FOUR INVESTMENT LAYERS
- Treavor Dodsworth CFP®, CPA, CKA®
- Mar 28
- 2 min read
You may have heard the advice- "Don't invest in something you don't understand." Even just traditional stock investments in a 401k or IRA can create confusion. The easiest way I have found to clear up some of this confusion is by thinking of them like a jawbreaker with four layers.
The farthest layer on the outside is the custodian. An example of a custodian would be Fidelity, Schwab, Vanguard, etc. This is the company that holds your account and is typically in charge of your record keeping.
The next layer is the type of account. For example, 401k, IRA, Roth, HSA, 529, etc. Generally what differentiates the type of account is how it is treated from a tax perspective. For example, an invested HSA can grow tax free and be distributed tax free (if used for medical).
The next layer is the ETF or Mutual Fund that you own within the account. These ETFs or Mutual Funds could be index based, active management, or some combination thereof. They could be focused in the US, a specific international country, or not have any geographical constraints. They could focus in on a specific category of the economy or be broader.
The fourth layer is the underlying investment (stocks, bonds, etc.) that the ETF or Mutual Fund actually owns. You may skip over the third layer and own the underlying stocks and bonds directly. This fourth layer is predominantly what is driving the rate of return of the account. For example, it is possible for your 401k at Fidelity to have the same return as your Roth at Schwab if their underlying investments are the same.
Custodian > Account Type > Investment Product > Stocks, bonds, etc. owned by that product
Given these are the investment layers it may be helpful to start by listing out your investments with each of these in a different column.
Who is my custodian?
What type of account is it?
What is the investment product in the account?
What is the underlying allocation of the product? - This one may be too difficult as it can be 10,000+ stocks in some cases.
Monthly Financial Coaching is not a registered investment advisor. This is not specific investment advice about a security. Please consult with a registered investment advisor before making any investment. Investing may cause loss.