Investing - What You Actually Own
Happy Sunday!
Investing - What You Actually Own
Investing doesn’t have to be exciting to do its job.
But MBAs love over-complicating things. It must be our inner consultant trying to break free.
I see some crazy stuff in financial accounts.
But what I don’t usually see are well-built portfolios that align with a family’s goals and values.
So let’s discuss some foundational concepts around investing to dispel some myths.
Before we dive into this week’s topic, here are some things I thought you’d like
AP – Tax Tips for Recently Married Couples and First-Time Parents
Spoiler alert: this was published April 13th, which is too damn late to start your tax planning. Tax planning is a year round event.
Substack – Books for the DIY Investor
I’ve shared this list before, and I’ll do it again. These books are a great place to start your finance education!
Sitreps – Job Board
Currently ~7 PE roles, ~13 strategy/ops roles, ~8 sales roles, and ~6 technical roles. And some insider information from the dude who reviews your application: have a one page resume.
Let’s dive in!
Here’s what this month has in store:
Flexibility vs Optimization
Risk
Things You Might Own
Fun Money
Individual Stocks.
You don’t need to own mutual funds or ETFs to be diversified. You can just buy the underlying stocks yourself. And in a vacuum, that’s how you’d start.
According to classic portfolio theory (and most CFAs you’ll meet), owning around 30 well-chosen, uncorrelated stocks is enough to diversify away the majority of your unsystematic risk.
That’s the kind of risk that comes from being overexposed to one company, one sector, or one idea. Unsystematic risks are the ones you can diversify away and why you build a diversified portfolio in the first place.
With 30 stocks, a single position size would be about 3.33% of your portfolio. A double or triple position is likely a risk that won’t keep you up at night, but having 20% of your portfolio in your employer’s stock would be a 6x position. And that’s a different story.
So, building a portfolio doesn’t mean buying 30 companies you think are cool.
It means 30 positions across multiple industries, sectors, geographies, and styles. And you have intentional position sizes and clear investment theses.
That means you do the work that an investment committee would do before buying, starting with:
Perform fundamental analysis
Incorporate forecasted return assumptions
Identify the price you’d sell at
But that’s not what most MBAs do……..
Instead, they buy five stocks and call it diversification. Usually:
The company they work for
And some tech stock they “believe in”
A recommendation from a coworker
Some other tech stock they similarly “believe in”
A defense company
They don’t know whether it’s overvalued or undervalued. They just “like the story.”
So while DIY stock-picking sounds empowering, the truth is most people don’t have the tools, discipline, or time to do it well (you can go debate whether anyone does it well over the long-term, but that’s not for today).
So, MBAs don’t magically build strong investment portfolios, which is why funds can be a great alternative.
ETFs.
ETFs (exchange-traded funds) are simply wrappers, containers that hold a bunch of underlying securities, like stocks or bonds.
The ETF structure allows you to get exposure to hundreds or thousands of positions in a single fund. This fund might be referred to as a ‘ticker,’ meaning the symbol you’d type in to research/buy/sell it, for example VTI or SPY.
ETFs are the workhorses of real-world portfolio design.
They trade like stocks. They have intraday pricing and market liquidity, plus tax-efficient, low cost, and flexible.
But not all ETFs are created equal.
Remember, an ETF is just a vehicle. What matters is what’s inside.
Now that we’re talking about funds, a quick note on terminology:
Passive investing means tracking a benchmark, like the S&P 500, without trying to beat it.
Active investing means a manager (or you) is making decisions to try and outperform the market through selection or timing.
There are ETFs that track:
Broad market indexes (e.g., VTI, SPY)
Specific sectors or themes (AI, robotics, clean energy)
Factors (momentum, value, quality)
International or emerging markets
Leveraged and inverse ETFs (2x, 3x, -1x)… which are usually terrible for long-term investors
Many investors assume “ETF” is synonymous with low-cost, passive, and diversified. But that’s not always the case.
Plenty of ETFs charge 0.50%+, rebalance frequently, and loosely track their defined strategies.
In the portfolios I manage, I use passive, market-weighted ETFs to construct globally diversified portfolios. Among other things, these funds:
Have expense ratios in the 0.03%–0.15% range
Offer diversification across sectors and companies
Minimize turnover, which helps with tax efficiency
Can be rebalanced easily and at low cost
Even though ETFs are super common, I still see mutual funds in portfolios.
Mutual Funds.
Before ETFs were a thing, mutual funds were how everyday investors accessed diversification.
Originally built to give investors access to the markets through their stockbroker, mutual funds were a way to pool money together and get ‘professional management’ across a diversified basket of securities. They became the default investment product throughout the ‘80s and ‘90s, back when you couldn’t log into a brokerage app and buy fractional shares of Amazon.
Like ETFs, mutual funds are wrappers, but they price only once per day (based on NAV), and are often sold in different share classes, each with different fee structures.
Some context:
Passive mutual funds (like Vanguard index funds) can be very low cost: 0.10%–0.20%
Actively managed mutual funds often charge 0.75%–1.50%
A-shares: Front-end sales loads (up to 5.75%)
B-shares: Back-end loads that decline over time
C-shares: 1% annual level load, sometimes used in fee-based platforms
On top of those, you may also pay transaction fees—I’ve seen platforms charge $20 per trade to buy or sell certain funds. That might not sound like much, but if your portfolio has five mutual funds and you’re making allocation changes monthly or quarterly, it adds up quickly. And unlike expense ratios, it’s not always obvious on your statement.
Mutual funds can also be tax-inefficient.
When a mutual fund manager sells underlying holdings, you get hit with the capital gains. Even if you didn’t sell a share. And in years with high redemptions, you might get a tax bill from a fund that lost money overall.
Every couple months I’ll meet with an MBA with some legacy mutual funds in their accounts, and often there are a few with annual turnover >200%. That’s every dollar in the fund trading 2x per year, and if you’re a high-earning MBA in a tax-hostile state, that can really suck.
Hello short-term capital gains taxed as ordinary income.
Not all mutual funds are like that. But you do have to look under the hood to see what’s going on.
Bringing it back.
Remember:
A group of 5 cool stocks is not a portfolio. Combining those 5 stocks with a random S&P 500 fund……still not a diversified portfolio.
An “ETF” is not a strategy, it’s a vehicle.
“Mutual fund” doesn’t mean bad, but it might mean expensive, inefficient, or old school.
At the end of the day, your portfolio is a tool.
It should support your goals, your timeline, and your tax situation.
Because it’s not just about owning things. It’s about owning the right things, in the right amounts, in the right accounts.
And before you can define right, you need to clearly define where you are today, where you’re going, and how you want to get there.
Next week, we’ll round out the series with a look at “fun money,” how to build rules-based approaches to gambling, and what it looks like when spouses approach investing from totally different angles.
Hope you have a great week.
-Henry
The content shared here does not constitute financial, legal, or any other professional advice. Readers should consult with their respective professionals for specific advice tailored to their situation.