Investing- Moving Beyond the Basics

Stocks vs. Bonds

Stocks

Buying stocks is buying ownership in a company. As a shareholder, if a company does well financially, the stock will generally follow. And as a shareholder, you get a say in the company’s affairs by being able to vote on items that come up for shareholder approval. Stocks can provide a high potential return over the long term, especially if you can handle short term market volatility. For example, early investors in companies such as Microsoft, Dell and Google have been rewarded handsomely. For novice investors, your best bet is to put your money into a stock mutual fund, where a money manager pools all the invested money and invests it in a broad range of stocks. This route has several advantages including the fact that your money is professionally managed and that these funds are diversified in a broad range of companies, which provides a hedge against volatility. Stock market mutual funds such as the S+P 500 have generally returned on average about 8% annually, however, like any investment, you can lose money in a any given year.

Bonds

A bond, on the other hand, is a loan to an entity such as a company or government that pays a set rate of interest. The main types of bonds are corporate bonds, municipal bonds and Treasury bonds (bonds, notes and bills). Overall, bonds tend to be somewhat less risky than stocks over the long haul, returning about 5% annually (again, this is an average, bonds can lose money too). Treasury bonds are the safest type of bond as they are guaranteed by the US government. Corporate bonds, which are not government guaranteed, pay higher rates of interest than treasury bonds since investors want a premium for the additional risk that they are undertaking. Finally, municipal bonds can be a good bet for investors. While they do not normally pay rates as high as corporate bonds, they are usually exempt from federal and state taxes, making their effective yields attractive vs. other investments.

So What’s an Investor to Do?

If you’re new to the investment world, all these choices may be making your head spin. So one good option is to consider opening a mutual fund. Basically, your money is pooled with the money of other investors and actively managed by someone that follows the market. Advantages of mutual funds include the fact that they are actively managed by professionals, are a low cost way to start investing and are diversified because the fund owns a variety of different stocks. Many mutual fund companies will let you invest small amounts each month with only nominal fees. But like all investments, there is some risk, so you need to understand how and where your mutual fund is invested. Some questions to ask before investing are

• What are the minimum investments?
• What is the fund invested in (stocks, bonds, commodities, money market)?
• How volatile is the portfolio (usually this is a function of what type of assets the fund is invested in)?

Once you are armed with this basic information, go ahead and start with some small mutual fund investments to get your feet wet. And as you get more comfortable with the experience, hopefully you’ll be tempted to continue on the path to start securing your family’s future.

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