Psychologists suggest that a good way to understand a somewhat complex idea—especially for those over 50—is with charts and graphs. For stocks, however, there is a three-dimensional object that surely you have seen—probably threw it down, like me! The Rubik’s Cube! Now, I’m not suggesting that you solve it; rather, just picture it! But, the six-sided cube, with three smaller blocks on each edge, meets our needs perfectly.
Consider the green (or any color) face of the cube. Large, Medium and Small companies are represented by the top, second and third rows across, respectively. You will undoubtedly see the term “Cap” after one of those sizes, from time-to-time, which refers to the amount of capital that the various companies have to work with.
The left-hand column includes “Value” stocks, which are generally more mature and somewhat more stable. “Growth” stocks are represented by the right-hand column, and are normally newer, and more volatile, but not necessarily to any dangerous extent. “Blend” companies, listed down the middle, have some of the characteristics of both value and growth. So, a large-cap value company would be represented by the upper left-hand block in our visualization, and a small-cap blend would be in the middle block on the bottom row.
For the investor who wishes to keep things simple, and doesn’t want to invest in individual stocks or bonds, Exchange-Traded Funds are a good option. ETFs tend to replicate all of the securities in a particular index, for instance: the Standard and Poor’s 500; stocks of one industry; foreign securities, etc. Most securities firms offer a wide range of ETFs for you to choose from. I have found two companies especially helpful: Sector SPDRs, for adding greater weight by replicating just the component securities of a particular industrial sector of the S & P 500; and iShares for a wide range of Foreign securities, on a Regional, Country or Global basis. ETF Tracker, although not a distributor of ETFs, is a good source of information.
Investors shouldn’t place all of their money in companies of just one type—large or small, value or growth. Similarly, it can be risky to bet it all in one Industrial Sector, such as: Energy; Health Care; Technology or Utilities. In fact, a good way to suffer a big loss is to invest only in: industries that did well last year, figuring that that trend will continue; industries that suffered last year, expecting a turn-around; or industries that you know well. And never, ever go whole hog, by investing heavily in the industry that you earn your living in!
Remember that the Rubik’s Cube is three-dimensional. But, let’s extend that third dimension—the depth, perhaps—out to include, say, nine or ten blocks. That would compare to the approximate number of basic industries in our Economy. Diversify among, at least a range of sectors, but you don’t have to invest in every one, in order to diversify. If you prefer. you need not invest in individual stocks.
I would also suggest considering a fourth dimension, which you may or may not feel comfortable in doing–Overseas Securities. Research material is in short supply for many individual Global (U. S. and Foreign) or just Foreign Securities. Besides Mutual Funds, Exchange-Traded Funds might be a good alternative–both for Domestic and Foreign Securities–for the investor who wants to keep things simple.
Whether you are interested in investing in individual securities, mutual funds or ETFs, be sure to check the web site(s) of securities firm(s) you deal with, or with particular mutual fund companies. It’s important, when you consider investing in mutual funds that you know the details: how they have ranked in their respective categories; what their investment goals are; big mutual funds often become more of an index fund, but with much higher prices; and how long the investment manager has been working on that fund.
The Bond Market is quite difficult to explain, at least in a scatter-shot approach, such as a blog post. And, unfortunately, most brokers don’t understand the bond market, since it doesn’t have the pizzazz that the stock market does. Over the years, however, I have written a number of blog posts on the Fixed Income market, which you can read by clicking on the “Investing” Tag, at the right.
NOTE: As always, if you don’t find what you’re looking for, send a Comment, which I will try to respond to.