Advantages and Disadvantages of Stocks, Mutual Funds and Bonds, and ETFS

The stock market plays a vital role in our economy. With thousands of stocks in the stock market, it is a powerful place where shares of publicly held companies are issued and traded. Investing in the stock market is a way to grow your money while working and living your daily life. Many say the stock market is too risky to invest in, but it is a way to build wealth and become financially “free.” Investing in stocks can provide one with impressive returns, and starting this is not hard. Starting up in the stock market can be cheap, and outcomes can be enormous. When you become an investor, your money begins to work for you; a stock market is a place where people could build long term wealth with not a lot of risk; there have been many recessions and many economic booms, each bull market has surpassed the bear market in overall gains. Keeping your money in a savings account will not help your money grow or even work for you due to inflation; buying stocks and even bonds (when interest rates are up) is a great safe way of beating inflation and making your money work for you. Investing in Stocks, Mutual Funds, and Bonds are all great tools to build long term wealth and blow any high yield savings account out of the water with returns. These days with a US dollar being weakened each day and the fed printing money, cash is trash, and the wisest decision you could make as a human is to invest in these assets to grow your wealth and protect your money against inflation and money printing.

Stocks

Investing in stocks is, in my opinion, the best way to grow your money; I started at 18 years old once I was able to open a brokerage account and have fallen in love with the idea of investing in great companies since. Investing in stocks brings a ton of value and growth if you treat it as a way of slowly growing your money for long term wealth, but if you treat it as gambling, 90% lose. If you invest for the long run, you will achieve excellent returns, but if you are looking to day trade or swing trade, it is profitable but much more challenging than buying a great company at a great price and holding it for a long time. Mutual Funds and Bonds are low-risk investments, but investing in stocks adds more risk to a portfolio and leads to greater or worse returns. One of the pros of stocks is they can give the highest returns. Mutual funds track the S&P 500 average 8% a year, while a stock in a great company could go up 415% in a single year because stocks give the highest historical returns over many other asset classes over the long term. Stocks add some diversity and growth to a retirement portfolio. Another advantage stocks bring companies to offer dividends. A group of stocks is referred to as the dividend aristocrats, who have increased their dividend for 25 years or more. There are 66 companies in the dividend aristocrats, and they are all high-quality companies. One of the benefits of using the Dividend Aristocrats list is that they have been successful over many economic cycles. To pursue maximum investment returns in the market, you have to be in it for the long term. It makes more sense to stay committed to an investment plan rather than guess the best time to be in the market. Over the past 70 years, bull markets have lasted longer (47 months on average) than bear markets (13 months on average). There have been 13 bear markets that decline a total of 25.8% before recovering. By contrast, the 14 bull markets since 1949 have lasted roughly 47 months on balance, each growing an average of 124.6%. While it is impossible to predict when a bull market will begin, it is possible to miss one by waiting on the sidelines.

Although there are many positives reasons to invest in the stock market, there are also some disadvantages. When investing in the stock market, the higher the return, the greater the risk of losing money. One of the main drawbacks I see today is free Facebook and Reddit groups that tell people to buy stocks mindlessly, and most of the time, these companies are trash pump and dump schemes, which end to insane losses. Other disadvantages are investing in 99% of the penny stocks offered, newbie investors get drawn to penny stocks thinking because there cheap, they will make you much money, but in the end, those companies are being traded at a price for a reason. Another disadvantage of owning stocks is when a company experiences financial problems and has terrible earnings reports, leading to a decline in stock price (unless it is tesla). There are no guaranteed returns; the price can rise and fall dramatically, so without some risk management and research into the company you are buying, it could lead to horrible losses and can even make some lose all their savings.

Mutual Funds

Mutual funds offer many advantages; instead of buying a share or multiple shares in a single company, a mutual fund provides a diverse amount of companies all in one share price. Mutual funds offer three key benefits they are, Diversification, professional management, and liquidity.
As an investor, Diversification is critical, and mutual funds are perfect for that, especially for someone who does not want to keep track of the earnings in specific companies each quarter. Mutual funds diversify your money into diverse holdings that track the three significant indexes or even specific industries. According to the blog the investor place “Of the $22.5 trillion allocated to U.S.-registered investment company vehicles, $18.7 trillion went to mutual funds, $3.4 trillion was devoted to exchange-traded funds at the end of 2017” These statistics show that mutual funds are being bought more than stocks and indexes because people want to invest and get their money in the market rather than doing the research themselves. Mutual funds average a 9% yearly return, so it is smart for someone who has no time on their hands or has no desire to learn the stock market to put a percentage of their paycheck into some diverse mutual funds each week. According to investor place, “You might, for instance, balance a value fund with a growth fund. Value funds concentrate on promising but out-of-favor stocks, while growth funds zero in on the issues of expanding companies with outstanding earnings potential. Because they rarely perform in tandem, including both types in your portfolio may help lower the total volatility of your stock holdings.” The advantage mutual funds bring as an investor you can invest in specific industries like right now, electric vehicles are hot, and you do not know which company to invest in, so you could buy a mutual fund with all the electric car companies grouped into one fund which you could invest in all of them buy just purchasing some shares in the fund. What I think the most significant advantage is with mutual funds is having access to a professional money manager unlike buying ETFs, mutual funds are usually bought through a financial advisor, and with the right advisor, your money will grow exponentially, building an investment portfolio is not for everyone so having an advisor manage your money is a massive advantage with mutual funds because an advisor will put you into the correct assets.

