Episode 210: Understanding the Market: Your Guide to Smart Investing

Hey, everybody, and welcome to episode number 210 of the weekly wealth podcast.

This is certified financial planner David Chudick, and I want to start this episode off with a quote that I heard this week while I was at a continuing education class.

And this quote was by Graham Holloway, and he's the past chairman of American Funds Distributors.

And he said, in my 25 years in the mutual fund business, I've never known a good time to invest.

There are always a dozen reasons why it makes sense to wait.

We have the new president, strife in the Middle east, excessive government regulation, oppressive tax rates, and a Congress that is more part of the problem than the solution.

So we're gonna talk a little bit more about that quote today, and I also want to talk about some definitions of investment terms.

With all of this stock market volatility we've had lately, I'm really doing my best to empower you to make good financial decisions, good investment decisions, and give you an education.

So I hope that you enjoy this episode.

Welcome to the weekly wealth podcast.

I am certified financial planner David Chudick.

This podcast and my wealth management practice are both designed to help the mass affluent to live better lives by how they handle their money.

We talk about financial strategies, prosperous mindsets, and simply how to build true wealth.

So come on and let's enjoy this journey together.

Let's get started with this week's episode, but before we do, please make sure to do all the things please like and subscribe to the podcast on the platform where you listen to it.

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Now, let's talk about that quote that I opened the show with about there's never really a good time to invest.

Do you know when that quote was from?

And this was by Graham Holloway, who's the past chairman of American Funds Distributors, now known as Capital Client Group.

He mentioned in his 25 years, there has never been good time to invest.

He mentioned that there are always reasons why we have new presidents, we have strife in the Middle east, government regulations, tax rates, Congress part of the problem.

Do you know when he made that quote?

That was back in 1981.

So back in 1981, I wasn't even 10 years old yet, but some of the same problems that we're still complaining about today existed.

So, you know, we had uncertainties with new presidents, we had conflicts in Middle East.

So the point is, there's always reasons not to Invest.

And in 1981, in 2020 and 2025, some of those same reasons exist.

So let's look back at some reasons why investing might have been really scary.

In 1987, we had Black Monday.

1990, we had the Kuwait invasion and the first Gulf War.

1991, the collapse of the Soviet Union, we had a Ruble crisis.

In 1998, we had Asian financial crisis.

In 1998, remember 2000, we had Y2K.

And that was going to really just destroy all the computers and take us back to the Stone Age and the tech bubble.

Of course, 2 was 9, 11, we had SARS in the second Gulf War in 2003, global financial crisis in 2008, we had swine flu in 2009, we had Brexit in 2016, Hong Kong riots in 2019.

And then of course, we had Covid in 2020, 2021, we had Russian invasion of Kuwait.

And now we have the Hamas war, We have potential tariffs.

We have all of these issues happening.

So yeah, I mean, there always are reasons not to invest.

But going back to New Year's 2020, what would have happened if you ignored all of the troubling events on the horizon?

Since then, the S and P index has risen more than 100%.

So that's just one way to look at investing.

Yes, it can be scary, but I don't think that a lot of these issues are new.

This is not the first time ever we've had some conflict in the Middle East.

This is not the first time ever we've had congressional issues.

And yeah, so just give that some thought and ask yourself, do I have too much money on the sidelines?

And if I do, is that due to an irrational fear?

Okay, so do I have too much money on the sideline?

And is that due to an irrational fear?

If you have any questions or if you just want to talk your way through it, I'm always available.

So email me davidarallelfinancial.com, and I will be glad to talk it over with you.

Alright, so we're going to take a quick break and then we're going to come back and talk about some different investing terms that can empower you to make great decisions.

If you're like most people, you really don't have a great idea of what your financial reality is.

You may have a general idea of what your debts are and what your assets are, but you don't have it written down.

If you'd like to have a complimentary balance sheet created for you go to www.weeklywealthpodcast.com balance sheet and I can help you to put together a balance sheet that'll show you your assets, your liabilities and your income.

