So, today we're going to talk about stocks,
and bonds, and mutual funds.
And stocks and bonds are investment asset classes.
Stocks enter into a portfolio in order to
provide growth, but they are volatile -
they move up and down.
Over the long term, they should provide higher
returns than bonds.
Bonds in a portfolio are there to generate
income, but also stability and diversification.
Oftentimes, when stocks go higher, bonds fall.
And so the idea of combining stocks and bonds
in a diversified portfolio makes sense for
the vast majority of investors.
Mutual funds, on the other hand, are not an asset class.
They're an investment vehicle.
And so, when it comes time to decide how to
invest in the stocks and bonds you're going
to own, you have three choices: you can buy
individual securities, you can buy mutual
funds, or you can buy ETFs - Exchange Traded Funds.
The choice varies, depending on what you're
trying to accomplish and the asset class,
but broadly speaking, individual securities
are where you go out and you buy Microsoft, or GE,
or you buy a municipal bond, and you own just that.
There are no ongoing fees associated, but
you are responsible for doing your own research
and monitoring, and it can be hard to be fully diversified.
Mutual funds and ETFs provide professional
management diversification.
And although there are ongoing costs, with
many mutual funds, the costs can be quite low.
As with most aspects of investing, the choice
of a mutual fund, an individual security,
or an ETF isn't a straightforward or simple
one, and the choice is going to ultimately
depend on you, the investor.
But it's definitely worth considering, because
the vehicle you use is going to
impact your investment returns.
Importantly, and in conclusion, if you buy
a mutual fund, an individual security,
or an ETF, you still own stocks or bonds.
So when you're working on your asset classes,
and your asset allocation, don't worry so
much about what vehicles you've used.
Think of it as "how many stocks do I own"
and "how many bonds do I own."
And then a separate, discrete decision will
be, individual securities, mutual funds or ETFs.
For more on stocks, bonds and mutual funds,
look at the blog on PureFinancial.com.