There are some advantages of mutual funds, but there are also many disadvantages. The most significant disadvantage, in my opinion, is the fees it cost even to buy one of these funds. The stock market offers a ton of diverse ETFs that mimic the same assets like mutual funds with just cheaper fees. Mutual funds have hidden fees called 12b-1 fees, which are disclosed in the mutual funds’ prospectus. Another disadvantage of mutual funds is they lack liquidity; when selling a mutual fund, it usually takes up to a day to get your asset into cash, while in the stock market, your order is usually filled within seconds of the time selling. Fund managers are useful, but they all are not great at what they do and could lead to losing money. There are two types of mutual funds; one allows you to get in and out of the fund at any time you decide, while some lock your money up for multiple years, which is a disadvantage because if you want to pull your money due to a crash or a significant gain. Mutual funds, just like any other investment vehicle, have advantages and disadvantages, I think mutual funds have more advantages than disadvantages, but I would never use them as an investment vehicle due to fees; I think I instead manage my money myself through stocks.

Bonds

Adding bonds to an investment portfolio creates a more balanced portfolio with less volatility. You could buy bonds from companies or buy bonds from the government. They usually give a guaranteed return rate, and when interest rates are low, it is usually an excellent time to purchase bonds. Bonds are referred to as fine-tuned income investments, paying interest to purchasers predicated on the amount invested. They can be offered by corporations, cities, states, or the federal regime. Bonds are composed of two primary components — principal and interest. The principal of a bond is the sum borrowed’s face value, while bond interest is the yearly amount paid on the investment. Bonds can be issued with maturities that range from less than a year to 30 years. When the bond reaches maturity, the principal is paid back to investors. Some investors use bonds to have a steady stream of income, making bonds great for funding future expenses like college or retirement because bonds are guaranteed money investors know the money they receive. Bonds have a low correlation to stocks, so usually, when stocks down, bonds are up. Bonds protect your retirement account from an economic downturn because when the economy is slowing down, investors flock to bonds for saver investments.
Bonds are great investments for people in or close to retirement who want to invest their money in a low-risk matter to defeat inflation. The advantage bonds have over other securities is they have less day-to-day volatility than stocks, and usually, the interest payments on bonds are higher than the dividend payments of stocks. Another advantage bonds have their interest rates are much higher than any savings account. Treasury bonds are risk-free investments, the yields are low, but RISK-FREE you cant lose money, so a bond from a stable government like America is an excellent investment if you are looking to preserve your money. Another advantage bonds have municipal bonds offer tax advantages, the interest earned on municipal bonds is exempt from federal income tax and sometimes exempt from local or state taxes.

The disadvantage of bonds has been they have significant risks when it comes to changing interest rates. When interest rates are low, the bond market moves in the opposite direction of prevailing rates. Another disadvantage with bonds is if you invest in a developing country and their currency falls, you could potentially lose your investment.

ETFs

Since their introduction in 1993 ETF’s have exploded in popularity because they are a great alternative to crooked mutual funds who are ran by crooked financial advisors. An ETF is a basket of assets designed to track specific indexes and industries. ETFs have low management fees and low expense fees which makes them Mutual funds on steroids.

There are a ton of advantages when it comes to ETFs, they give your portfolio exposure to a group of equities that tracks a broader range of stocks instead of one, for example lets say you want to invest in the cannabis industry but dont know what company to invest in and dont have interest in looking through 100s of companies you could buy the $MJ ETF and invest in all the big cannabis companies, which makes you diversified on ALL companies, and not just betting on one single company.

Although ETFs give plenty of diversification they also trade just like a stock it can be purchased on margin and sold short or even you could trade options on ETFs just like you could with normal stocks. Because ETFS are traded like a stock you could look up the price and compare it to the sector or commodity it is tracked with. I think the biggest advantage ETFs have over mutual funds is they have much lower expense rates. The management fees are under 1% on most ETFs while Mutual Funds could be up to 4%.

While there are many pros to ETFs they also have many drawbacks it is important on the indusrty your investing in and how volatilie it is, if you are buying an Electric Vehicle ETF your gonna get alot of volatility and could suffer big losses, it is vital to be aware of the fund’s focus and what types of investments it includes. As ETFs have continued to grow increasingly specific along with the solidification and popularization of the industry, this has become even more of a concern. So you should know what the ETF is tracking and understand the risks of the industry you are betting on as an investor.

Some ETFs lack liquidity, If an ETF is thinly traded, there can be problems getting out of the investment, depending on the size of your position in relation to the average trading volume. So before buying a specific ETF make sure the liquidity and volume are above 80,000 if not you could have trouble selling your investment if there aren’t any market buyers. So make sure the ETF your buying does not have large spreads between the ask and bid prices or you could get killed on low liquidity.

ETFS are great investments and I think they are the second best investment compared to stocks. They offer diversity, low fees and great returns.


Overall, I think that investing in stocks is the best way to grow your money. I think a portfolio of 60% stocks, 20% ETFS, 10% cash and 10% bonds is perfect for a young college kid like myself. I would not invest in mutual funds because the stock market offers way too many diversified ETFs with a smaller expense ratio than mutual funds. These four assets are significant components to building long term wealth, and I am happy I started investing at 18 at 100% stocks. The more knowledge I learn on the financial market, the more I feel comfortable in my future of financial success and independence. People who do not invest in assets are at more risk because of inflation; cash is trash assets are the best way to grow generational wealth, and if done right, you could retire at 40 instead of 60.

School research paper I hope you enjoyed 🙂



Categories: Financial Advice

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