And it can give you a visual representation of where you are.

So www.weeklywealthpodcast.com balance sheet.

All right, let's get back to the show.

So today we're diving into something that trips up a lot of investors investment jargon.

So maybe you've heard terms like alpha and beta and P E ratio thrown around, but weren't exactly sure what they meant.

Or maybe you kind of know, but not enough to feel confident using them when evaluating your own investments.

So for the rest of the episode, we're going to decode the most important investment terms that investors should know, whether you're just getting started or already investing regularly.

If you master these concepts, it'll help you to make smarter decisions.

Alright, so the first thing we're going to talk about is understanding the performance metrics.

So let's start with how we evaluate performance.

So this is where terms like alpha, beta and Sharpe ratio come into play.

Alpha is a measure of how much better or worse an investment has performed relative to a benchmark index.

And we're going to talk about indexes a little bit more in detail in a little bit.

But an example of an index is the S&P 500.

A positive alpha means it outperformed.

A negative alpha means it underperformed.

So if you hear that a fund has an alpha of 2, that means that it beat its benchmark by 2% after adjusting for risk.

This is key if you're trying to find actively managed funds that truly add value.

Now, beta tells you how volatile an investment is compared to the market.

And we hear a lot about market volatility lately.

A beta of one means the investment moves with the market.

Greater than one, it's more volatile.

Less than one, it's more stable.

So if volatility scares you, then maybe you should have investments with a beta of less than 1.

So, for example, a stock with a beta of 1.5 is 50% more volatile than the market.

It might swing higher on a good day, but also drop further on bad days.

Now, the Sharpe ratio is a big one for comparing investments.

It measures return per unit of risk.

So the higher the Sharpe ratio, the better the return you're getting for the amount of risk you're taking.

And remember, we want to take the right amount of risk for us.

Now let's talk about understanding risk and volatility Standard deviation.

This is a term that tells us how much in investment returns fluctuate.

Higher standard deviation equals more ups and downs equal higher risk.

Lower standard deviation equals more consistency.

So again, if you're someone who feels like you tend to not be able to sleep at night when your investments are going up and down, maybe you should choose investments with a lower standard deviation.

If you're someone who feels like, you know what, I'm okay with the ups and the downs because I'm shooting for higher risk and higher reward type investments, then a higher standard deviation is important to you.

R squared.

R squared tells us how closely an investment tracks a benchmark.

And r squared of 100 means it moves almost identically to the benchmark.

If it's much lower, that means it's doing its own thing.

And finally, drawdown.

Drawdown is another one to know.

It refers to the largest drop from a peak to a low point before recovery.

Understanding an investment's worst case scenario helps prepare you mentally and financially.

Now let's hit on some terms that directly affect your wallet and your account balances.

Expense ratio.

This is what you pay to invest in a mutual fund or an ETF.

A 1% expense ratio means you pay $10 on every $1,000 that you invest.

So over time, high expenses can eat into your return.

So lower is often better, but it's not always better.

So make sure that you understand your expense ratios within your investments.

Now, dividend yields is how much money you earn from dividends as a percentage of the stock price.

So for example, if a $50 stock pays $2 in dividends per year, that's a 4% yield.

That's great income for income focused investors.

So if you're looking for income, dividends might be a great answer for you.

Not all funds, not all stock pays dividends.

So make sure that you know if you're investing in a dividend paying investment.

Now, your P2E ratio or your price to earnings ratio is a valuation metric.

A high P to E ratio, the company's expected to grow fast.

And a low P2E ratio could mean it's undervalued or that it's struggling.

So it's important to compare within industries.

And this is a number that is oftentimes good to know.

And finally, we're going to discuss market capitalization, or it's called market cap.

And it's simply the size of the company.

So share prices times the number of shares.

Large cap companies are more stable.

Small cap companies are riskier, but might not always but might offer higher growth.

So your market cap is simply the stock price times the number of shares outstanding.

