The inflation you’ve noticed in your daily life also has a significant impact on your long-term financial health.
For instance, if all your money sits in a traditional passbook savings account, the interest you’re earning doesn’t bring high enough returns for you to stay ahead of inflation.
It’s one reason to look at investments like stocks, mutual funds, bonds, and other investment products.
“Over the long term, you want to have some exposure to the stock market so that you’re not losing purchasing power,” observes Bill Smigiel. “Returns on the stock market have historically outpaced inflation over the long term.”
That said, the stock market is fluctuating, and, Smigiel adds, “It’s not a smooth ride or an easy go of it.”
By talking with an investment advisor, you can assess your complete financial situation, and identify your goals and risk tolerance.
Such professionals can help you develop an investment strategy to try to stay ahead of inflation and work toward your long-term goals, whether that’s saving for college or building a solid nest egg.
Before making any significant financial moves, it’s good to familiarize yourself with the available investment vehicles. Here’s a chart outlining six common options.
| What is it? |
Key Highlights |
Bill’s Perspective |
| 1. Stock – A share of stock represents ownership of a portion of a given corporation. The expectation is that when a company performs well, the value of its stock – your share in that company – increases in value. |
You have the potential to earn greater returns than a savings account or bond, for example.
But because you’re investing in a single company, stocks carry more risk because performance is hinging on the success or failure of just one company. |
“Buying individual stocks is for those who understand the risk and are willing and able to potentially lose the money they invested.” |
| 2. Mutual Fund – A financial company pools money from many people and invests those dollars in a collection of stocks, bonds, and other vehicles. Investors own a share of the fund and benefit from the returns it generates. |
Mutual fund portfolios are expertly managed, eliminating the need for you to do the deep research on individual stocks. They also balance your money across several companies and investment types reducing your risk. |
“With a mutual fund, you get diversification. It’s a way to get exposure to lots of different companies without having to put up as much money as you would if you were to buy the individual stocks.” |
| 3. Index Funds – Index funds are a collection of stocks and bonds whose mix of investment are the same as those of a given index like the S&P 500 or Nasdaq Composite. The goal is to mirror the returns of that particular index. |
Because they are made up of various stocks that mirror the market, they offer instant diversification. Index funds can also be in the form or a mutual fund or ETF. |
“Index funds operate by rules versus being managed by a portfolio manager, so they typically have lower operating expenses and fees.” |
| 4. Exchange Traded Funds (ETF) — An ETF is also a grouping of stocks and bonds but what sets it apart is the way that it is traded. ETFs are actively traded in real-time on a stock exchange during the trading day, whereas mutual funds transactions happen at the end of the trading day. |
ETFs’ tradability and lower fees make them ideal for investors seeking to keep fees low, avoid capital gains tax and be able to liquidate their funds quickly during market hours. |
“ETFs tend to be more tax efficient than mutual funds because of the way they are traded and redeemed.” |
| 5. Annuity – An annuity is an insurance contract issued by a financial institution that provides guaranteed income in retirement for as long as you live and no matter what happens in the market. They can also be structured to pay money to your heirs after your death. |
Annuity payments tend to be higher than bonds because they include both principal and interest. However they often have high fees compared to mutual funds and other investments. |
“With stocks, bonds, and other investments, you can sell and be out of the investment in minutes. But with annuities you may be penalized if you want to get out of the contract. Plus, you often don’t have any say about how or where your money is invested.” |
| 6. Bonds – Bonds are like IOUs. Governments, cities, and corporations issue bonds and agree to pay out a specific interest rate across the life of the bond (anywhere from 3 to 20 years, for example). The issuer also promises to repay the principal once the bond matures. |
Bonds don’t offer returns as high as stocks for example but they’re more predictable. You can expect them to deliver the interest rate the issuer promised unless you decide to sell early, the company defaults or the company cancels the arrangement early. Also, unlike annuities, bonds can be sold. |
“Bonds provide an income stream and are suitable for more conservative investors.” |
LPL Financial advisors can answer any financial questions you have and help you find a long-term investment path that fits your individual needs. Advisors are available right in the lobby of Liberty Bank’s branches. Please call LPL at 773.594.6603 to set up an appointment or click here.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. The rate of return of an investment will vary over time, particularly for longer-term investments. Investments that offer the potential for higher returns also carry a higher degree of risk, including the potential loss of principal.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against risk; it is a method used to help manage portfolio volatility.
Indexes are unmanaged. It is not possible to invest directly in an index.
In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. An issuer may default on payment of the principal or interest of a bond. Bonds are also subject to other types of risks such as call, credit, liquidity, interest rate, and general market risks.
Fixed annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.
