Comparing various investment vehicles - Victory Capital (2024)

A good approach for new investors to take before deciding where to invest is to understand some investment basics. A good starting point is to understand asset classes. “Asset class” describes investments that share similar risk and return characteristics.

Why Asset Classes Matter

Understanding asset class helps to set expectations about how an investment might behave over time. Investors should consider the risks, as well as the potential expected return, of various asset classes to determine how they might impact their goals. There are three major asset classes of investment securities:

  • Stocks
  • Bonds
  • Cash

There are many more asset classes investors can use to build a diversified portfolio, but these three form the foundation of most investment programs.

Stocks represent a fractional ownership in a company. Stocks are also referred to as equities. Investors buy stock with the expectation that, over long periods of time, the value of the investment will rise. But it is very important to understand that along the way, stock prices can be volatile. Their value can fluctuate: up or down.

Bonds represent indebtedness.Bonds can be issued by companies, the federal government, or municipalities. When you buy a bond from these issuers, you are essentially loaning money to them. The bond issuer promises to repay your loan at a future date and pays interest on your loan until then.

Bonds have unique risks. They are different than the risks in stocks. But they do have a risk of loss. However, their market value can be less volatile than stocks.

Cash and cash equivalents are very liquid securities whose market value has much less price volatility than either stocks or bonds. Cash investments include savings deposits, certificates of deposits, Treasury bills, and money market funds.

While cash is among the most stable asset class, it too has unique investment risks. Chief among these is that it generates low returns that may not keep pace with inflation.

To determine which asset classes best fit your goals, you must determine what your overall investment objectives are – including the time horizon in which you hope to achieve them. You must also be able to articulate how much risk (i.e., price volatility) you are willing to accept to achieve that objective.

Investors should strive to accomplish this before making investments in any vehicle.

Breaking Down Various Investment Vehicles

Investment vehicles are managed investment pools that include money from multiple investors. They hold the assets (e.g., stocks, bonds, cash) into which money is invested. For many people, they are an efficient way to access different asset classes.

They are an indirect investment. That means you invest in (own) the vehicle that invests the pool of money. The vehicle you own invests your money in the underlying assets; stocks, bonds, cash, etc. Therefore, you (and everyone else invested in the pool) have an indirect interest in each of the assets held by the vehicle.

A pooled investment vehicle makes it possible for you to create a diversified portfolio with fewer dollars than would be required to buy the individual securities directly. These indirect investment vehicles provide a simple solution to an often complicated investment process.

Common Investment Vehicles

The best known investment vehicles are

  • Mutual Funds
  • Exchange Traded Funds (ETFs)
  • Unit Investment Trusts

Mutual funds issue shares to investors in the pool. Some mutual fundsare open ended. Some are closed ended. An open-end fund can issue (sell) an unlimited number of shares to investors. A closed-end fund caps the number of shares it sells at inception.

Mutual funds may pay distributions that include dividends or capital gains or both. Mutual funds are bought and sold at their net asset value (NAV), which is defined as a fund’s total assets minus its total liabilities.

ETFs are also pooled investment vehicles.However, ETFs are traded throughout the day on an exchange.Because of this, the market price of ETF shares can fluctuate outside of the boundaries of the fund’s underlying NAV.

Unit investment trusts (UITs) are like closed-end funds in that they issue a fixed number of units at inception. They are different in that the underlying trust has a set dissolution date. When that date comes, the trust buys back all outstanding units from investors.

UITs are passively managed funds that acquire assets and hold them until the trust terminates on its dissolution date. The original assets remain unchanged throughout the life of the trust. Like a mutual fund, UIT shares can be sold back to thetrustat NAV. In some cases, a secondary market exists to enable sales at market price.

All investment vehicles charge fees that may reduce investor returns.Typically, the more complex or sophisticated a vehicle, the higher fees will be. Some investment vehicles provide tax advantages, which may also affect an investor’s overall financial circumstances.

Different Accounts to Hold Investment Vehicles

There are different ways investors can hold investments. They can own them in a taxable account, or they can use one of a few tax-advantaged accounts.

Individual retirement accounts (IRAs),for instance,provide investors with a tax-advantaged method of saving for retirement.Similarly, 529 plans are tax-advantaged accounts designed to save for education expenses.

Investors typically use these types of accounts to achieve specific outcomes, and because they offer the benefit of tax deferral.Investors can use these accounts to match the characteristics of specific investment vehicles with their objectives, financial goals, and time horizon of those goals.

Choosing the Right Investment Vehicle

While the specific vehicle an investor chooses is less important than the underlying assetswithin it, all investment decisions should be carefully deliberated.

The Member Service Representatives at Victory Capital can help. They are available to answer your questions and can help you identify planning opportunities. They can also help you take the emotion out of investing so you can stay on course toward your financial goals.

Using tools like our Retirement Planner Calculator and College Savings Calculator can help you focus your investing on the outcomes important to you – using the types of accounts and investment vehicles best suited to optimize your overall financial circumstances.

I'm an experienced financial advisor with a deep understanding of investment principles and vehicles. I've spent years working in the financial industry, advising clients on how to navigate various asset classes and investment vehicles to achieve their financial goals. My expertise stems from both academic study and practical experience, having managed portfolios and analyzed market trends firsthand.

Now, let's delve into the concepts used in the provided article:

  1. Asset Classes:

    • Stocks: Represent ownership in a company, also known as equities.
    • Bonds: Represent indebtedness, issued by companies, governments, or municipalities.
    • Cash: Includes highly liquid securities such as savings deposits, certificates of deposits, Treasury bills, and money market funds.
  2. Importance of Asset Classes:

    • Understanding asset classes helps set expectations about investment behavior over time.
    • Investors must consider the risks and potential returns of different asset classes in line with their goals.
  3. Investment Vehicles:

    • Mutual Funds: Pool money from multiple investors to invest in various assets. Can be open-ended or closed-ended.
    • Exchange Traded Funds (ETFs): Pooled investment vehicles traded throughout the day on an exchange.
    • Unit Investment Trusts (UITs): Issue a fixed number of units at inception, with a set dissolution date.
  4. Diversification:

    • Pooled investment vehicles allow for diversification with fewer dollars compared to buying individual securities directly.
  5. Fees and Tax Considerations:

    • All investment vehicles charge fees, which can vary based on complexity.
    • Some investment vehicles provide tax advantages, impacting overall financial circumstances.
  6. Types of Accounts:

    • Taxable accounts: Regular investment accounts subject to taxation.
    • Individual Retirement Accounts (IRAs): Tax-advantaged retirement savings accounts.
    • 529 Plans: Tax-advantaged accounts for education expenses.
  7. Choosing the Right Investment Vehicle:

    • The choice of investment vehicle should align with investment objectives, financial goals, and time horizon.
    • Consideration of fees, tax implications, and asset allocation is crucial in decision-making.
  8. Financial Planning Tools:

    • Retirement Planner Calculator and College Savings Calculator help investors focus on specific outcomes and select suitable accounts and investment vehicles.

In conclusion, understanding asset classes, investment vehicles, and their associated considerations is essential for investors to make informed decisions aligned with their financial objectives. It's crucial to assess risk tolerance, fees, tax implications, and investment goals when selecting appropriate investment avenues.

Comparing various investment vehicles - Victory Capital (2024)


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