The stock markets were especially volatile last week. Normally volatile would refer to something going up and down, but when used in the context of the stock markets, we tend to only think about negative returns. I have written before about why holding the course and not making emotionally based decisions is best for anyone’s long term financial success, and I could do that here too. But, during a conversation with a client last week, it occurred to me that it might be better to more clearly explain exactly what our clients are invested in, and why “the markets” are something much more substantial than what we sometimes conceptualize them to be.
I remember a few months ago I heard an advertisement for some investment product. For the life of me I cannot find what it was, but what has eaten at me since then was their describing investing as “gambling in the Wall Street Casino.” Investments can be like gambling: trying to time when to buy and sell investments, choosing to only buy certain types or sectors of investments and thinking anyone other than insiders can know information that will give one an investment advantage. But true investing is ownership. Ownership in actual companies that employ people, produce goods and/or services and make a profit. Their actual performance is not based on the whims of emotional market participants or computer trading.
I am going to work through a series of writings to better explain what investments that are in your portfolios. The funds that I will explain are used in the majority of the accounts that we manage. Some of the smaller accounts have the same strategy of investing, but we use more all-encompassing funds to achieve similar results.
The largest percentage holding that most accounts have is the DFA US Core Equity 1 Portfolio. This is how we achieve the broadest exposure to the US stocks. At its core, we want the US portion of your (and my) portfolios to own as many profitable, actively traded US stocks as possible. Then we layer on some additional strategies, but I will save explaining that until we get to those funds. I think the best way to explain this and the other funds is to share some of the data:
How many stocks are in this fund? The number of holdings is 2,787. So, you, as an investor in this fund own a piece of 2,787 US stocks. Keep in mind, when you own stocks, you own part of those companies.
Which stocks are those? The Top 10 Holdings are:
Apple Inc. 3.51%
Amazon.com Inc. 2.56%
Microsoft Corp. 2.33%
Alphabet Inc. 1.18%
JP Morgan Chase & Co. 1.03%
Berkshire Hathaway Inc. 1.01%
Johnson & Johnson 0.97%
Exxon Mobile Corp. 0.94%
Intel Corp. 0.85%
Facebook Inc. 0.84%
While these companies have been flying high in recent years, you have participated in that performance. When many of them felt some pain last week, your portfolio also experienced some of that pain. Is there anything fundamentally wrong with any of those companies that we would expect them to be worthless in the coming years? Highly doubtful! So, when Apple’s stock price took a tumble last week, did that mean that consumers had suddenly stopped buying Apple products? No, it didn’t. Don’t be afraid when we experience negative returns. Stock prices are ultimately determined by the profitability of the company they represent. If companies are profitable, we will have a trend toward positive stock market returns. And remember, when you buy your next Apple product or order something on Amazon, you own a piece of those companies!
I want to share a bit more data. The holdings above imply DFA US Core Equity is mostly invested in technology stocks, but here is the actual sector breakdown:
Information Technology 22.75%
Consumer Discretionary 15.99%
Financials 14.90%
Industrials 13.47%
Health Care 12.59%
Energy 5.89%
Consumer Staples 5.85%
Materials 4.04%
Utilities 2.56%
Telecommunication Services 1.95%
REITs 0.02%
I will also cover how and why we use certain funds in future communications, but for now, I wanted to convey that true investing is not conceptual, but consists of ownership in real companies.
Data as of September 30, 2018
