Stock, Bonds & Mutual Funds
Stocks and bonds are the two main vehicles that you are likely to invest in. Stocks offer an ownership stake in a company, while bond are essentially loans made to an organization or government. In general, stocks are considered riskier and more volatile than bonds. However, there are many different kids of stocks and bonds, with varying level of volatility, risk and return.
- A bond is a debt security – the issuer owes the holders a debt, and is obligated to repay the principal and interest
- Bonds are purchased directly from the bond issuers, typically by individual investors, speculators and institutional investors
- Bond holders are, in essence, lenders to the issuer
- Bonds can be issued by public sector authorities, credit institutions and corporations
- You can choose the length and term of the bond and typically known how much money you will get back at the end of the term (also know as the maturity date)
- Stock is capital raised by a corporation through the issuance and distribution of shares through financial markets
- Stock are purchased through a centralized stock exchange, typically by brokers, who represent their clients
- Stockholders own an equity stake in the issuing company
- Stocks may be traded at any time – there is no fixed term, maturity date or guaranteed return
If trading individual stocks and bonds is not your cup of tea, investing in mutual funds is another option to consider.
Mutual Fund (collection of stocks and bonds)
- Your money is pooled with the money of other investors into a fund that is invested in anywhere from a few dozen to hundreds of different securities
- Fund is managed by an expert fund manager who reports to a board of directors
- Provides you with professional money management as well as instant diversification
The Effect of Time on Investing
Investing can seem like a very risky, complex and fast-moving process. With endless combinations of investment vehicles to choose from, it can be difficult to take your first step as an investor – especially with the knowledge that all investments carry the risk of losing some or all of your money. So why bother?
Well, there are many compelling reasons to make investing a part of your overall financial plan. Investing can:
- help preserve your wealth by overcoming the effects of inflation
- help you save for long-term goals (such as retirement or your children’s education)
- generate income
So how can you get past all the negatives associated with investing and make it work for you? A helpful first step is to realize that, as a young investor, you have time on your side.
Time and Luck
We’ve all heard the stories (or seen the informercials, or bought the e-book) about those people who took a chance on a risky investment and by some stroke of luck woke up the next day as millionaires. It’s easy to be drawn to ‘get rich quick’ stories because we all secretly wish we could be the stars of those tales. Those success stories help establish the myth that being a successful investor is a lot like being a hotshot gambler – that you need to risk it all to get a worthwhile reward, and that some people are born with the innate ability to predict the market, make the right moves, buy and sell at the exact right time, and strike it rich.
The truth is that serious investing required a lot of time. There’s an entire education behind active trading. If you were to invest into the stock market without any prior research, you might as well be playing the lottery. Educating yourself about the stock market is no simple task and it requires ongoing research. It’s not only about understanding the way economies and global market places work – it’s also about staying up to date on what’s happening in our world. Environment, technology, politics and culture all have the ability to influence economic forces. Beyond understanding those interactions, a smart investor also keeps very close tabs on the industries and companies they invest in by monitoring things like performance, governance, public opinion and industry trends. Now, imagine all that data changing and updating daily; suddenly, it’s clear why it can – and should – take so much time to make educated investment decisions.
When we acknowledge that preparation takes an incredible amount of time, it minimizes the role that luck plays in investing. Suddenly it’s less about taking a gamble and more about making calculated and educated decisions, which is a good thing – it means that investing is something you can practice, explore and ultimately improve on, over time.
Time and Risk
For every investing success story, there’s an accompanying horror story. This myth comes in different flavors – acting on bad advice, losing every last dime, and getting taken advantage of by an evil or incompetent financial advisor are just some of the common scripts. This myth perpetuates the idea that investing is so scary and so unpredictable that it’s simply not worth the risk.
It can be tricky trying to separate this myth from the truth, because risk and loss are both very real outcomes of investing. No investment is ever guaranteed, meaning your invested money is never absolutely safe. Some investment types may be safer than others, but the risk of losing your money is ever present.
After making smart, thoroughly researched investment choices, your next best protection against risk and volatility is the amount of time you have for your investment to mature. The narrower your investment time frame, the more vulnerable you are to sudden and often unpredictable changes in the market. By contrast, if your investment is long term (think decades), date-to-day changes suddenly hold less influence. Plus, there is time to recover from market declines; the same cannot always be said for short-term investments.
Time and Returns
Yet another investment myth is that it’s impossible to find a combination of investment products with your risk tolerance level that will result in a high yield. In other words, playing it safe with your investments means measly returns.
Do you remember learning about compound interest? Time happens to be compound interest’s best buddy. Together, they can really put your money to work for you. This is especially important to note for long-term savings goals (retirement is a good example). Even products with a relatively low expected yield can accumulate a lot of weather over long periods of time, so do not get discouraged by low interest rates on investment products. Look for opportunities to maximize the effect of compound interest, such as reinvesting your dividends or refraining from cashing out your investment early.
As you can see, time plays a significant role when it comes in investing. It can give you more control over your investments, it can increase your tolerance for risk and your ability to recover from any losses, and it can maximize your returns. By starting early, investing wisely and giving yourself the time you need to reach your goals, you will discover the positive impact that a little bit of planning today will have on your lifestyle in the future.