What are the investing basics that can help shape long-term financial decisions?
Many people hear terms like stocks, bonds, ETFs, mutual funds, dividends, or Roth IRAs and assume they already understand the basics. But what if going back to the basics helps inform people as they make money decisions?
In this episode of Retire in Texas, Darryl Lyons breaks down the core building blocks of investing in a way that is simple and easy to share with kids, college students, young adults, or anyone who wants a clearer understanding of how money can work over time. He explains the difference between stocks, bonds, and cash, while also showing why discipline and long-term thinking can matter just as much as the investments themselves.
You’ll learn:
• What stocks represent and why ownership in companies has historically helped build wealth.
• How growth stocks, income stocks, dividends, and company size can affect an investment portfolio.
• Why bonds are different from stocks and how risk, return, and time horizon come into play.
• Why cash can be useful for emergencies but may not be ideal as a long-term investment.
• How mutual funds and ETFs allow investors to own many companies through one investment vehicle.
• Why Roth IRAs can be a powerful tax-advantaged tool when used properly.
Investing can feel complicated, but Darryl explains why the basics are worth revisiting. Stocks, bonds, cash, ETFs, and retirement accounts all have a role to play, but the bigger lesson is learning how to think long term, stay disciplined, and build a framework that fits your own situation.
Benefiting from the show? We’d appreciate it if you left a review on your favorite podcast platform.
Transcript:
Hey, this is Darryl Lyons, CEO and Co-Founder of PAX Financial Group. And you’re listening to Retire in Texas. This information is general in nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. Hey, I just want to say thank you for listening because a lot of you guys tell me in the community that you listen.
I get, I mean, it’s humbling the amount of feedback I get and how many people listen. So thank you, thank you, thank you. It’s exceeded my expectations. So, it encourages me to continue. I kind of look for clues on what to do a podcast on and a lot of its feedback from y’all and just conversations in the community.
And one that came up recently was somebody asked me about educating kids on money. And then I spoke at Saint Mary’s University and a very basic topic on money. And so, I’d like to make this specific podcast about the basics, but do not tune out because you may misunderstand the basics. And I know you’re sophisticated.
You may have MBA, you know, you we have a comment, by the way, we have economists as clients. We have senior tax partners. We have people who are very smart financial people that use us. I say all that because I love their humility that they say, look, there’s some things I just don’t know. I don’t want you to be the person that lacks humility.
Says, I already know this stuff, so I don’t need to listen. So just please listen. Indulge me for the next few minutes, because there may be some misunderstanding about a simple concept that can mislead you into making decisions down the road that could be detrimental. So, I want to try to go back to the basics. It’s healthy for all of us.
So let me start. This is going to be a basic show. And some of you guys are going to be like, that’s not really basic, but I want to keep it basic and I want to also make it in such a way that maybe you can share this with the youth, kids, or college folks or whoever that might want to understand stocks, bonds and investing.
So, let’s jump into it. I don’t have a lot of time. I have plenty of time, but I only want the show to be 15 or 20 minutes. So, when it comes to and I’m actually writing while I say this because it’s easier for me to do it that this way. There’re really four major types of investments.
There’s stocks, bonds, cash and then alternative investments, which will typically be like real estate and oil and gas. You’ve also heard private credit private debt there’s or private equity, cryptocurrency, they’re alternative in the fact, and real estate may be an outlier to the alternative in the fact that the historical returns of them are less predictable.
And they oftentimes don’t provide a consistent income or some combination thereof. So, a little bit more predictability in their investment profile. And when I say profile of an investment, how you determine the risk and how you determine the potential reward, it’s a little hard to get your head around those alternative investments. Like I said, real estate falls into that alternative category in this conversation.
Stocks, bonds and cash kind of the staples. The basics of investing in general stocks is ownership of a company. So, you own a piece of Microsoft. It’s not enough to go into, you know, a store, go online and say, hey, I own a piece of Microsoft. So, I get free technology. It’s just, you know, they used to give you a certificate, right?
