Stocks vs Bonds vs Mutual Funds
John Woodfield, Senior Wealth Advisor, Portfolio Manager, B.Comm, CFP®, CIM®, FMA, FCSI®
Summary of Key Points
The video explains the differences between stocks, bonds, and mutual funds, which can be harder to understand than real estate since they cannot be seen or touched.
A mutual fund pools investors’ money, is professionally managed, and invests in stocks, bonds, and other investments; fees are also higher.
A stock represents ownership in a company, entitling you to a share of revenue, often paid as dividends that are typically higher than bond interest.
A bond is a loan to a company or government that pays regular interest and returns the original amount at maturity, like an IOU.
Work with a CFP and a portfolio manager to align your portfolio with your goals.
CFPs and PMs are fiduciaries in Canada.
Video Script
In this video we’re going to walk through the difference between stocks, mutual funds, and bonds. You’ll also learn how each fits together to provide for your future and whether you should work with a portfolio manager.
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I’ve been a CFP for over 25 years, and have seen, over and over, the high comfort level that people have when buying real estate.
They can see and touch property but when they think of other investments, like stocks bonds or mutual funds, they become wary because they aren’t clear on how these work. So let’s get clear on the exact differences.
1) A mutual fund is a packaged product.
It is a group of individual company shares (stocks) or bonds. You pay a fee to be in a mutual fund since there are management costs. A mutual fund is a product you buy to meet a goal.
But if you are a US person, residing in Canada you should avoid Canadian mutual funds as these are taxed punitively by the IRS.
2) A stock, or share, is a piece of a company that you own.
For example if you own Apple stock you are a part owner of the company Apple. People often think of the stock market as risky and unknown. To protect yourself from the risks of an individual stock going up and down in value, you would typically own a variety of companies that are secure and have a good dividend.
Dividends are like interest and are paid consistently on a set date.
3) Bonds are essentially an IOU from a government or a corporation.
Governments issue bonds when they need to borrow money. You are loaning money to the government or corporation. For example a 5 year, $1000 bond with 5% coupon means that you loan the company or government $1000 which you will get back in 5 years. In the meantime they pay you a fixed rate of interest of 5% That would be $50 per year.
Are you looking to ensure you have a steady income in your retirement?
I recommend taking a look at the services offered by a high quality financial advisor. I recommend using one that is a CFP and a portfolio manager since they have a duty as a fiduciary and most do not. A Fiduciary duty is a legal obligation to put a client’s needs first.