Stocks, Bonds & Funds

Stocks: Ownership

When you buy a stock, you own a piece of a company.

If you buy 100 shares of Apple and Apple has 16 billion shares outstanding, you own 100/16,000,000,000 = 0.000000625% of Apple.

As the owner (shareholder):

• You benefit if the company grows (stock price rises)
• You benefit if the company profits (dividends paid to shareholders)
• You have voting rights on company matters (mostly symbolic for large shareholders)
• You're last in line if the company goes bankrupt (creditors paid before shareholders)

Stock returns come from:

1. Price appreciation: You buy Apple at $150, it rises to $180. You sell for $30 profit (20% return).
2. Dividends: Apple pays $0.92 per share quarterly. On 100 shares, you collect $92/quarter or $368/year (3.7% dividend yield).

Historically, stocks return ~10% annually (6% capital appreciation + 4% dividends, roughly).

Risk: If the company fails, your stock becomes worthless. If the market crashes, your stock price falls (temporarily, usually recovers).

Bonds: Lending

When you buy a bond, you're lending money.

Example: You buy a US Treasury bond with:

• Face value: $1,000
• Interest rate (coupon): 5%
• Maturity: 10 years

The government owes you:

• $50 per year for 10 years ($1,000 × 5%)
• $1,000 principal at the end of 10 years

You're guaranteed these cash flows (if the government doesn't default, which the US government won't).

Bond returns:

• Interest payments (coupon): 5% annually
• Price changes: If interest rates rise, bond prices fall (inverse relationship). If rates fall, bond prices rise.

Historically, bonds return ~5–6% annually (mostly from interest, some from price appreciation).

Risk: If interest rates rise, your bond's price falls (if you sell before maturity). If the issuer defaults, you might lose principal. US Treasury bonds have minimal default risk; corporate bonds have higher risk.

Bonds vs. Stocks: The Tradeoff

Stocks:

• Expected return: 10% (higher)
• Volatility: High (prices swing 10–30%+ in a year)
• Best for: Long-term investors who can ride volatility

Bonds:

• Expected return: 5% (lower)
• Volatility: Low (prices stable, returns predictable)
• Best for: Conservative investors, short-term needs, stability

Why not 100% stocks (higher return)? Volatility. If you need $100,000 in 2 years and you have it in stocks, a 30% market crash means you have $70,000. You might not meet your goal.

Why not 100% bonds (stability)? Low returns. Over 30 years, 5% vs. 10% is the difference between $432,000 and $1,074,000 on $10,000 starting amount. You give up enormous wealth for stability you don't need.

Why a mix? Most people use both:

• Long-term money (30 years to retirement): 80–100% stocks (tolerate volatility, need returns)
• Medium-term money (5–10 years to goal): 60% stocks / 40% bonds (balance growth and stability)
• Short-term money (1–2 years to need): 0% stocks / 100% bonds or cash (stability is critical)

Funds: Baskets of Investments

Instead of buying one stock (Apple) or one bond, you can buy a fund that holds many.

Mutual Fund:

• A basket of stocks and/or bonds managed by a fund manager
• You own "shares" of the fund (each share is a tiny piece of all holdings)
• Traded once per day at the fund's net asset value (NAV)
• Might have an annual expense ratio (0.5–2% typical, sometimes higher)

Example: Vanguard's Total Stock Market Fund (VTSAX) holds 3,500+ US companies. Buy one "share" and you own a tiny piece of all 3,500 companies.

ETF (Exchange-Traded Fund):

• Like a mutual fund but trades like a stock (any time during market hours)
• Usually has lower expense ratios (0.03–0.5%)
• Can be bought/sold with immediate execution

Example: VOO (Vanguard S&P 500 ETF) holds 500 large US companies, trades anytime the market is open.

Why Funds Are Better Than Individual Stocks

Diversification:

• Single stock: You own 1 company. If it fails, you lose everything.
• Fund: You own 500–3,500 companies. If one fails, it's a tiny loss.

Studies show that a single company can lose 50%+ of value from a bad quarter. A fund never does (because it's diversified).

Lower cost:

• Individual stocks: You pay trading fees ($0–10 per trade, depending on broker)
• Fund: Annual expense ratio of 0.03–0.5%, built in

Better returns:

• Individual stock pickers: Studies show 90% of active traders underperform the index over 15+ years
• Index funds: Match the market by definition (you get the average, which beats 90% of active traders)

Less research:

• Individual stocks: You need to research the company, understand financials, predict future earnings
• Fund: The fund manager does this (or the fund just tracks an index passively)

Types of Funds

Index Funds:

• Track a specific index (S&P 500, total market, bonds, etc.)
• Low expense ratios (0.03–0.2%)
• Predictable returns (you get the index return, minus fees)
• Best for: Most investors

Actively Managed Funds:

• A manager picks stocks trying to beat the index
• Higher expense ratios (0.5–2%+)
• Unpredictable returns (might beat or underperform index)
• Rarely worth it: Most underperform the index after fees

Sector Funds:

• Hold stocks from one sector (tech, healthcare, finance)
• Riskier than diversified funds
• Best for: Experienced investors with conviction on a sector

Bond Funds:

• Hold multiple bonds (treasury, corporate, high-yield)
• Provide diversification within bonds
• Lower returns than stock funds
• Best for: Conservative portions of portfolio

How to Choose

For a simple portfolio, choose:

1. US Stock Index Fund: VOO, VTI, or VTSAX (0.03–0.04% expense ratio)
2. International Stock Index Fund: VXUS or VTIAX (0.08–0.1% expense ratio)
3. Bond Index Fund: BND or VBTLX (0.03–0.05% expense ratio)

If you want simplicity, pick one all-in-one fund:

• VFIAX: 50% stocks / 50% bonds (moderate)
• VTIAX: 100% stocks (aggressive)

Then allocate your money 70/20/10 (US stocks / international stocks / bonds) or 80/10/10 depending on age and risk tolerance.

A Worked Example

Starting: $50,000 to invest

Goal: Diversified portfolio, minimal effort

Plan:

• 70% in VOO (US stock index): $35,000
• 20% in VXUS (international index): $10,000
• 10% in BND (bond index): $5,000

Expected returns:

• VOO: 10% annually
• VXUS: 9% annually (international stocks slightly lower)
• BND: 5% annually

Blended return: 70%×10% + 20%×9% + 10%×5% = 7% + 1.8% + 0.5% = 9.3% annually

After 30 years at 9.3% return: $50,000 grows to ~$750,000

That's the power of a diversified fund portfolio: simple, low-cost, strong returns.

Start This Week

1. Open a brokerage account: Vanguard, Fidelity, or Charles Schwab
2. Choose your allocation: 70/20/10 (US/International/Bonds) or 80/10/10
3. Buy index funds: VOO, VXUS, BND (or their equivalents)
4. Set up automatic investing: $100–$500/month automatically buys your allocation
5. Don't check it constantly: Let compound interest work for decades

That's everything you need to know to build wealth through investing. Stocks, bonds, and diversified funds—simple, effective, proven.