Recently we talked about ways to start investing — some options include striking out on your own using an online trading platform, hiring a financial advisor, or taking advantage of a low-cost robo-advisor like the one offered as part of MoneyLion.
This week, let’s look at the four most common investment types: exchange-traded funds (ETFs), mutual funds, stocks, and bonds.
ETFs and mutual funds
Mutual funds and ETFs are both “baskets” or “pools” of shares of many individual stocks and/or bonds. With one mutual fund or ETF, you can invest in a diversified set of multiple investments — without doing the work of handpicking individual stocks and bonds. Sweet!
When you buy or sell a mutual fund, you generally transact at the price set at the end of the trading day. On the other hand, ETFs are bought and sold on an exchange (more like individual stocks), and the price of the ETF is determined by investor demand at any time during the trading day. Many investors like that ETFs offer more flexibility in this regard.
Typically, ETFs have lower expenses than mutual funds. Mutual fund expenses may include commissions, redemption fees (often there’s a penalty if you sell before 90 days of ownership), and operational expenses like paying the salary of the person(s) who manages the fund. In general, ETFs have no commissions and lower operating expenses.
Stocks and bonds
Stocks are shares of individual companies. When you buy a stock, you’re buying a tiny slice of ownership in a company. Since each share of stock represents an ownership stake in a company, the value of your stock can go up significantly over time if the company performs very well. Of course, if the company runs into trouble or goes bankrupt, you could lose some or all of your money instead.
On the other hand, bonds are debt instruments, like an I.O.U or loan. When an entity (like a city) needs to raise money for a project, it issues bonds to raise funds. In return for the investor’s loan to the entity, that entity (in this case, the city) promises to pay the investor back all of its money plus interest by a certain time. With many types of bonds, these repayments are made at regular intervals, and therefore bonds are often used by investors who seek reliable interest payment income over time.
Individual stocks and the overall stock market may be riskier than bonds in terms of their volatility and the risk of losing money in the short term. However, stocks offer the potential to provide much higher long-term returns. The prices of stocks and bonds usually move in opposite directions, so it’s important to invest in a mix of both to help you grow your money as well as cushion against losses as the markets fluctuate.
Which investment is right for me?
Your investment mix should depend on your age, risk tolerance, and goals, but diversification is critical. In general (but not always), a portfolio mix of roughly 60% stocks and 40% bonds (whether via ETF, mutual fund, or multiple individual investments) is the industry standard for seeking moderate growth while attempting to minimize large fluctuations in portfolio value.
With MoneyLion, your portfolio is designed to match your unique profile, and you will be invested in low-cost ETFs in a stock-bond allocation designed to help minimize risk. The ETFs will also diversify your investments globally so that some are invested in U.S. markets and some are invested internationally.