And it was a stock certificate. They don’t do that anymore. It’s all electronic. But you have ownership of a company, you own a piece of company, and it’s really incredible. It’s if you think about it, years ago, 100 or 200 years ago, you know, my family didn’t grow up with a lot of money. So, if we were a serf or peasant, we would continue to be a servant or peasant, because access to land or being a part of a royal family really wasn’t in the cards, so to speak.
So, you just kind of keep doing that. But along comes the United States of America and building out a system, a capital market system where anybody can own a company. Now, anybody can own a company. Doesn’t mean you’re this business owner, but you can buy a company through the stock market and accumulate wealth. And there’s so much conviction that this has worked over the last several.
I guess it goes back much further in the United States. But it’s worked so well that the president has just come up with these Trump accounts, trying to get people to save early. If you need more evidence to have conviction that investing in the stock market long term has historically built wealth. That’s another show, another conversation for me to convince you.
But stocks have historically worked and provided an incredible tool for people to accumulate money. I also want to encourage you to and maybe be on the show. I might have done one before. I’m pretty sure I did. On the power of compounding. And so, stocks, when you own a company, this is an important thing to understand. The company is motivated.
The company being the key executives, key leaders are motivated to grow. If they don’t grow, they get fired. Who fires them? People own the stock ultimately. I mean, it goes through a process, but the CEOs are tasked to grow the company. So, let’s say the company grows 10% in a given year. So, the value and I’m making up these numbers, the value of the company’s worth 10 million.
And it grows 10%. Now that now the value of the company’s worth 11 million, CEO is tasked to grow another 10%, but not 10% on the original 10 million, on the 11 million. So, it’s a compounding effect that happens inside of the stock, because the company growth is compounding on itself each year. And the value of that share that you own is directly tied to the value of the company.
You pick it up when I’m dropping. So, the compounding effect happens when the executive leadership is tasked to grow the company year after year, and that growth compounds on itself. That’s why it works. And then the CEOs, the executive teams are all incentivized to make that happen. Otherwise, they get fired. So, it’s a pretty powerful system. You just have to spend some time.
I think we all do have to reflect and take a step back and appreciate how it works. And I appreciate ignorance in a lot of ways, because over the years I’ve seen some very ignorant people say, you know, I’ve heard it works. I’m just going to trust it, go about life. Then they wake up ten years later and they’ve accumulated wealth through the stocks.
It’s a fascinating system. There’s two major types of stocks. There’s growth stocks and there’s income stocks. The growth stocks are like I mentioned that CEO. Oftentimes it may be a technology company that just that the executive team just they sell, I don’t know, they sell, I just use AI – artificial intelligence. We’ll use chips or whatever. Right. Doesn’t really matter.
And they just year after year compound that growth. Now let me compare that to income stocks. Income stocks maybe something more like AT&T, a company still innovating but they pay out a dividend. So, the profits that they make each year instead of the growth, the growth companies take the profits and they just kind of use it to grow bigger and bigger.
But the companies like AT&T or others, they take that income and they pay it out to you in the form of a dividend. Now, if you’re going to retire, those dividends are real nice to live off of. But the dividends, just as a side, dividends as a whole in the stock market have gone down quite a bit.
So, less people have been more attracted to the dividends many times. And I haven’t heard this a lot lately. People say, you know, give me $1 million of an investment strategy, and I just want to live off the dividends. That used to be the way life worked. But dividends have gone down quite a bit over the last several years.
So, dividends, albeit are still and I think an important part of your portfolio have been less of a priority. But it’s important to know about the dividends, because some CEOs and executives of different companies are tasked to use company profits to just reinvest, what they call something called CapEx capital investments. And some of them are just paying out the dividends.
Having a mix of both is healthy. Really. Some stocks that have growth, some stocks that are income. Another category of stocks I think are important are large medium and small company stocks. And a good healthy mix is important. A large companies would be like AT&T or Intel. Medium size H-E-B is not publicly traded. They’re privately held.
But if they were the size of the company, which size is defined as number of shares outstanding times the value per share. But they’re privately held. But H-E-B, a more regional company, would be mid-size and a small company would be a lot of biotechnology companies, a lot of companies that are smaller, that just aren’t as big.
