What exactly is the difference between bonds vs stocks vs mutual funds? And how do exchange-traded funds fit int he mix? In this video, Pure Financial’s Director of Research, Brian Perry, CFP®, CFA® explains.
So, today we’re going to talk about stocks, and bonds, and mutual funds. And stocks and bonds are investment asset classes. Stocks enter into a portfolio in order to provide growth, but they are volatile – they move up and down. Over the long term, they should provide higher returns than bonds. Bonds in a portfolio are there to generate income, but also stability and diversification. Oftentimes, when stocks go higher, bonds fall. And so the idea of combining stocks and bonds in a diversified portfolio makes sense for the vast majority of investors.
Mutual funds, on the other hand, are not an asset class. They’re an investment vehicle. And so, when it comes time to decide how to invest in the stocks and bonds you’re going to own, you have three choices: you can buy individual securities, you can buy mutual funds, or you can buy ETFs – Exchange Traded Funds. The choice varies, depending on what you’re trying to accomplish and the asset class, but broadly speaking, individual securities are where you go out and you buy Microsoft or GE, or you buy a municipal bond, and you own just that. There are no ongoing fees associated, but you are responsible for doing your own research and monitoring. And it can be hard to be fully diversified.
Mutual funds and ETFs provide professional management diversification. And although there are ongoing costs, with many mutual funds, the costs can be quite low. As with most aspects of investing, the choice of a mutual fund, an individual security, or an ETF isn’t a straightforward or simple one, and the choice is going to ultimately depend on you, the investor. But it’s definitely worth considering because the vehicle you use is going to impact your investment returns.
Importantly, and in conclusion, if you buy a mutual fund, an individual of security, or an ETF, you still own stocks or bonds. So when you’re working on your asset classes, and your asset allocation, don’t worry so much about what vehicles you’ve used. Think of it as “how many stocks do I own” and “how many bonds do I own.” And then a separate, discrete decision will be, individual securities, mutual funds or ETFs.