The stock market is a bit complicated, but it is a large part of modern financial systems. It is a place where companies are bought and sold, letting ordinary people and large institutions become part owners of companies. This also provides a platform for businesses to raise money and for investors to make money.

The stock market is a collection of markets and exchanges where activities like buying and selling "shares" occur. When someone is talking about the stock market or says things such as "the market is up/down today," they are usually referring to a stock market index, such as the S&P500, which represents the largest American companies, or the TSX60, which represents the largest Canadian companies. There is also the ACWI (All Country World Index), an extensive index that tracks 23 developed and 24 emerging nations. Note that the ACWI, or a modified version, is what I recommend for a strong core in a portfolio (potentially alongside other things, but we're not there yet).

So, what's the purpose?

The primary function of the stock market is to allow companies to raise money to fund their operations, invest in new projects, or expand their business by selling shares of stock, also known as equity, to investors. This process begins with an IPO or an Initial Public Offering. This is where the releases a certain amount of shares to be sold at a specific price. For example, a company can sell 1 million shares at 10 dollars each, giving them 10 million dollars in cash.

Once these shares are listed on a stock exchange, investors buy and sell them. This market allows investors to sell their shares to earn profit. If the value of the company rises, the price of the shares could rise, too, so you can sell them for a profit.

The stock market isn't a niche market either; it has hundreds of billions of dollars traded and is subject to strict regulation. Many government agencies regulate what happens in these markets, working to prevent fraud, insider trading, and other unfair practices. The United States has agencies like the Securities and Exchange Commission (known as the SEC) and the Financial Industry Regulatory Authority (FINRA). In Canada, there are the Canadian Securities Administrators (CSA).

People invest in the stock market for many reasons, primarily to earn capital gains through the appreciation of their shares and to collect income from dividends. Is the stock market volatile? Sure. Is it risky? It can be, in the short term. Despite that, the stock market has given much higher average returns over the long term than other investment/savings options.

The stock market is a vital component of the global economy, allowing companies to grow and investors to participate in their success. Understanding the basics of how the stock market works is essential for anyone interested in investing, as it can help individuals make informed decisions and build a diversified portfolio to achieve their financial goals.

There are a lot of different portfolios an investor can follow. Amongst them all, one stands out to me; the Core and Explore portfolio. This strategy offers a structured yet flexible blueprint for building a diversified portfolio that can work with different financial goals and risk tolerances. It’s as versatile as you want it to be.

The Core: Stability and Diversification

The heart of this strategy is the “core.” This is the foundation of your investment and will represent a significant portion of the portfolio. I suggest 50% as a minimum, but I recommend more. The core will offer stability and long-term growth. It will consist of broad, diversified, low-cost mutual funds or exchange-traded funds (ETFs), and later on, I will share many recommendations and help you understand which is for you. We want to aim for something that will mirror the performance of the global stock market, with a little bit of bias to your home country. For this series, I will be using home bias towards Canada. It represents about 3-4% of the global market cap but will be about 25% - 30% of the core. I will go over the pros of home bias with additional resources later on.

A strong core will give you numerous advantages:

• Lower Costs

  • We will stick to low-cost funds, which have minimal management fees (~0.20%). We will also purchase funds that trade in our currency, so there will be no foreign exchange fees.

• Good Returns With Reduced Volatility

  • We will be holding funds with diversified holdings. We will receive good, stable returns and be less susceptible to market fluctuations due to the free lunch that is diversification. 1

• Simplicity

  • A core portfolio will simplify the investment process. It will be easy to manage and rebalance, as there are numerous 1-fund solutions that we will explore later.

The Explore: Personalization, Growth Potential, and Fun

The ‘explore’ portion of the portfolio will allow you to pick your own investments. This part of your portfolio should be smaller.

Here’s the truth. You’ll hear people say that “investing is solved” and that “people should just buy XEQT, go to sleep, and wake up 30 years later”, and they are correct. However, what they don’t realize is that “going to sleep, and waking up 30 years later” is the hard part. In a traffic jam on a highway, people are tempted to switch lanes, especially if they see the lane next to them moving quicker. However, studies have found that this does not allow you to arrive at your destination any quicker and does increase the chance of an accident.2 People just want to do something.

So, the exploration part of the portfolio comes with its own advantages.

• Active Engagement

• Personalization

• Higher Growth Potential

Balancing the Two

The Core and Explore strategy isn’t just a one-size-fits-all. It needs to be shaped to suit different people, depending on their risk tolerances, time horizons, and how much “exploring” they want to do. For example, younger investors may be willing to take on more risk, as they have a longer time horizon. At the same time, they may have shorter term goals, like buying a car, so how should they structure your portfolio then? This is why, in the upcoming posts, we will go over setting good goals, and having a clear risk tolerance.

This strategy has a clear psychological advantage over others. Investors who want to do something will be able to satisfy this urge, and can help prevent them from exposing themself to too much risk.

The Core and Explore portfolio strategy provides people with a balanced approach that combines the best of both worlds: the stability, good returns, and efficiency of passive core investments, and the personalization and active management with explore selections.

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Preface

• Introducing The Core and Explore Portfolio

• The advantages of this investment strategy

  • Will also go over a 100% ETF / Mutual Fund Strategy
    

Read it here!

https://shu6.substack.com/p/what-is-the-core-and-explore-portfolio

Some Education

• Why should I invest?

  • Investing vs Saving

• What is the stock market? (Below)

  • Can I outperform it?

• The roles and differences between stocks, bonds, cryptocurrencies, ETFs, HISA’s, Gold, and mutual funds.

• Compare self-directed investing, robo-advisors, and financial advisors.

• Emphasize the critical role of diversification across asset classes and globally.

• Dividends

• The power of a 2% fee charged by mutual funds.

• Other common misconceptions and errors in investing.

Setting Your Goals

• Setting good goals and good expectations

Figuring Out Your Risk Level

• The importance of having an emergency fund

• Assess your risk tolerance

• What percentage of your portfolio should be core versus explore?

• The option of currency hedging.

• Discuss the 120-age (and its equivalents) rule for bond allocation and other strategies to adjust risk nearing retirement or specific goals.

  • Consider the strategy of maintaining 100% equity until retirement.

Choosing an Investment Account

• The advantages and disadvantages of different investment accounts.

• The tax implications of investing.

Building the Portfolio

• Guide on selecting high-quality ETFs and stocks.

  • Go over different types of ETFs

    • Some track indexes, some are covered-call ETFs, etc.

• Home Bias

• Questioning the necessity of individual stock picking.

• The importance of portfolio rebalancing.

  • How and when do you rebalance?

• Compare dollar-cost averaging with lump-sum investing.

• How to thoroughly understand investment choices and avoid overlap.

  • Reading ETF fact sheets

• How to not get overwhelmed by all the different products and their different performances.

Portfolio Monitoring and Adjustment

• How to track portfolio performance against benchmarks and personal goals.

• When and how to adjust the portfolio.

Post-Purchase Actions

• Avoiding excessive stock picking and succumbing to FOMO.

• Advise on ignoring market noise.

Technology and Tools

• Investment apps and platforms for portfolio management.

• Trusted news sources.

• Setting up automated alerts and watchlists to stay informed.

Continuing Education

• Resources for further learning, including books, podcasts, and websites.

• Online communities.

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  I will continue to post more parts of this series as time goes on. Feel free to subscribe and get updates, and also feel free to share this to someone who may benefit.

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