The four types of traditional investments

Making Smart Decisions with Josh Tirado

Josh: This is Josh Tirado, and welcome to the Making Smart Decisions podcast. Today, we are going to touch on the most common traditional types of investments. That may sound very boring, but it is not. We will cover it quickly and you will be very well informed moving forward.

[00:01:55] So when I say the four types of traditional investments, one is newer than the others, but we're talking stocks, bonds, mutual funds ETFs. Now I do understand there are other things. There's cash, there's gold. There can be real estate. There are precious metals, there's currency. There's a lot of things out there, but when clients come to me and I look over their portfolios of what they have before they've come to me, or they're asking me questions on investing, or they're doing some investing on their own.

[00:02:21] What I see time and again, are stocks, bonds, mutual funds, ETFs. The reason being mutual funds are what is in everyone's 401k. And 403Bs. People like to buy mutual funds. It's easier. ETFs have become more popular year over year. Because they follow an index and they are usually a more cost-effective method of getting into investing than mutual funds.

[00:02:48] And then you have traditional stocks and bonds where instead of painting with such a broad brush, covering an index, you can be very specific with individual stocks and bonds. So those four things are what I see. Day-in and day-out most often stocks, bonds, mutual funds ETFs. So let's start with the basic stock at its core.

[00:03:06] You own a share of stock. You're owning a share or a piece of that company that you're investing in. And that is how you had company ownership. You bought a share of stock. Usually, you're buying multiple shares of stock. It's a company as well. Ideally, the company grows. People think the company's more valuable.

[00:03:24] The perceived value of the company goes up. Your share of stock becomes worth more than what you paid for it. You bought it for $10 a share. The company does well and grows that share becomes more valuable because, from $10 to $20, that is a growth stock. There's also a value stock. That is where the company is giving a dividend.

[00:03:43] So the company really might, and this usually falls into line with larger, more established companies. Not always, but often this company is doing very well. They're not trying to necessarily grow larger. They have a dominant share of the market throughout there, but they're doing well and they're continuing to try to grow their profits.

[00:04:01] And they're passing that along in the form of the dividend. So every year for every share of stock you own, you might get 1%, 2%, 3%. The highest I usually see is four or five, but usually, three, three to 4% is a good dividend. So if you own a hundred dollars worth of stock and it's paying a 3% dividend, you will receive a check for $3.

[00:04:23] You can take that money and run. You can reinvest it. And that 3% goes across whatever you own, whether you want a hundred dollars of that shit that stock a thousand dollars of that stock, a hundred thousand dollars that stock you're getting that 3% dividend. So you're making your money on your return by them.

[00:04:38] Giving money to you in the form of a dividend, that's really how they're sharing their profits. Or do you have a stock that is going up because the company's value is going up and the value of your share is going up? So at its core, a stock is a piece of that company. Now, things have changed quite a bit in the economy and it is not always based on is this the best company making their product your stock is not necessarily directly tied to how the company is doing. Sometimes it's affected by the industry that the company is in, it's affected by the market cycle. What's popular right now. Is that a popular industry? Is it a popular company? Are they making a popular product or not?

[00:05:18] Is it something in demand they're at different times of the year, different things are more in demand. So a lot of those outside forces now coming into play. Or it's not just the core of the company. It's the, it's what that company represents and how it fits into the greater economy. A bond. Is what they consider to be a debt instrument.

[00:05:39] So basically the company needs to, or the government or whoever is issuing the bond, the raising money to accomplish something, whether it's growth, whether it's some sort of initiative with governments, municipalities that usually they're building a bridge, they're building roads with a company they're trying to expand.

[00:05:57]They're running on a new product line, they're doing something. And instead of borrowing the money, they're raising the money. So you offer a bond. So you're giving the company money in exchange for shares of the bond. Now, again, it depends on what type of bond, but sometimes the value and the prices of the bonds fluctuate too, depending on how popular and how in-demand the bond from that company is.

[00:06:16] So the value of your share of the bond can go up or down. But the basic reason you're buying a bond is to get the interest off the bond. Similar. To a dividend being paid to a stock interest, being paid to the bond, yearly basis. So when you buy the bond, you say, okay, I'm going to buy this bond.

[00:06:35] And this bond is paying me 5%. So again, you want a hundred dollars. You're going to get a check for $5. Now bond interest is usually paid out quarterly, not annually like stock dividend is, but it's the same general concept. So stock. Piece of the company bond, you're essentially loaning money to the company in exchange for them promising to pay you interest.

[00:06:57] The values can change on both.

[00:06:59] A mutual fund is a collection of stocks or bonds or a mixture of both and sometimes cash and some other things. But generally speaking, mutual funds hold at least 30 to 50 individual stocks. Usually, more usually a couple of hundred individual stocks, usually at least a couple of hundred.

[00:07:19]Individual different types of bonds. So collectively you are saying, okay, I don't have the money to buy all these different stocks or all these different bonds. But if I give my money to the mutual fund, my money is pooled with other investors. They have a big enough pot of money that they can go buy these different stocks, these different bonds.

[00:07:36] And then they're being professionally managed. Many mutual funds are managed where they're buying or selling the stocks or bonds. Towards a common goal of either a certain risk level or a certain return. There are some mutual funds where they're very passive or they just buy and hold those stocks or bonds for a year.

[00:07:53] And then at some point they might re rebalance it. Basically, you're collectively adding your money together to get broader exposure to stocks and bonds or some sort of custom portfolio within the mutual fund. That is why they're so popular inside 401k plans. There tend to be additional fees on the mutual fund because you have someone managing it and the day-to-day costs of buying it, as opposed to you just buying a stock or buying a bond and potentially paying a small commission to do that.

[00:08:19] The mutual plan has an extra layer of fees, but you are receiving benefits for those fees. Now, this product ETF or exchange-traded fund came out a number of years ago. It's becoming more and more popular every year. The exchange-traded fund trades in real-time, every day, like it's a stock. There can be managed, but oftentimes there's little to no manage...