Wealth Management Executive Joey Feste Looks at 5 Types of Investments
There are many different types of investments that can help you reach your financial and wealth-building goals while you mitigate and align risks with your preferences and tolerances. Although each has its own set of features and risk factors, it is imperative to select an investment strategy that coincides with your current financial situation and future objectives.
Joey Feste, a Senior Managing Partner with wealth management firm KM Capital Management, with over thirty years of financial adversity experience, highlights five basic types of investments.
Investors who purchase stock in a publicly traded company are hoping (and ideally, there is ample credible evidence driving this expectation) that the value will rise over time. In addition, some companies pay dividends to stockholders, which are regular distributions of earnings.
According to Joey Feste, many individuals who are new to the world of investing in stocks are attracted to companies that pay dividends. However, what they need to realize is that this might not be the best long-term decision. For example, instead of paying out a dividend, it might make more sense for a company to invest that capital in purchasing assets or expanding operations that ultimately drive up profitability and, consequently, the stock price.
The simplest way to understand bonds, especially in terms of how they differ from stocks, is to see them as loans made to companies or governments. In return, these organizations pledge to pay back the principal plus interest. Generally, bonds are safer than stocks, which is why they provide lower returns. However, unless it is a government bond, there is still some risk that investors need to concern themselves with, comments Joey Feste. If the issuer defaults, then after a long liquidation period, investors will likely only receive a portion of their principal.
A mutual fund is a type of investment in which multiple investors pool money into a single transaction. Mutual funds can include a mix of stocks, bonds, and other assets. Actively managed mutual funds have designated fund managers who select companies and investment types, while passively managed mutual funds are designed to track stock market indices like the S&P 500 and the Dow Jones Industrial Average.
An index fund is a kind of mutual fund, but with an important difference: instead of being comprised of stocks, bonds and other securities from various indexes (e.g. S&P 500, DJIA, Nasdaq, etc.), the fund passively tracks a specific index by holding stock of the publicly traded companies within it.
According to Joey Feste, index funds do not have an active manager, which typically leads to a lower expense ratio. They may also earn interest or dividends, which are distributed to investors. However, there are risks, such as a lack of downside protection, and the inability for investors to act immediately if they suspect mis-pricing due to over or under-pricing of a single stock, or a group of stocks, owned by the index fund.
Exchange Traded Funds (EFTs)
ETFs have skyrocketed in popularity over the last couple of decades. They are designed to mirror the performance of an index. However, unlike index funds, ETFs can be purchased and sold like stocks. Consequently, the price fluctuates throughout the day, whereas the price of index funds are priced a single time at the end of each trading day.
Joey Feste argues that many new investors have ETFs in their portfolio, because it allows them to enter the stock market. Instead of choosing individual stocks to buy and sell — which can be risky and unnerving — they focus on the performance of a broad index and make decisions on that basis.