Weights & Measures
Weights & Measures
Hello everyone, and welcome to the June,2021 installment of the Boodle blog. It is our goal and purpose to educate our clients and readers on how to get the most out of investing by understanding how the stock market works and how to make it work for them. We see our mandate as a calling to disrupt the financial industry and the education industry because too few people possess the knowledge, discipline, and confidence to make intelligent choices when it comes to their money.
So with that being said, lets cover two subjects in this blog and how you can apply these principals to your portfolio holdings- Weights & Measures.
Stocks are “weighted” securities and by that, we mean the size of a company’s stock determines its “weight” in proportion to other stocks in the market. Take Apple for example. By the size of the company according to dollar amount, Apple is the largest company in the stock market because the company is valued at $2 trillion dollars. Now take a company like Lennox Technologies. Lennox is valued at $12 billion dollars. Lennox therefore has a lot less weight than Apple Computer.
Weighting tells an investor the size and scope of a stock and serves as a guideline for investors seeking stocks of certain sizes, or if you will, valuations. However, just because a company has a large (or small) valuation does not necessarily mean you would want to add its shares to your portfolio.
This is a good time to talk about the other tool investors should use when evaluating a stock – Measures. Many years ago, I met a gentleman who shared an interest in investing like me. He seemed to have a passion for stocks, and he told me that he owned more than 50 individual stocks in his portfolio! Owning 50 different stocks requires a ton of effort, input and savvy from the portfolio owner just to keep on top of the portfolio and make sure that the rate of return makes sense in relation to say, the S&P 500. Boodle believes in maintaining a simple approach to managing a portfolio properly and owning dozens of stocks does not strike us as the best way of doing it.
We believe in the average person owning mutual funds that mimic a sector, or better still the entire market. This way you can measure your portfolio against a benchmark (think S&P 500) and know exactly how your portfolio stacks up.
Many investors do not know how to measure a portfolio, and thus many investors have no idea how their portfolio is performing. Measuring is also a tool we use at boodle to determine many other factors. We measure the unemployment rate, we measure interest rate hikes, or rate cuts. We measure consumer confidence, housing sales, auto sales and on and on. This measuring provides clues as to which direction the stock market might be headed in, and how best we can position our portfolios. Knowing your asset allocation weight, and then understanding how to measure performance will help make you a better investor, and the results should impact the bottom line of your portfolio in a positive way. Is your portfolio weighted properly, and is it simple to measure? Think about that. Until next time, thank you for choosing Boodle and we hope to see you back here next month.