Stocks vs mutual funds vs bonds

Stocks vs mutual funds vs bonds

Author: CindyRella Date of post: 19.07.2017

June 12, in Investing in Stocks 2 Comments. When new investors think about first taking control of their savings or retirement, one of the first questions they ask themselves is.. A little bit of initial research will lead the new investor to discover that the most common types of investments outside of a savings account are bonds, mutual funds, and stocks.

Bonds vs. bond funds: Which is better? - Ultimate Guide to Retirement

In this comparative guide, I will provide a detailed comparison between all three investment mediums, including what they are, what the risks are, and what the typical return is like. Before we jump into the comparisons, it is first important to understand the basis for each investment. Understanding why people, organizations, or governments are looking to fork over money with interest in the future in exchange for money today is extremely important to deciding which investment is right for you.

A bond is nothing more than a loan. A company or government may want money today to fund new projects, but does not have the money to fund the projects. The organization decides that they will issue bonds and pay the money back over time with interest.

This makes sense for the company or government for a variety of reasons. If the government of a small town wants to build a new senior center, the annual budget for that town is not going to have enough extra revenue to build an expensive structure.

The natural question becomes.. Why would the government or company not just get a loan from the bank?

stocks vs mutual funds vs bonds

The answer of course is to save money. Loans from banks carry higher interest than the typical bond. Bonds are among the lowest-yielding forms of investment, with typical quality bonds paying anywhere from 1.

The yield depends upon both the risk and the term — the longer you have to wait to get your money back and the higher the chance of not getting paid back, the better the yield.

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As a whole, quality bonds have very low risk factor of not getting paid back. If the company or government issuing the bonds goes bankrupt, you could lose your initial investment. While a CD has a different name, these are practically the same thing as a bond except that a CD is issued by the bank. You give money to the bank for a pre-agreed upon amount of time and then the bank proceeds to lend it to would be homeowners, car owners, or business owners at a higher interest rate.

They pay you a smaller interest rate than the interest rate they are charging for the loan. CDs tend to be a very poor investment when interest rates are low like they are at the time of this writing and even less appealing because the bank is making money directly off of your money — there are better options out there.

Mutual funds are theoretically diverse sets of holdings that allow investors to invest in a diversified position without the hassle of buying or capital requirement needed to buy into many different bonds or stocks. While mutual funds sound great on paper, I am not a big fan of these funds.

Investors are typically charged an annual fee by the fund in order to pay the managers and for the company running the fund to take a profit.

The problem with the amount charged is that it tends to be so high that it destroys the return. Of course, there are some exceptions to the rule. Some bond-based funds can have an investment fee of just. This can be useful for retirees or near-retirees who do not wish to take on the risk of investing in the stock market and want a diversified bond position holding many different bonds reduces risk of losing money due to one of the bond-issuers defaulting. Another fund subset that makes for a good investment is an index fund.

Most mutual funds that involve a manager picking individual stocks cost much more to manage and as a result are not worth the fee. Stocks are a completely different animal from the bond. Unlike the bond where a company, organization, or governmental body is asking for a loan and offers interest, stock offers something entirely different. Rather than offering interest, companies that issue stock are offering ownership in exchange for money. Because ownership of stock just represents ownership of the company rather than a loan, there is no guarantee of return when buying stock.

A Quick Guide to Asset Allocation: Stocks vs. Bonds vs. Cash -- The Motley Fool

As a shareholder, you share in the ups and downs of the company. The company may start paying a dividend or raise an existing dividend if earnings are strong. Companies sell stock for two primary reasons: The raise money portion is obvious: Rather than get a loan, the company can sell a portion of itself to avoid taking on debt. Companies also go public in order to compensate owners and individual investors. The founder might not want to sell the company, yet still wants to access some of the wealth he or she has created.

In short, if you have no risk tolerance and need your money in the near future for retirement, then you should be invested in bonds or a low-fee bond fund. If you have a long term for your investment and do not want to learn about stocks, invest into a low-fee index fund.

If you have a long term for your investment and are willing to learn more about stock investing, investing in individual stocks is worth the time and effort. How will these different types of investments fare over 20 years?

Stocks, Bonds And Mutual Funds | Retirement Basics

Over this term, a diversified bond holding would likely pay out around 2. Of course, this table assumes a few things. Firstly, it assumes you have 20 years to invest.

stocks vs mutual funds vs bonds

Secondly, the stock portion assumes you are a moderately successful investor. Beating the market average by a few percentage points is a solid feat. If you are interested in learning more about investing in stocks, be sure to read my stock-picking manifesto.

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Abacus Planning Group | Understanding the difference in stocks, bonds, mutual funds, and ETFs

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