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6. What to invest in?

The “Beating the Market” articles concluded that seeking “excess returns” (also called alpha) is a complex and difficult task that the mindful individual investor should avoid in favor of simpler investing approaches.  Although it’s a nice fantasy, for most individual investors, beating the market is not necessary to achieve long term goals like a comfortable retirement.  While this covers what not to do, we still need to define specific actions that are indicated by a mindfully simple investing approach, which is the purpose of the next two articles on what to invest in:

But first, we need to define a few basic concepts.

Definitions

A quick review of the internet and popular investing books shows that most of the discussion of investments for individual investors boils down to three basic options: stocks, bonds, and cash.  Along with real estate, there are many other possible investments, which I discuss in Article 9 on “alternative investments”The main reason Mindfully Investing focuses on stocks, bonds, and cash is that alternative investments tend to be more complex, often lack a clear history of returns, and involve significantly higher uncertainties and risks.

Let’s start with a brief review of each of the main three investment types.

Stocks

Stocks represent ownership in a company as well as a claim on part of the company’s assets and earnings.  Large and small companies from around the world issue stocks related to every imaginable type of commerce.  Although stocks are a simple concept, there is a vast array of stocks available to the individual investor.  Also, there are different flavors of stocks such as “common” and “preferred”, but we don’t need to get into those details right now.

I focus here on stocks of publicly traded companies rather than privately held company ownership (e.g., a small business owner), which is a highly investor-specific and varied type of investment beyond the scope of this website.  (However, it’s worth noting that privately-held ownership should be factored into your overall investment plans.  Because private ventures are often much riskier and have correspondingly greater potential returns, you should always evaluate your overall balance of risk and return across the entirety of your investments to make sure your investing plan is comprehensive and objective.)

Bonds

Bonds represent a debt owed by the bond issuer (the entity seeking the loan) to you, the bond purchaser (the lender or creditor).  Companies and various levels of government can issue bonds.  All bonds include a defined period of time over which the loan will take place (like 1, 5, 10, or 30 years) and interest that will be paid (and with what frequency) to the bond purchaser during that period.  Like stocks, there are many flavors of bonds including federal government bills, notes, and bonds; local government (e.g., municipal) bonds; foreign government bonds; and various types of corporate or private bonds.  Most bonds also have a credit quality rating, which is an estimate of the future risk that the bond issuer could fail to make regular payments or pay back the loan at the end of the period.  For example, U.S. federal government bonds are generally the highest quality, while some types of corporate bonds issued by weaker companies are often referred to as “junk bonds” because of their high risks.  As with other investments, higher risk means higher returns in the form of higher interest payments during the life of the bond.

Cash

You already know what cash is, but I want to broaden the definition of cash for this discussion.  Beyond what’s in your wallet, cash is also an investment vehicle and pays a low interest or other return. This can include your bank account, money market accounts, and similar deposit holdings that usually return interest in smaller amounts than riskier investments.

Cash also includes relatively short-term bank certificates of deposit (CDs).  CDs provide a relatively low rate of interest at the end of a specified period, although when interest rates began to rise in 2022, they return much better rates than in the long, previous low-interest period. You can withdraw your money prior to the end of that period but with a specified penalty.  Some CDs have longer hold periods (like five years), but for inclusion in our cash category here, I am mostly focused on shorter-term CDs (3 years or less).

It’s worth noting that some saving accounts and 1 to 2 year CDs currently (as of June 2023) return 4.0% to 5.2% annually. These aren’t returns to brag about, but when compared to the volatility of the stock market, they’re a solid bet – unless, of course, you have more deposits in one bank account than the FDIC limit, in which case you might be okay, but you do have risk.

A mindful discussion

Also, before moving on to the more detailed articles, I would like to remind readers why both the Article 5 series and the Article 6 series are mostly an analysis of data and history.  As discussed in Article 2, mindfulness is synonymous with rationality and empiricism and is not confined to simply handling our emotions better.  In many ways, these articles resemble more an application of science to investing rather than an application of the philosophy of mindfulness, but as I also mention in Article 2, those two perspectives share much in common.