As a financial advisor, the first thing I do when I begin working with someone is to get an understanding of what they are trying to accomplish with their investments.{{more}} Then I review their statements to get an understanding of what they currently own. As part of my process, I always ask why they chose the specific investments in their portfolio. Often I find that people can’t explain why they own something and, more important, they are not sure exactly what they own. Too often I hear “Well I kinda know what a stock is, but why don’t you explain it to us again.”
Let’s start with stocks or equities as they are sometimes referred to. Stock, simply put, is ownership in a company. If you own stock in XYZ company, then you own part of the company. You will share in the good fortunes and misfortunes of that company. You can buy stock in large, mid or small-sized companies, both foreign and domestic. All the categories carry varying levels of risk.
A bond, by comparison, is debt. A company, municipality, or government is looking for a loan. In return, they will pay the grantor of that loan (i.e. the bond holder) interest. The interest is usually paid on a semiannual basis for the life of the loan (i.e. until the bond matures), at which point the principal investment is paid back to the investor. Bond maturities can vary, but are typically between 1 and 30 years. One does have the ability to sell a bond prior to maturity.
That brings us to mutual funds. A mutual fund is an investment vehicle that allows investors to pool their money to invest in a professionally managed portfolio. Mutual Funds have all types of investment objectives. They can be made of stocks or bonds or a combination of stocks and bonds. Some stock mutual funds are growth-oriented, where the earnings of the companies whose stock the fund owns are expected to outpace the market. Some are value-oriented, meaning the stocks the fund owns are considered undervalued relative to investment fundamentals by the portfolio manager.
You can find stock mutual funds that invest in large, medium and small-sized companies, both foreign and domestic. Bond mutual fund can be invested in varying types of fixed income securities, including taxable and tax-exempt issuers, and with varying maturity durations, from short-term to long-term.
Which, if any, of these investments is right for you? Well that depends on your risk tolerance and time horizon and what you are trying to achieve. You should consult a financial professional who will take the time to explain your alternatives before making any investment decisions.
Before investing, carefully consider the investment objectives, risks, charges and expenses of the mutual fund as well as their investment options. This and other information is contained in the prospectus, which you should read carefully before investing. Prospectuses are available from your registered representative. Mutual funds are subject to market risk. Your principal value may decline.
This article was prepared by Patrick Shanley and is not intended as legal, tax, accounting or financial advice. Patrick Shanley is a Financial Services Representative with MetLife, Inc. The opinions provided above are not necessarily those of MetLife, Inc. The opinions provided are for general information purposes only. Metropolitan Life Insurance Company (MLIC), New York, NY 10166. Securities products offered by MetLife Securities, Inc. (MSI) (member FINRA/SIPC). MLIC and MSI are MetLife companies. L0613328862[exp1114][CT]