Those are going to have more risk, but usually not always, usually the risk, when you have more risk, this is generally a rule of thumb in life. If you take on more risk, you’re going to expect or hopefully get more return. That’s the game. There are outliers to that rule of thumb, but that’s generally the game. And so, if you’re going to own small companies, you got to make sure you know how much you own.
Because if you own too much, you may be taking on too much risk. Now the third category of stocks are international versus domestic. And we have something called a home company, home country bias, which we generally in America want to own US companies. But the international market has merit to, maybe not China, maybe not Russia. But generally speaking, you’re going to want to own companies overseas. I’ve spoken about this in previous podcasts, but it does create a different diversified Asian factor in your investment portfolio.
Bonds, on the other hand, are not a stock at you know that already, but a bond is a loan that you make to, let’s say AT&T. Now here’s where it’s interesting. If AT&T were to file bankruptcy because everyone’s switched to T-Mobile, they closed their door and they put a bankrupt sign on the door. I remember Michael Scott in the office said, how do you file bankruptcy?
How do you declare bankruptcy? And he walked into a room and said, I declare bankruptcy. That was funny. But anyways, if they file bankruptcy, AT&T files bankruptcy, they put a bankrupt sign on the door, and then there’s a line to get money because they’re waiting for everyone to, you know, waiting for AT&T to sell all their inventory.
So, the first group in line, the first suits in line waiting for their money, or the IRS, of course, they’re going to get if there’s anything to sell equipment, telephones, sofas. There’s anything to sell at AT&T has any money in the bank, then the IRS is going to get theirs. Second group that’s going to get their money.
Is anybody any bank that lent AT&T money against the building. So those are called secured loans. And I’m oversimplifying this, but I think you’ll get it. The third group that would get their money are any bondholders, anybody that lent money to AT&T and usually the money’s out. There’s no money left after that. The last group in line, and they don’t even step in line because usually they don’t get anything.
And that’s the stockholders. But here’s what’s important. The prioritization still matters today in bankruptcy, because whoever’s in the front of the line is generally the one that gets the least return on their investment. So, if the bondholders are closer to the front of the line in bankruptcy than the stockholders, then the bondholders are taking on less risk, and as a result, they get less in return.
So, bonds are alone. And if a company goes bankrupt, you might get your money back. But it just depends on how much money that bankrupt company still has in the bank. Now a bond is a loan. So, what we need to talk about the terms. The terms of the bond may be 30 years. That means you give AT&T, keep using them as an example.
$100,000, let’s say $100,000. You give them $100,000 in 30 years, they’ll give you $100,000 back with 4% coupon. They call the coupon 4% interest each year. So $100,000, you get $4,000 each year. It’s awesome. 30 year bond. That’s a long term bond. A ten year bond is going to be more intermediate. A 3 or 4 or 5 year bond is going to be short term bond.
The longer the term, the higher, what they call interest rate risk. And then I might get into that in another podcast. But longer term bonds typically have more of a risk. And you get a little bit better yield because you’re lending the money out for a longer period of time. They are able to categorize bonds in terms of risk.
Those with real high risk, called high yield bonds. Companies that are slightly more financial, you know, might have financial problems. Those that are really good quality companies are called investment grade bonds. So, bonds usually have usually have less returns in stocks, as you would imagine, because they have less risk. And if you’re young I mean, this is just an opinion.
I really don’t think you should have much bonds if you’re young. You know, I like stocks. That’s just my personal opinion. Your financial advisor may sit down with you and have a different recommendation. But if you’re young, stocks work much better than bonds. As you get older and you want to kind of dilute the portfolio from a lot of risk, then adding some bonds in there might make sense for you.
The third category I mentioned, there’s four categories. Stocks, bonds, cash and alternative investments. The third category is an investment just not a good one. And that’s cash. That’s just a place for you to park your money. If you have an emergency, you can go to Bankrate.com and see what cash is paying. Now, there’s a little different. There’s nuanced ways to define cash, but, you know, today’s rate.
