\n
The moment my fingers met the keyboard to begin this article, I had a lucid dream flashback to a Broadway Playbill with a song called Stocks & Bonds. Now, for the life of me, I can\u2019t remember which musical this came from or why I seem to have repressed the memory. DM me if you know what\u2019s going on in my subconscious right now.<\/p>\n
Anyway, let\u2019s talk about stocks and bonds, arguably one of the most boring topics I could possibly address with you but one that forms the basis for a lot of decisions you\u2019ll probably need to make in your financial life if you decide you want to become filthy stinkin\u2019 rich.<\/p>\n
The good news is you don\u2019t really need to understand much beyond the basics to be an investor in 2020. In fact, you technically wouldn\u2019t need to understand anything, especially when you use a service like Betterment \u2013 but I\u2019d argue that it\u2019s good to know (even if it\u2019s just a little) what\u2019s happening in your Vanguard 2060 target date fund.<\/p>\n
Stocks<\/h4>\n
Every time you buy a stock (or, more likely, an index fund that\u2019s composed of many different stocks), you\u2019re buying a tiny little share of a company. Which means when they make money, so do you! Woohoo!<\/p>\n
The bad news? When they lose money, stockholders usually bear the brunt. In short, they\u2019re volatile.<\/p>\n
But because there\u2019s no cap (theoretically speaking), there\u2019s really no limit to how much you could make. The downside, of course, is that you can lose every last penny. <\/p>\n
For example, if you bought 10 shares of TSLA at $42.10 in 2017 for $421.00, today you\u2019d have $3,727.20. That\u2019s about a 780% return. <\/p>\n
For a less titillating example, maybe instead of TSLA you had purchased a single share of CHKAQ (Chesapeake Energy) for a whopping $1,404 in 2017. Today, that single share would be worth $5.30.<\/p>\n
These are both real examples that illustrate some of the most #dramatic moves I could think of. <\/p>\n
You can think of purchasing a stock a little bit like gambling. But instead of putting all your chips on red or black, you\u2019re putting chips on one, specific hue of one<\/em> color on a massive color wheel that moves unpredictably. [This is why I\u2019m a huge fan of low-cost index funds \u2013 I\u2019m not a betting woman, but I have enough faith in the entire stock market to go up over time \u2013 so instead of buying Cornflower or Cerulean, you\u2019re buying an entire row of all blue, or a little bit of the entire rainbow. Is this color wheel example working for me?]<\/em><\/p>\nSo at its most granular level, a stock is a single share of a single company. When we refer to \u201cstocks\u201d within a portfolio more casually, we\u2019re usually<\/em> referencing entire collections of them, like VTI<\/strong> (Vanguard Total Stock Market Index Fund), which tracks all the stocks in the entire U.S. stock market. <\/p>\nFor example, almost my entire Roth IRA is invested in VTSAX<\/strong>, or \u201cVanguard Total Stock Market Index Fund Admiral Shares\u201d \u2013 this is an index fund. <\/p>\nVTI, mentioned above, is the ETF version<\/em> of VTSAX. The only real difference between an index fund and an ETF is that an ETF can be traded throughout the day, as if it were a single stock. <\/p>\nAs of the end of August 2020, the top 10 holdings (making up 23% of the fund\u2019s value) in VTSAX were:<\/p>\n
Apple Inc.<\/p>\n
Microsoft Corp.<\/p>\n
Amazon.com Inc.<\/p>\n
Alphabet Inc.<\/p>\n
Facebook Inc.<\/p>\n
Johnson & Johnson<\/p>\n
Berkshire Hathaway Inc.<\/p>\n
Procter & Gamble Co.<\/p>\n
Visa Inc.<\/p>\n
UnitedHealth Group Inc.<\/p>\n
So indirectly, I do own some Apple. And some Alphabet. And some Amazon. Because I bought tens of thousands of dollars of VTSAX, which fund managers at Vanguard stuffed with companies they deem promising.<\/p>\n
The stocks in your portfolio are responsible for its growth. They\u2019re also usually responsible for downswings. Most of the time, a young person should have 90%+ stocks in their long-term investment portfolios \u2013 the higher the percentage, the more risk you\u2019re inviting in. But that\u2019s the beauty of starting early, baby! When you\u2019re young, you\u2019ve got decades to weather the storm. <\/p>\n
Bonds<\/h4>\n
So here\u2019s the funky thing about bonds: While a stock can only be purchased in a publicly traded company, you can buy bonds from companies or governments<\/em>. You\u2019re essentially buying a loan that the company or government has to repay you in the future, with interest. <\/p>\nThe return on a bond is capped \u2013 which means, unlike TSLA, you\u2019re not going to get a 780% return over three years. Whether a company does extremely well or not, there\u2019s a much greater chance that you\u2019re going to end up with the amount you agreed upon upfront. <\/p>\n
Bonds provide stability in an investment portfolio \u2013 you can think about them a little like your trusty pair of joggers in the closet. You\u2019re probably not going to turn many heads or get asked out on a date in your old faithful pair of athleisure pants, but you\u2019re also not going to spectacularly embarrass yourself. Reliability! Consistency! #bonds<\/p>\n
(I told you this subject was boring \u2013 I am reaching<\/em> here, people.)<\/p>\nIf you\u2019re interested in learning a more salacious take on bonds, pick up the book or stream the movie The Big Short. It reveals the unwieldy underpinnings of the financial crisis in 2008 and, while it\u2019s tremendously confusing at points, part of the irony of the story is that most of the bond managers in fixed income departments on Wall Street also<\/em><\/strong> didn\u2019t understand what they were buying and selling \u2013 in short (BIG short), bond managers packaged tranches of subprime mortgage loans together in bonds, then sold them off with faulty ratings. <\/p>\nThey got enormously wealthy, then people defaulted on their subprime mortgages. The bonds went bad. The system collapsed. Everyone lost their job \u2013 except for a handful of people who saw it coming and shorted the subprime mortgage bonds by doing this wonky, backwards thing called a \u201ccredit default swap.\u201d <\/p>\n
Again, it\u2019s convoluted \u2013 but both the movie and book are excellent, and they may help illustrate why you see language like, \u201cBonds are usually<\/em> more reliable.\u201d Nothing is a certainty when you invest, but bonds are about the closest thing we\u2019ve got.<\/p>\nWhat you really need to know<\/h4>\n
All you functionally need to know is that when you look at your holdings in a portfolio (be it a target date fund for retirement, a General Investing account with Betterment or Ellevest, or a portfolio you\u2019re courageously assembling yourself), you want to have a balance that skews heavy on the stocks and light on the bonds if you\u2019re planning on using the investment in, say, 30 years \u2013 but you\u2019ll want to temper that enthusiasm for #risk if you intend to access the money in the shorter term.<\/p>\n
That being said, if you\u2019re going the ETF route (like investing in VTI; in other words, the entire stock market), you\u2019re doing a pretty good job of mitigating risk to begin with. <\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"
The moment my fingers met the keyboard to begin this article, I had a lucid dream flashback to a Broadway Playbill with a song called Stocks & Bonds. Now, for the life of me, I can\u2019t remember which musical this came from or why I seem to have repressed the memory. DM me if you […]<\/p>\n","protected":false},"author":178814,"featured_media":2433,"comment_status":"closed","ping_status":"open","sticky":false,"template":"si-template-single-post-taxable-investing.php","format":"standard","meta":{"footnotes":""},"categories":[35],"tags":[47,44],"class_list":["post-517","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-and-taxes","tag-401ks-and-iras","tag-taxable-investing"],"yoast_head":"\n
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