Investing for Beginners: Stock Funds vs. Bond Funds for 2014 and Beyond

When you talk about investing for beginners, you need to be very careful when comparing stock funds vs. bond funds because most beginners don’t distinguish stock funds from bond funds. Come to think of it, most of the people who invested money with me when I was a financial planner didn’t understand their bond funds, especially. In 2014 and beyond, this could be expensive.

Stock funds are a great way to invest for beginners who want to invest money in stocks. Most people understand the concept and understand the risks involved. Bond funds are a different story. Most people who invest money in them tend to view these funds as very investor-friendly. After all, for a recent 30-year period they outperformed stock funds (stocks). Not only that, but they rarely have a bad year, while equity funds have had some very difficult times.

Over the last year or so, a handful of my readers have balked at my warnings about bond funds versus mutual funds. stock funds for 2014, 2015 and beyond. Let me explain and simplify investing for beginners, because this is a topic of importance to all investors. After all, you must own both types of funds to have a balanced portfolio; and this should be one of the objectives of every investor.

The issue of stock funds vs. bond funds is really a question of risk vs. potential returns. People understand that the former can be risky, but they accept it because they know they can also be very rewarding. For example, equity funds returned around 30% in 2013. From their 2009 lows, they are up around 150%. Those kinds of returns are worth the risk. That’s beginner investing 101. The higher the potential return… the higher the risk.

On the other hand, few average investors today understand risk vs. issuance of potential yields when applied to bond funds for 2014 and beyond. In fact, many have become attached to these funds. After all, they have consistently performed since the early 1980s and have paid handsome income (dividends) versus earnings. safe investments such as bank certificates. At the same time, the share price (value) has increased. The problem is that most investors don’t understand the risk involved; and few understand WHY these funds have been such good investments.

What I emphasize in Investing for Beginners 101 is that there are few things you can count on in the world of investing. For example, you can safely bet that there will always be uncertainty. And there is one more rule of thumb you can count on. When interest rates fall, bond prices (and bond fund values) rise; and when interest rates go up, they go down. When I was a financial planner, I explained this to every client I sold these funds to. It was rarely a problem, because interest rates peaked in 1981 and basically fell for more than 30 years.

The average investor today has never experienced an extreme economic environment of rising interest rates. Rates soared to historically high levels in the late 1970s and early 1980s. Some investors were losing nearly 50% on their bond funds in 1981. These investments aren’t safe, and the problem in 2014 and beyond is the prospect of higher interest rates. With rates near record lows, this means you’re taking risks to earn a dividend of around 3% a year on longer-term bond funds. Also, the potential for stock prices (value) to rise is daunting, since interest rates can’t really go much lower.

Successful investing is always challenging, and investing for beginners can sometimes be hair-raising. I think 2014 and beyond could be a hair-raising time for investors. Our government has lowered interest rates to EXTREMELY low levels to stimulate the economy. Now the powers that be are trying to resolve the situation. Interest rates could rise more than expected.

In stock funds vs. Bond Fund Debate The main issue I see is that risk vs. potential returns is not favorable for bond funds because potential returns are limited, as they have been in recent years. If the economy stalls and interest rates soar, both can be losers… both carry considerable risk in 2014 and beyond. Investing Rule #1 for Beginner Investing: When interest rates go up, bond prices and bond fund values ​​go down.

Don’t despair, investing for beginners can be challenging. Keep this in mind: risk vs. profit potential still makes investing money for higher returns a winner vs. dragging it safely and earning peanuts.