Read the Ingredients – Even on your investment funds

Financial Life Planning for Busy Parents

Ever wonder what’s in your index fund? Similar to reading labels in a grocery store, you are likely to find things that you either don’t recognize (erythorbic acid in your frozen blueberries??) or are surprised to find (cane sugar in jarred pasta sauce??). It would serve you well to delve deeper into the components of your investment vehicles, particularly index funds, to avoid potential pitfalls and misconceptions.

Join Matt Robison and I this week as we discuss the various labels you should be paying attention to in the stock market. One of the first label mishaps is not knowing the difference between mutual funds and exchange-traded funds (ETFs). These investment wrappers may contain similar assets but have distinct characteristics such as tax treatment and use in investment strategies.

In case you aren’t completely confused yet, let’s jump into another sticky subject that even has Wall Street scratching its head. You’ve likely explored the concept of value and growth companies, which are commonly used labels to categorize stocks. Growth companies are expected to expand and generate higher future profits, while value companies tend to have stable earnings and lower growth prospects. Understanding these distinctions when choosing investments is key as different funds may focus on either value or growth stocks.

Speaking of funds and Wall Street’s “whoops,” a popular value index fund, the iShares S&P 500 Value ETF (ticker IVE) includes Microsoft which is typically a growth company. Here is where knowing the ingredients of the fund is crucial.

While it may seem laborious, it is essential to gain insight into the underlying assets and strategies employed by the fund. This knowledge enables you to make informed decisions based on your preferences and risk tolerance.

Stick to the Basics

Would you prefer to avoid the intricacies of analyzing individual funds altogether? You would do well to stick to three broad categories of funds:

1. Total US stock market
2. Total international market
3. Total bond market

By investing in these diversified options, you can bypass the need to decipher specific ingredients and still achieve a well-rounded portfolio. (hint: use low-cost index funds that track the above)

In the world of investing, understanding the ingredients of investment funds is crucial for making informed decisions. While the complexities and nuances can be overwhelming, you have the option to either dive deep into analyzing funds or simplify your approach by focusing on broader categories. Whichever path you choose, the key takeaway is to be mindful of what you are investing in and align your choices with your financial goals and risk tolerance.