And finally, I want to talk about understanding the stock market indexes and talk a little bit about the markets.

And I use air quotes versus individual stocks and securities.

So the big indexes that you'll hear about on the news are the s and P 500 that tracks the 500 of the largest companies in the U.S.

so the S&P 500 is a broad, broad index that tracks a lot of companies.

And these are the big companies that you more than likely have heard of.

The Dow Jones Industrial Average, or known as the dow.

It follows 30 large companies, so only 30.

The Nasdaq is a composite.

The Nasdaq Composite is full of tech and growth companies.

And the Russell 2000 tracks smaller companies in the U.S.

so these indexes represent the performance of groups of companies.

But here's a key insight.

The market is not the same as individual stocks.

So people will say, well, what are the markets going to do?

Or the markets were down or should I invest in the markets?

And we need to be careful to understand that investing in the markets is not always what we're doing.

Oftentimes you're buying individual stocks, individual bonds, or you're buying a mutual fund that might invest in a specific industry or specific sector of stocks.

So people often say the market is up or the market is down, but that doesn't mean your portfolio is performing the same way.

Indexes are averages.

Some stocks do better, some stocks do worse.

So let's look at 2022, the S& P, and we can call that the market.

It was down about 18%, but Occidental Petroleum was up over 100%.

Well, why was that?

Well, rising oil prices and strong demand proves that even in a down year, smart investments in specific sectors or companies can still grow.

So this is a great reminder to think critically and not assume that your personal investments are mirroring the headlines.

And we talk a lot about watching the news and getting our emotions out of our financial decisions.

Now, remember that publicly traded companies are typically led by boards of directors and by leadership.

And their jobs are to figure out ways to make profits and to have their stock prices increase.

I mean, literally, that's the only reason they exist.

So the markets are not the same as individual stocks.

So keep that in mind.

Now, our firm, we have a process on how we pick individual stocks, and it's done very systematically.

And if you're investing on your own, hopefully you have a system.

But if not, you can email me davidarallelfinancial.com and we can talk a lot about our system and see if it makes sense for your financial life.

All right, so let's wrap it up.

Today we unpacked a lot.

We talked about performance metrics like alpha and beta, risk measures like standard deviation and drawdown.

We talked about strategy terms like expense ratio and P2E ratio, and we clarified how the markets differ from individual investments.

Remember, understanding these terms give you power.

Power to make smart decisions and ask better questions to your financial advisor and build a portfolio aligned with your goals.

Now, if you'd like help applying these metrics to your own investments or you're not sure how your portfolio stacks up, reach out.

I am here to help.

You can email me davidarallelfinancial.com and I'll always be happy to spend 30 minutes with anybody.

Now, I do think that understanding a lot of these terms is very important, but I would make the argument that professional money management can be a wise idea for many people.

We're all busy and we might intend to monitor our investments, we might intend to put systems in place, we might intend to do research.

But come on, there's kids, there's work, there's trying to exercise.

There's all the things that distract us in life.

And oftentimes we just don't give our investments and our financial decisions the priority that they need.

And I think that working with a professional financial advisor like myself can add in some systematic decision making processes and it can also add in some accountability.

So if you've ever wondered what it might be like to work with me personally, just email me davidarallelfinancial.com we can talk about our financial planning process.

We can talk about our investment process.

So I hope that you're enjoying our latest series of episodes on the weekly Wealth Podcast, talking about some stock market empowerment topics.

These are some scary times, but they also may have many, many opportunities that can help you to grow up your portfolio moving forward.

So if I can be of any help to you, make sure you reach out to me.

Don't forget to like us on social media and let me know if there are any topics that you would like us to cover.

So until next episode, I wish everybody a blessed week.

Thanks everybody.

Investment advice offered through Parallel Financial and SEC Registered investment advisor able to conduct advisory business in states where it is registered or exempt or excluded from registration contents contained herein or for informational purposes only and should not be construed as an offer or solicitation for investment advice or for the purchase or sale of any security, insurance or other investment product.