Investing is a means for individuals to increase their wealth. Investing comes in all styles and flavors, and is as varied as the individuals who invest. It is basically placing your money in an investment vehicle (such as a stock, bond ETF or Mutual Fund, which we will discuss later), instead of letting it sit in a low returning, traditional bank savings account.
There are investments for all types of investors, ranging from conservative investors that don’t want to take a lot of risk, to aggressive investors that are willing to take on more risk in search of potentially greater returns. Determining where you fall on that spectrum varies from investor to investor.
In this and other tutorials, we will help you to understand what investing is, what your options are and what the best course of action is. Our goal is here is to provide informative commentary and education, which in turn you can use to can help you navigate which investing strategies and vehicles may be right for you.
In today’s hectic world, it’s very easy to become so consumed with work, children and other commitments, that we leave very little (if any) time to think about our financial future. Investing is simply a structured way to make sure some of your hard earned money gets set aside, grows and works for you.
It doesn’t matter whether you have $5 to invest or $5,000,000 to invest, the only thing that matters is you actually get started! History suggests, the sooner you get started investing, the greater your investments will grow over time, due to the magic of compounding returns, a concept we will talk about later in this article.
Nowadays, with the advent of automated investing, getting started is quick, simple, personalized and automated. In fact, in a matter of a just few minutes today’s investor can take a risk profile, open an account, choose a personalized investment strategy and fund their account ... all online!
Additionally, investors can choose to have a fully automated investment strategy, which operates on autopilot or they can choose to walk through the process with an advisor. Either way today’s modern investment technology makes investing simple!
Types of Investments
As aforementioned, there are a myriad of ways that you can go about investing, including putting money into stocks, bonds, mutual funds, ETFs, real estate or other alternative investment vehicles. Typically in the beginning stages of wealth building, and for the purposes of our discussion here, we will be concentrating on stocks, bonds, mutual funds and ETFs.
Stocks ‐ investing in the stocks of individual companies has long been the preferred method of growing wealth through investing. In stock investing, investors buy shares of stock, which gives them an ownership stake in the company. Investing in quality companies, investors hope (anticipate) the value of that company will rise over time as its business prospects, sales and earnings grow (along with the value of their investment in the company).
Companies (stocks) to invest in typically come in two forms, large, well established companies that have a long operating history, and smaller, less established companies that are early in the existence. Generally speaking, larger companies tend to be lower in risk than their smaller counterparts, but on the flip side offer slower growth potential.
Typically a portfolio of individual stocks will on anywhere from 20 to 50 stocks.
Bonds ‐ Bonds are debt investments in which an investor loans money to an entity (typically a company or government) which borrows the funds for a defined period of time at a variable or fixed interest rate.
The proceeds from these bonds are typically used by companies, municipalities, states and governments to raise money to finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.
There are typically two main factors that investors need to be aware of when investing in bonds’ credit quality and duration. The former refers to the bond issuer’s ability to repay the loan’s interest and principal, while the latter refers to when the period of time that the bond repaid to the investors and the interest payments stop.
Companies with poor credit quality tend to offer bonds that pay higher levels of interest since the possibility of default is higher, whereas as companies with a long history of successful borrowing and repayment, tend to offer lower interest payments.
Comparably, bonds with longer maturities tend to pay higher interest rates than bonds with shorter maturities.
Mutual Funds – Mutual Funds are an investment vehicle made up of a pool of moneys collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets. Mutual funds are typically run by a professional portfolio manager, and research team, which determine what investments to buy, sell or hold. They tend to hold a lot of securities offer the potential for a more diverse investment. Academic studies suggest diversification among holding is a good way to reduce the risk of investing in a concentrated, smaller pool of investments.
Mutual funds can invest in all stocks, both stocks and bonds (called a balanced fund), or all bonds.
ETFs ‐ Exchange Traded Funds or ETFs as they are more commonly referred to are investment vehicles that track market indices, such as the NASDAQ‐100 Index, S&P 500, Dow Jones, etc. When you buy shares of an ETF, you are buying shares of a portfolio of investing instruments that track the yield and return of its underlying index. ETFs allow investors to buy a diversified portfolio with the simplicity of trading a single stock.
What approach is right for you?
Determining what investment vehicle is right for you depends on three simple factors; first, what is your goal for investing, and second, how long a time frame do you have until you need to access the money in your investments, and third, how much fluctuation in your investments can you tolerate?
Shorter‐term goals usually mean more conservative (and liquid) investments, ones that won’t be as adversely affected by periods of market volatility and contraction. Conversely, longer‐term goals and time horizons tend to align with choosing more aggressive investments as historically, even with negative return periods, equity and bond markets have provided consistent wealth creation over the long term.
What you pay for your investment product matters. Investors usually pay one of two types of fees, a commission or a management/advisory fee. A commission is a service charge (per transaction) assessed by a broker or investment advisor for investment advice and/or handling the purchase or sale of a security, or basket of securities.
On the other hand a management fee is typically a flat % based on the assets investors have in a strategy. For instance, an investor in a strategy/portfolio with $100,000 being charged a 1.00% management fee would pay $1,000 per year to the investment advisor/manager for the investment services rendered.
In order of costs, mutual funds tend to be the most expensive to investors, with ETFs the least. However, recent advances in trading technologies have made investing in individual stock portfolios extremely cost efficient. In fact these investing vehicles are now approaching ETF cost levels, and in some cases undercutting them, which is good news for investors!
While many money managers will argue their more expensive fees are worth the increased cost, countless academic studies show nearly all money managers can’t consistently beat the returns of the passive S&P 500 Index*. Thus the less you pay for your investments, more you are likely to return over time!
*The S&P 500 Index is a collection of the largest companies weighted by market capitalization publicly traded in the US.
This material is intended presented for educational purposes only and should not be used or relied upon to make investment decisions. Any references to returns are not to be relied upon as past returns may not be an indication of future returns.
Investors should carefully consider their personal investment objectives, risks, charges and expenses. Investing can result in the loss of some, or all of your principal, please consult a financial professional before investing.