Investing

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.

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Mutual Funds & ETFs

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 Funds

Pool your money with the money of other investors to purchase tens or hundreds of different stocks, bonds or other investments. As the fund’s assets appreciate or depreciate, so too will the value of the shares you own. Mutual funds trade once each day (at market close) at that day’s net asset value (NAV).² Shareholders are able to receive income and capital gains.

Exchange-Traded Funds

Most exchange-traded funds (ETFs) are designed to track the performance of a particular market index (such as the S&P 500 or the NASDAQ 100), industry or sector. They function much like mutual funds but are priced continually throughout the day, so they can be traded like stocks.³

A note on fund taxes and fees:

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:

Load/No-Load Funds

Funds are either sold with a ‘load,’ where you typically pay the broker a commission on your investment, or ‘no-load,’ where you purchase without a commission. Loads may be paid at the time of purchase or sale.

Management Fees

Fees are used to pay the fund's portfolio manager for expertise in managing the fund. They are typically lower for passively managed funds than actively managed funds.

Other Fees

Funds may also charge 12b-1 fees for marketing, fees to maintain an account, redemption fees to discourage short-term trading and/or exchange fees to move money between funds.

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Stocks & Bonds

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.

Stocks

Shares of ownership in an individual company that can be traded on an exchange; their value will fluctuate based on the performance of the company.

Bonds

Debt obligations of a company, the government or a municipality; when you purchase an individual bond, you’re lending the issuer your money for a specific period of time, which they agree to pay back at a certain rate of interest.

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.

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Alternatives

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

Minimize the impact of market volatility
Increase your overall portfolio diversification
Enhance your risk-adjusted returns

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Cryptocurrencies & NFTs

Cryptocurrencies

Fungible tokens, such as Bitcoin, can be exchange with each other at an equivalent rate, and therefore be traded or used as a medium for commercial transactions.

Non-Fungible Tokens (NFTs)

Are a different type of asset that leverages the unique identification codes and metadata associated with blockchain technology. NFTs are increasingly being used to represent digital ownership of both virtual and real-world items like artwork, photography, collectibles and real estate.

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.

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Sustainable & Impact Investing

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.

Sustainable Investing

A strategy of investing in companies with strong ESG scores (for example minimal carbon footprint, workplace and board diversity) based on the belief that those companies are more likely to thrive going forward.

Impact Investing

Investments made in firms focused on socially and environmentally worthy endeavors (such as affordable housing, healthcare and education, renewable energy and access to safe water) with the intent of creating both a positive impact as well as a financial return.

Investment risks

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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