Did you watch last week’s video about how you can become a millionaire? If you missed it, you can WATCH it here.
Now that you know why you need to start investing, it’s now time to help you get super clear about what you can actually invest your money in
Below I explain the difference between a stock, bond and mutual fund:
A stock is ownership in a company. When you buy a stock, you buy a piece of the company. So if the company does well, you do well. Congruently, if the company tanks, your stock tanks. Just like bonds, there are many types of stocks because there are many different types of companies out there. Large company stocks (large cap), mid cap stock, small cap stock, international stock, emerging stock, tech stock, etc. Historically, stocks have an annual average return of 10.8%.2 However, remember that with more return comes more risk. So when investing in stocks, keep in mind that you have to be able to handle the extra risk or volatility to reap the potential reward in the long run. Using the Rule of 72, if you have $5,000 in stocks that average 10% return overtime, it will take you 7.2 years to double your original investment to $10,000. By the end of 36 years you will have potentially $160,000. Compare that to the $10,000 you will have after 36 years if you leave your money in just cash investments. Now you can start to see why taking on the extra risk can become worth it in the long run.
The best way to describe a bond is to think of it like a loan. You loan your money to the government or a company, and in return they pay you interest for the term of that loan. Typically bonds are considered conservative types of investments because you can choose the length and term of the bond and know exactly how much money you will get back at the end of the term or “maturity.” There are many types of bonds; government bonds, corporate bonds, short-term bonds, long-term bonds, municipal and inflation protected bonds, etc. Generally bonds are less risky than stocks and the main way you lose money on a bond is if the company or government issuing the bond defaults on their obligations. Historically, bonds have an annual average total return of 6.3%.1 Again, using the Rule of 72, and have $5,000 in bonds that average 6% return overtime, it will take you 12 years to double your original investment to $10,000. Better than cash but still not that great.
Bonds are subject to market risk and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Mutual funds represent another way to invest in stocks, bond, or cash alternatives. You can think of a mutual fund like a basket of stocks or bonds. Basically, your money is pooled, along with the money of other investors, into a fund, which then invests in certain securities according to a stated investment strategy. The fund is managed by a fund manager who reports to a board of directors. By investing in the fund, you own a piece of the pie (total portfolio), which could include anywhere from a few dozen to hundreds of securities. This provides you with both a convenient way to obtain professional money management and instant diversification that would be more difficult and expensive to achieve on your own. Every mutual fund publishes a prospectus. Before investing in a mutual fund, get a copy and carefully review the information it contains, such as the fund’s investment objective, risks, fees, and expenses. Carefully consider those factors as well as others before investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to affect some of the strategies. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to affect some of the strategies. Investing involves risks including possible loss of principal. This information is not intended to be a substitute for specific individual tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of returns used do not reflect the deduction of fees and charges inherit to investing.