Mutual Funds

A Mutual fund is a combination of many stocks and bonds. The mutual fund pools cash, giving the investor the ability to purchase small pieces of stocks, bonds, or a collection of assets, and simultaneously providing investors a cheap way to diversify and reap market gains, while still hedging against losses.  Professionals manage the holdings that make up the fund’s portfolio.  Investors buy shares that rise or fall in value based on the performance of the fund’s underlying securities or holdings.  Unlike stocks, mutual fund investors do not have direct ownership or voting rights of the stock; however, mutual fund investors do share equally in the profits or losses of the fund’s total holdings.

Owning a single share of Amazon would cost approx. $2,300 today; however, there are many mutual funds that cost less than $30 per share. The mutual fund owns Amazon, and other stocks such as Apple, Johnson and Johnson, Ford, etc. So, the investor can still own a diversified group of these expensive stocks for a much cheaper rate, concurrently reducing even more risk through diversification.  Some mutual fund companies focus mainly on small cap companies, or just fixed income; knowing your asset classes are still a very important factor in the investment portfolio.

Since all mutual funds are professionally managed, it cost money to buy shares of mutual funds.  At Schenley, we give our clients the institutional share class expense ratio, which gives us the ability to pass on a lower cost to our clients when purchasing mutual funds with us. Mutual funds are priced once a day after the market closes at 4:00 P.M.

ETF’s

Exchange Traded Funds (ETF’s) have the ease of trading exactly like a stock, meaning the price of the ETF changes by the minute, and changes within the trading day.   ETF’s also have the diversification benefits of mutual funds, usually with lower costs.  The underlying goal of an ETF is to track the current index and follow it based on the pool of selections, including stocks and bonds.  It’s not a stock, not a bond, and not a mutual fund, but its own fund that can be traded on an exchange.  There are different types of ETF’s, but the main one being index exchange traded funds.  ETFs give you a way to buy and sell a basket of assets without having to buy all the components individually.

The fund provider owns the underlying assets, designs a fund to track their performance and then sells shares in that ETF to investors.  Like mutual funds, the shareholders own a portion of an ETF, but they don’t own the underlying assets in the fund.  Investors in an ETF that track a stock index get dividend payments, or reinvestments, for the stocks that made up the index.

An example of an index ETF would be to purchase the S&P500.  You would have 500 large cap companies in your portfolio, which essentially gives you a sizable reward with the least amount of risk.  An investment in the S&P 500 ETF earned 28.8% last year but lost 6.24% in the prior year.  ETF’s are an extremely low-cost way to invest in a group of stocks or bonds, which will diversify your portfolio and reduce risk.

If you have any questions or concerns about stocks, bonds, mutual funds, or ETF’s, or if you want to get started investing, please do not hesitate to reach out to one of our advisors at Schenley.  We look forward to hearing from you.

Click the link below to view “What you need to know about Stocks & Bonds”

Stocks

A stock is an investment; when you purchase a company’s stock, you’re purchasing a small piece of that company.  The piece that you purchase is called a share.  When you own stock in a company, you are a shareholder because you share in the company’s profits or losses.  As a shareholder, you technically are part-owner of the company; therefore, you receive certain voting rights within the company.  When shareholders purchase stock, it benefits the company by raising capital.  Companies, such as UPS, Apple, Pepsi, Ford, or any other public company in the world, grow and invest this capital into products for the company’s growth.  As the company grows and prospers, the shareholders participate in the growth of the company either in the form of a higher stock price, or as a quarterly dividend.  For investors, stocks are a way to grow their money over the long-term and provide a hedge against inflation. 

Investors purchase stocks in companies they think will go up in value; if that happens, the company’s stock price per share rises in value as well. The stock can then be sold for a profit.  Purchasing a stock can be riskier than purchasing a bond, mutual fund, or ETF, but the reward can be greater as well.  Stock prices change by the minute during the day.  Typically, stocks are known to be bullish over a longer duration; or in layman’s terms, stocks tend to rise over a longer time period.  When the stock goes up overtime, and the investor sells the stock at a higher price than what he paid for the stock, there is a capital gain.  A rise in the stock price is the most common way to make money in a stock, but you can also make money through dividend income.  Dividends are the cash payments made to the shareholders for sharing in the profits of the company.  A dividend is typically paid quarterly to shareholders.  Mature companies with a long history of paying consistent dividends, like Pepsi, will typically raise their dividend over time.  Pepsi is a value company stock.  Growth stock companies do not usually pay a dividend; although, growth companies typically have higher gains, or rising prices.  Growth companies focus on ploughing all its cash back into the company, to grow the company (hence the word growth stock).  A good investment should earn an average of approximately 7%-10% per year.

Bonds

Think of a bond as a loan. When you buy a bond, you’re purchasing a loan to a company or government that pays back a fixed rate of return. It is a safer investment than stocks, but still has risk.  Bonds generally require minimum investments, typically bought in $1,000 increments. The investor or lender receives semi-annual income, or a coupon, in return for buying the bond.  Unlike a stock that typically pays quarterly dividends, bond funds usually pay interest income to you on a monthly basis.  Bonds are inversely correlated to interest rates; when interest rates go up, bond prices go down.  A good bond investment should earn an average of approximately 2%-5% per year. 

There are many different types of bonds which you can buy; the safest bond would be a US Treasury bond, because it is backed by the guarantee of the U.S. Federal government.  Frequently, the Treasury Bond is pegged to a 30-year loan payback.  Other types of bonds investors buy are mortgage backed bonds, corporate bonds, or bonds issued by companies such as municipal bonds, or global bonds issued by other governments.  All governments and corporations need bonds in order to borrow money.  It’s commonly used for governments to fund roads, schools, bridges, dams, buildings, or other infrastructure.  Here is an example to help grasp the concept of a bond: If the investor purchases a bond for $1,000; at the end of the one-year term the investor receives the $1,000 back, but also receives the interest along with it.

While it’s possible to buy individual bonds, many people choose to purchase them through bond mutual funds, which offer lower-cost access to a diversified group of bonds.  The quality and safety of bonds help balance the risk associated with stock-based investments.

Click the link below to view What you need to know about Mutual Funds & ETF’s!