Understanding the Building Blocks of Investing

In past columns, we have talked about the market, suggestions on choosing an advisor, and some of the “inside” procedures of a financial advising practice. Today, we are going to do a very high level review of investing. This approach may seem too simple to many, but, generally, I find a review of the ABCs of investing has value for our clients.   

So, on to the basic investment building blocks.

Our business can appear to be quite complicated – but generally, everything filters down to two types of investments: equities and fixed income.

Equities is a broad category that is also known by other names such as stocks, the market, S&P500, the stock index, and the Dow Jones among others. Buying Apple stock, Vanguard Market index, and equity ETFs such as SPY are such examples. For the investor, this is a chance to own a portion of a company (although usually a very, very small portion). The investor has the expectation of outcomes as a result of their investment. First, when you own a company, you want the value of your investment to increase. Second, when the company makes a profit, you as an owner want your share of the profits, referred to as dividends.

Another component of equities is their purpose: growth and value. Growth stocks, as the name suggests, tend to grow very rapidly. With that growth there can be significant risk but also the expectation of an increase in stock price. An example of a growth stock is the chipmaker Nvidia.

Owners of value stocks have a larger focus on dividends with growth following. Value companies tend to be established companies and less volatile than growth stocks. Think of stocks such as JP Morgan or Procter & Gamble. Growth stocks have been very positive in 2024, but things cycle, so we are now a little more focused on value, which tends to follow growth, for our clients.

Fixed income is a much larger group of investments and has many different names. You have undoubtedly heard them referred to as bonds, corporates, treasuries, municipal bonds, and high-yield bonds. The core concept of fixed income is loans. The investor lends money to a company or government agency and, in return, expects interest payments. Bonds, although they can move in price, are generally purchased for income streams. In general, bonds are less volatile than stocks but offer less potential for growth. In our practice, we especially like this category right now considering interest rates are high – specifically, we like high-quality corporates and agency-backed mortgages in a quality bond fund.

For most individual investors, it often requires too much capital to invest in enough stocks or bonds individually to diversify risk. That is why there are investment products like mutual funds, ETFs and indexes. Each product has its own cost and benefit proposition when it comes to management, underlying fees and tax efficiency. I do think mutual funds work especially well with bonds. Bonds are not traded on an exchange like the New York Stock Exchange so the size of trade does matter and there are many good bond fund managers. Equity decisions are more client dependent on what is appropriate but generally a good fund or ETF can provide the risk adjusted return clients are seeking.

I hope this was not too basic a review. There are many other considerations to discus with your advisor (we didn’t even start to explain life insurance products) but these are the basic building blocks of securing your financial future.

Successful investing! QCBN

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Schott Financial Management are not affiliated. These are the opinions of Stephen Schott and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. The information in this email is confidential and is intended solely for the addressee. If you are not the intended addressee and have received this email in error, please reply to the sender to inform them of this fact. We cannot accept trade orders through email. Important letters, email, or fax messages should be confirmed by calling 928 776-1031. This email service may not be monitored every day, or after normal business hours.  Indices mentioned are unmanaged and cannot be invested into directly. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Diversification and asset allocation strategies do not assure profit or protect against loss.

Steve Schott has been a financial advisor since 2010. His expertise in business ownership and capital management spans banking, office products, office machines and autos. A former owner of Prescott Honda, Steve holds an MBA from the University of Arizona and a bachelor of science in finance from The University of Denver. Steve is a proud graduate of Prescott High School and an avid community volunteer. Steve purchased Tomlinson Wealth Management from its predecessor, Andy Tomlinson, in 2019, making Schott Financial Management a third generation financial firm in Prescott.