3 popular investment vehicles, explained

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In this edition of Weekend Update, I’m going to explain some of the basics of three investment vehicles.

First, what is an investment vehicle?

In the broadest terms, an investment vehicle is any financial account or product you use to create returns. They can be extremely low risk, such as a bond or a certificate of deposit (CD), or higher risk, such as stocks, options, and futures.

While it’s important to remember that all investments contain risk, generally, the greater the anticipated return on an investment, the higher the risk.

What is a stock?

A stock is an investment that represents a fractional ownership of a company. Simply, when you buy a stock (called “a share”) you are buying a small part of a company.

The goal is to buy shares and for the share value to increase over time.

The way stocks work is that publicly traded companies offer their stock for sale through an exchange such as the New York Stock Exchange or the Nasdaq.

To select stocks that are appropriate for you, your fiduciary advisor will determine what level of risk you are comfortable with, as well as what types of companies most interest you, and after intensive research and portfolio stress testing, he or she will make recommendations and select stocks that most closely align with your goals and needs.

On a side note, if you invest in a 401(k), or similar defined contribution plan, it’s likely that you already own at least some stock.

What is a bond?

One way to define what bonds are is to view them as loans. When you buy a bond, you are loaning money to a corporation, or the local or federal government. Those entities issue bonds to raise money for various projects or initiatives. As an investor, you are lending money to the bond issuer in return for interest payments and the repayment of your principal when the bond reaches its maturity date.  

So, what is the key difference between bonds and stocks?

Bonds are the equivalent of loaning money to a company wherein you’ll receive interest return (which can be paid to you or reinvested), while stocks, on the other hand, nominally represent an ownership in a business. (When it comes to stock, you also may or may not, depending on things such as the class of stock and how much of it you own, receive dividends, or even have voting rights.)

Stocks are considered a riskier investment than bonds but are expected to offer greater returns over time.

Bond prices generally move in the opposite direction of interest rates. So, when interest rates rise, bond prices often head down. One important note is that bond prices typically reflect where the market is expected to move in the future. And that means if the Fed, our nation’s central bank, telegraphs that it will raise interest rates in the next few months, bond prices could reasonably be expected to decline immediately, and may have already reacted to the rate increases by the time those increases occur.

While both stocks and bonds should almost certainly be a part of your investment allocation, besides fixed income, one of the key advantages of investing in bonds is that they can help you to better withstand stock volatility.

What is cryptocurrency?

A cryptocurrency is a digital currency that is secured by cryptography (secure information derived from mathematical codes), which, because it is distributed among a vast network of computers, makes it difficult or even impossible to counterfeit.  

Cryptocurrencies (often called “coins” or “tokens”) enable you to purchase goods and services, participate in games, or you can trade them for a profit (or loss). Cryptocurrencies are hosted by blockchain technology, which offers users a reportedly hacker-resistant record of who owns what, along with verifiable receipts of each transaction.

After a November 2021 peak, when the total market value of cryptocurrency was estimated to be north of $2.9 trillion, that market took a massive hit during the “crypto winter” of 2022, losing nearly two-thirds of its capitalization.²

Among the knocks against cryptocurrencies is that they are not issued by any central bank or authority (which some view as an advantage due to anonymity), so, while they are technically a currency, they are uninsured.

Simply, if you or the blockchain gets hacked, or your crypto exchange files for bankruptcy, while there is private insurance you could purchase, the government offers no protection, so you are technically on your own.

Another disadvantage of cryptocurrencies is their extreme volatility. So, why do their prices fluctuate so much?

A gamut or reasons, including supply and demand, investor rumor and behavioral finance, the threat of new regulations, the fact that there are more than 22,000 cryptocurrencies,¹ and even media hype that can artificially create bubbles based on headlines.

After 30-years of advising, and having hosted thousands of workshops and podcasts, I have come to learn that it doesn’t take a financial planning degree to benefit from the basics of money management, investing, and finance.

Simply, the more you understand about precisely where you might need professional guidance and support in the short term, the better off you’re likely to be over the long haul.

As a reminder, aside our free Retirement Resources Library, we offer complimentary virtual and in-person appointments where you can comfortably and without pressure ask questions and get actionable answers from one of our experienced fiduciary advisors.   

^{1 Different Types of Cryptocurrencies – Forbes Advisor}

^{2 August 2023 Crypto Market Forecast – Forbes Advisor}