05: Knowing What You're Invested In
Today, we’re talking about what you own inside your investment accounts, if you have them. You might own investments inside a Tax Free Savings Account, a First Time Home Savings Account, a Registered Retirement Savings Plan, a Defined Contribution Pension Plan, a Non-Registered Account, or some other kind of account (there are so many!)
In a future episode, we’ll talk about the difference between the many different account types and why they matter, but for now let’s focus on the thing you put your money into in the hopes that it will spawn new money.
Why is this important?
Investing at its most basic is giving something of yours to someone else in the expectation that you’ll get back more than you put in. Well, that’s the structure of capitalism: the expectation that capital needs to–must!–grow. Remember, you can invest anything in anything - you can invest your body into growing a whole new human, your skills into your community, or your energy into your friendships. And these investments aren’t transactional - you don’t expect to get more back than you put in, or expect anything back at all, other than deeper relationships and resilient communities.
When you’re investing with money in our current system, which is the default assumption most people make when they think of investing, and the thing we’re talking about today, what you usually want to get out of the whole exercise is more money. To do that, you need to know what you’re investing in, how much you might get out of it, and when.
Now, this isn’t telling the future. No one knows how your investments will do next week, let alone thirty years from now, and anyone who tells you different is selling you something, and I’m pretty sure you don’t want it. Instead, this is an exercise in setting realistic expectations and understanding the risks involved.
The two main types of investments are stocks and bonds. When you invest in stocks, you’re buying a piece of a company. If that company does well, your stocks will increase in value or you’ll get a share of the profits sent to you, or both. If the company doesn’t do well, your stocks will decrease in value, possibly even to the point where they don’t exist anymore.
When you invest in bonds, you’re lending your money to a company in exchange for a promise to pay you some amount of interest. If the company does well, you’ll get your money back plus interest. If they don’t, to the point where they don’t have enough cash or assets they can turn into cash to repay their debts, in which case you lose.
Mutual funds and Exchange Traded Funds are investments that own investments - stay with me here. You and a whole bunch of other investors buy units in a mutual fund or an ETF, and the managers of those funds in turn buy stocks or bonds. You own tiny pieces of stocks or bonds in proportion to how many units of the fund you own, and earn (or lose) money based on how well those stocks and bonds do.
To find out what you own, you’ll need to get your hands on your statements, which you might get by mail, or by logging into your account online, or by checking the app on your phone. Look for the section that’s talking about asset allocation - that’s just the insider term that means “how much of any one kind of investment do you own compared to any other kind of investment”
Usually, your asset allocation is pictured as a pie chart, where one wedge represents cash, another bonds, and another stocks. Sometimes instead of stocks it will say equity, and sometimes instead of bonds it will say fixed income.
If you want a more detailed look at what you’re invested in, look for the section talking about “portfolio assets” or “securities owned” or “investment details”. What you’ll find is a list of securities (read: stocks, bonds, mutual funds, ETFs, etc) that you own in that account. The details of that security are just an internet search away.
On a site like Morningstar.ca, you’ll be able to see what kind of security it is, how much it costs to own (if it’s a mutual fund or ETF), how it’s done over time, what kind of industry it represents and where it is in the world, and - if it’s an investment that invests in other investments (say that five times fast), it will list the top ten securities it owns.
I’ve included some examples in the Resources section for this episode on readysetmoney.ca.
Conclusion
Knowing what you’re invested in and understanding what you can expect from it are two different things, and you’ve taken the first step. It’s okay if you don’t intend to become an expert in this stuff, but you should know what your money is out there in the world.
Because it’s such a big topic and a long learning journey, I’ve included couple of resources that could help you make sense of it all in the resources section of this episode. They include a delightful little book by my good friend John Robertson, and a course developed by my other good friends Tim Nash and Darryl Brown.
RESOURCES
The Value of Simple: A Practical Guide to Taking the Complexity Out of Investing
Morningstar (Canada)
Here’s what you’ll on Morningstar (this is an example, not advice to buy anything!):
You can search for your security by name (Vanguard Growth ETF Portfolio) or by symbol (VGRO). The MER (or Management Expense Ratio) is the cost of operating the fund, including taxes. It’s expressed as a percentage of the fund (see the next image for what that means in dollars).
In the Price section, the Management Expense Ratio is translated into hypothetical dollars for someone who invested $10,000 over 10 years and earned 5% per year.
The Sustainability section tells you how much of the fund is invested in things like oil and gas, military contracting, and weapons, among other things.
The Portfolio section of the Morningstar listing tells you how much of the fund is invested in equity (stocks), fixed income (bonds), cash, plus some other asset classes that are important but not important enough for this episode.
Further down on the portfolio tab, you’ll see “Holdings” which is the list of the top ten securities this ETF owns. The asset allocation (above) and sustainability (below) sections include all the information from all of the holdings.
