmerging Markets Over 8,600 more companies
Source: Dimensional Fund Advisors, as of December 31, 2022.
For educational purposes only. Review Important Disclosure information.
Breaking Down the Indexes
Ken French Data Library. For illustrative purposes only. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. All investments involve risk, including loss of principal. Past performance is not a guarantee of future results.
Chasing Missed Opportunity
Many investors suffer from recency bias and overemphasize companies or regions that have done well recently. However, historically we see no discernible pattern that suggests we can predict which countries will do the best.
In some years, U.S. companies do well. In other years, companies in Europe do well. In other years, we see companies in emerging markets do well. And we have seen plenty of times where U.S. companies lagged their international counterparts, even over five-year periods.
Evidence-driven investing looks at diversification from other angles as well. We can sort companies based on their size and value (how the public pricing of the company compares to its book value). These are called asset classes.
Asset classes are categories of investments that tend to share characteristics and respond similarly to market and economic events. Asset classes extend beyond stocks to bonds and other investments, and they form an extremely important building block in investing.
The challenge here is: can you find a pattern in the colors?
No? That’s why we invest in a broad range of asset classes—to diversify and balance out returns. While no one knows who might outperform in the future—we know that investing in companies all around the world, both big and small, is the starting point for any good portfolio.
Returns Aren't Predictable
Source: Ken French Data Library, Morningstar Direct 2022. For illustrative purposes only. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. All investments involve risk, including loss of principal. Past performance is not a guarantee of future results.
