Basic Investment Types
With all the thousands of stocks, bonds and funds available, how do you decide which investments will best meet your specific needs and goals? Let’s start by reviewing the basic investment types.
With all the thousands of stocks, bonds and funds available, how do you decide which investments will best meet your specific needs and goals? Let’s start by reviewing the basic investment types.
Many new investors start out investing with mutual funds and exchange-traded funds (ETFs) since they require smaller investment amounts to create a diversified portfolio.1
Mutual fund distributions and capital gains are taxed each year whether you receive them in cash or reinvest them in the fund. ETFs, on the other hand, have no mandatory capital gains distributions. You only pay taxes on your profit when you sell a fund.
Make sure you also understand how fees are assessed before purchasing any mutual fund or ETF:
Stocks may outpace in one year, but then reverse in the next year. Or energy stocks may climb while technology stocks fall. In reality, the mix of investment types you choose will have far more impact on your portfolio performance than the specific individual investments you own.
By owning a broad array of investments in each asset class, you reduce the likelihood of one single underperforming stock or bond negatively impacting your portfolio. It’s a great way to create a balance between risk and return.
When most investors think of alternative investments like hedge funds, commodities or real estate, the word ‘risky’ comes to mind. But, in actuality, because they often move in a different direction than traditional stocks and bonds (low correlation), adding alternatives to your investment mix may help
Both of these assets, however, are speculative and subject to a high degree of volatility, so investors should be very cautious when considering a portfolio allocation to either.
Environmental, social and governance (ESG) factors play an important role in the portfolios of socially conscious investors. Thanks to today’s more sophisticated strategies and screening capabilities, you can better align your investments with your personal values without having to sacrifice significant return potential.
With any investment, the biggest risk is that you can lose money. While some investments are less risky than others, you pay for that added stability through lower rates of return. Before making any investment, understand its potential risks and rewards to determine if it's appropriate for you.
Visit the Investing Principles page for more information and steps to consider before you begin.
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