What Catholics Need to Know About Different Investment Funds

Here’s a Quick Run Down on Common Investing Options You Have

There are many ways to achieve financial security through investments. While old fashioned picking a stock and watching it rise is still an option, there are many, many ways to put your money to work for you in the market.

Unfortunately, there is such a diversity of choices that most investors don’t know where to start or what kinds of investments are best for them.

While there are more ways to invest than just the following, these are very common types of investments that you may find yourself considering.

• Growth of Capital Oriented Stock Portfolios
• Dividend Income Focused Stock Portfolios
• Index Funds
• Mutual Funds
• Bonds

Growth of Capital Oriented Stock Portfolios

This is what most people consider an investment portfolio. In its most basic form, it is made up of a number of different stocks, each selected because it is believed to be ripe for an upward move in price.

The reason for that expected price move depends on the type of stock purchased. Some investors like to buy growth stocks. That is, the company is quickly growing its sales and, usually, its earnings. Jump on the bandwagon early enough and you might end up owning the next Google or Apple. Buy the wrong stock and you might end up with Pets.com or WebVan, both of which went bankrupt.

Other investors search for value stocks. These companies shares are undervalued because of doubts about their ability to continue to operate profitably. When the market corrects this undervaluation, the investor stands to make money. You could even have several portfolios, each geared towards a different level of aggressiveness. Whether buying growth or value or both, in theory, it’s very simple. Just be sure to buy stocks that are poised to rise in value and sell them for more than you paid.

In practice, this is rather difficult and is why many people seek the help of professional financial advisors.

No matter the approach used in a portfolio, there are a host of different ways to weight the stocks in it. You can put most of your money in just a few stocks or a little money in many stocks. You could focus on a few industries (e.g. energy and biotech) or buy many kinds of companies across many different industries.

Even within industries, stocks are divided into at least these three groups: Large Cap, Mid Cap and Small Cap. Each of these three capitalization classes has generalized benefits (e.g. Large Cap stocks tend to be more stable while Small Cap stocks are often fairly volatile) and individual portfolios may focus on one segment in particular or try to strike a balance.

There are many ways to use a Growth Oriented Stock Portfolio to achieve a wide range of financial goals. It is a highly adaptable instrument that can be customized to fit anybody’s needs.

Dividend Income Focused Stock Portfolios

Similar to Growth Oriented Stock Portfolios, Dividend Income Focused Stock Portfolios are made up of individual stocks. What sets the two apart is the reason for including or excluding stocks. Instead of searching for stocks that are undervalued with the goal of eventually selling them at a profit, Dividend Income Focused Stock Portfolios focus on stocks that provide their investors with a stream of income through the payment of periodic dividends. For this type of portfolio, capital appreciation is a secondary consideration.

Instead of reinvesting all corporate profits, some companies pay their shareholders a portion of their earnings as dividends. The extra cash flow provided by dividends is often very important for older or retired individuals.

Creating a dividend focused portfolio is not as simple as finding stocks that offer the highest dividends.

Some companies offer high dividends because they don’t need all of the cash generated by their operations to sustain the business. The profit they make is more than enough to cover their expenses and the extra is returned to shareholders. These companies are often mature businesses that have limited reinvestment opportunities available to them. On the other hand, some stocks offering high dividends may reflect the stock market’s unfavorable assessment of the future course of their earnings. In other words, the high dividend may be a vestige of past success and be unsustainable in the future. For these companies, dividend cuts may well be forthcoming in the future.

An important concept to understand when investing for dividend income is that the dividend a stock pays can change at any point. In fact, one of the great aspects of this approach is that, when done correctly, the income produced by the portfolio should rise over time. Poorly selected stocks may subject the investor to both falling income and loss of capital.

Dividend investing can be a great way to a stable future. Properly planned and executed, a dividend focused investment strategy can produce a growing income stream.

Index Funds

Historically, the stock market has risen in the long run. It may have occasionally gone down for a period, but it has always recovered and gone on to new highs. For investors who would like to ride the rising tide of the stock market, index funds are an intriguing prospect.

Relatively complicated to form, index funds are designed to mirror the performance of common market benchmarks or market sub-segments.

To establish an index fund, a portfolio manager assembles a set of stocks that are designed to mirror the performance of a specific target. The S&P 500 and Russell 2000 are just some examples of benchmarks index funds track. There will always be some tracking error, but the index fund follows the general pattern of the target.

There are many benefits to investing in index funds, among them the instant diversification of capturing a large sample of the market. For instance, the S&P 500 is made up of five hundred different stocks in many different industries and having a fund that copies its structure provides a similar level of diversification.

Sometimes called passive investing, index funds require little maintenance. After being created, the portfolio manager just needs to periodically tweak the make up of the fund to adjust for any divergence between the fund and the target. For investors, it’s a very simple, passive way to invest in the general trends of the stock market or a specific market segment.

Mutual Funds

To many individuals, mutual funds are the path of least resistance into investing. Mutual funds may include a wide range of different investments, or specialize in just a single type of asset. When investing in a mutual fund, the investor owns a share in the fund itself, not in the assets that the fund contains. It is often the case that the investor will not know what investments comprise the fund.

An easy way to conceptualize a mutual fund is as a box full of investments. Investors know the market value of the box but do not necessarily know what’s actually inside it. To investors who don’t want to get involved in the nitty gritty of investing, this is a benefit. They simply buy shares of the mutual fund and let things take care of themselves.

At the same time, with a good financial advisor, you can get a similar level of hands-off investing without any of the shortcomings of mutual funds. For a more in-depth examination of mutual funds, see our main mutual funds article.

Bonds

Essentially an IOU with a due date and interest rate, bonds are an interesting investment vehicle. Commonly issued by the Federal Government, States, Municipalities and many corporations, a bond is a way for investors to loan money to the entity issuing the bond in exchange for a fixed rate of interest over a specified period of time. After the time has expired (called reaching maturity), the issuer will pay the investor the face value of the bond.

While bonds may seem like a sure thing with their fixed interest payments and repayment of the face value, there are a lot of factors at play that can make investing in bonds more difficult than it may appear.

Interest rates rise and fall and what may have been a good rate on a bond when it was issued could now be far below current interest rates. Similarly, if the bond issuer is suddenly at risk of going out of business or defaulting on its bonds, redeeming the bond at maturity is no longer a sure thing. In order to compensate for these possibilities, many bonds offer issuers and investors ways to sell or buyback bonds depending on interest rate changes. And investors can buy or sell bonds part way through the maturation process, making bonds a difficult investment option to master. A financial advisor can provide guidance on bond selection and further explain how bonds can help you achieve your financial goals.

There are many other types of investments available and this brief list is meant to cover only some of the more common types. Knowing what each is and generally how it can help you can be the first step to achieving your financial goals.

For more information, contact our financial advisors today!

Post from: Insights