As in the story of the “Wizard of Oz”, entering the forest conjured up scary thoughts of the unknown. In Dorothy’s case the unknown was Lions, and Tigers, and Bears; Oh My! Her new venture into the forest created anxiety and fear about the worst possible outcome for her experience.
Similar thoughts of anxiety and fear can grip us as we enter into the new world of investing. With so many investment choices, how can we choose what is right for us and not cause us to lose all of our money if we choose the wrong investment? We start thinking: Stocks, Bonds, and Funds; Oh My! Where do I start?
This is where an investment advisor can lend a helping hand. As a fee-based fiduciary, an investment advisor works on behalf of the client and recommends investments suitable for the client and consistent with achieving the individual’s financial goals.
So how do you decide between stocks, bonds, and funds for your investments? A lot of it depends on the individual’s risk tolerance, investing time horizon, and personal wealth-building goals. Historically, stocks outperform bonds over a long period of time (see the graph below), however stocks have more volatility than bonds. This means that stock prices can have large price moves up or down depending on the economic climate and the operations of the business. That’s why with stocks, you should be somewhat familiar with the business that you invest in and watch the price performance more closely.
What about bonds? Bonds are considered less risky than stocks, however historically bonds have a lower investment return than stocks over the longer-term (see the graph above). onds are also more sensitive to changes in interest rates; therefore knowledge of the interest rate environment is important when owning bonds. The price of bonds moves in reverse of interest rates. Therefore, if interest rates are increasing like the current economic environment; the bond price will go down and reduce the value of your investment.
Finally with Funds or ETFs, these investments add an element of diversification to your portfolio to help smooth out the big price swings you get when owning individual securities like stocks or bonds. This is because Funds or ETFs consist of a basket of stocks or bonds that can reduce the big price moves since the investments in the fund move differently from each other. This feature means you do not have to monitor the funds as closely as you do with individual securities. For new and busy investors, this feature makes Funds and ETFs an ideal investment holding.
Let’s take the fear and anxiety out of investing. We don’t have to worry about Stocks, Bonds, and Funds; Oh My! We can instead think about securing our financial future. Let Paycheck to Wealth prepare a personalized investment selection to help you achieve your wealth-building goals. The time is now, let’s get started.