You’re going to get a 3% return. It’s just not enough to keep up with inflation long term. So, cash is a long term investments really stupid. Which really leads me to the greater point is that long term, what I define, and I think most experts would define long term some variation of stocks in your portfolio, long term really helps build wealth and keep up with the rising costs of inflation.
The problem is, is we don’t know which stocks to buy. And so, what we do, what we did, like I guess it was in this, oh gosh I was going to say 70, the 70s is when 401(k) came out. But maybe the 20s there. The idea of mutually funding an account with thousands of people across the country became available.
That was called a mutual fund. People mutual fund an account. That way you can own 50, 200 or 500 different companies. And that way, if one went bankrupt like Enron, you’d be okay. You wouldn’t lose all your money. So mutual funds were a way to accumulate wealth long term. And it really worked well. And it still works well.
But I guess 20 years ago, 30 years ago now, time flies. Computers became more prevalent. So, the guy that was a mutual fund manager in New York with a nice suit and drove whatever car he wanted, the Bentley, they started questioning whether or not he was bringing in as much value because computers could start to trade stocks instead of him.
And so they came up with something called an exchange traded fund. They have the same last name fund, right? Mutual fund. In exchange traded fund. They’re related. One is with a computer. And again, I’m oversimplifying it. One is not. Which one’s better? Well, there’s a lot of research on that. Exchange traded funds have been beating up the New York manager in a lot of categories.
Not all of them, but many of them. So today, most people own exchange traded funds. Exchange traded funds are really an incredible way for you to own stocks, but not just one at a low cost, not get overly wrapped around the axle and investment strategy and be able to do life. You just do life in a way that you can help your money work for you while you’re doing life, raising kids and, you know, going to soccer games, working, all that stuff.
But exchange traded funds have been really, really helpful. And so, to accumulate wealth along the way, diversifying and different types of stocks using exchange traded funds really are one of the best ways to be able to be a long term wealth builder over an extended period of time. There’s just one thing I want to mention about this.
It’s not the stocks, bonds, and cash that really matter. It’s you, being disciplined enough to put money in there. And many people just don’t do that. They just don’t do it soon enough. They don’t do it enough. They make excuses. And for you, if you’re thinking about accumulating wealth, you got to stop making excuses and you got to carve out money and start putting it in there and then be disciplined with that.
So if you can do that long term, I’ve seen a lot of people be very successful. There’s one other thing I might mention that’s probably the most important factor, so don’t discount that. You might want to put a wall around your exchange traded funds. And years ago, they call this a traditional IRA. You put money in a fund.
At the time it was a mutual fund. You got the tax deduction. But when you pulled it out in retirement, you had to pay taxes on it. That was called a traditional IRA, very similar to a 401(k), put money in and you get a deduction, you pull it out, you have to pay taxes. So, a senator from Delaware said I’d like to play the game differently.
And this was like 1994. He said, maybe 6, 1996. He said, I’d like to play the game differently, and I’d like for you to name this game after me. And his last name was Roth. So, they called a Roth IRA, a Roth IRA. Here’s how this works. You don’t invest in a Roth IRA, so don’t misunderstand. You put money in the Roth IRA.
You don’t get a tax deduction. You buy your exchange traded funds that own stocks, and then as it grows, you don’t have to pay taxes on it while it grows, which is awesome. But when you pull it out of retirement, you don’t pay taxes on it then either. So, if you wanted to know one of the best ways to accumulate wealth is to be able to use stocks through an ETF with a wrapper around it called the Roth IRA.
There’s rules around that. So you want to make sure you know those rules. Financial advisor can walk you through that. But that would be the framework. Every single one of our clients at PAX Financial Group, has a custom framework that’s based on their unique situation because everyone’s different. So that’s why personalization is so important. But this should give you enough clues on how to customize the wealth building plan for you.
So that way you can wake up one day and say, I did it! I was able to save wealth and I did it in such a way that made sense, didn’t add too much risk to my life, and I was able to enjoy life and make a difference. I hope that helps. I hope that gives you a framework.
If you have more questions on this, please email me. I appreciate your emails. Darryl@PAXFG.com and remember you think different when you think long term. Have a great day.
Listen on:
