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finance. a la shmoop. what are the different types of mutual funds? alright

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well first of all if you haven't watched our video on mutual funds already, well

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go ahead and do that first. it was directed by Steven Spielberg and we need [mutual funds video link]

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to amortize the million bucks we spent on it to hire him. is he really doing

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sharknado seven now? anyway mutual funds. there are actually more of them than

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there are individual stocks. and like hairstyles mutual funds are available in

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a wide variety of options. why? because investors want to buy slices

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and dices and combinations of stocks and bonds to fit a ludicrously large and

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complex set of needs. and with the handy dandy help of computers slicing and

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dicing is really easy today. there are really two categories of mutual funds.

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bond funds and equity funds. and lots of them are combined as well ,like half

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bonds half stocks you know the Centaurs of the finance world.

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well those funds live at either end of the short term risk spectrum like here [stock spliced with bond]

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and here. the short term riskiest funds are high gross mall cap companies often

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technology-related little engines who could who pay no dividend and trade at

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high price to earnings ratios. the least risky are short term bond funds which

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live way over here like a dead body in a lake tied to a cinder block. they don't

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go up much. most mutual funds live somewhere here in the middle of the pure

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stock only or pure bond only ends. so what's a standard mix of stocks and

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bonds in a mixed or balanced fund? well maybe 50 50 75 25 90 10 something like

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that .there is no standard. so let's start with some extremes. bond funds are

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shockingly just a collection of bonds. boring. they pay a bunch of interest they

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come due in a wide range of eras or durations like six months in the future

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to 30 years in the future to even a hundred years in the future. yep Disney

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has a bunch of century bonds they famously launched along with Nicky

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announcing that he was getting a bellybutton ring. note that bonds carry

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many different dials that get turned from interest rates to call provisions

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like how soon the bond which is in theory a 30-year bond could be called

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back by the issuer if rates get cheaper in its future you know stuff like that.

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well as far as dials go a duration is another

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one of them. like how long until the bond comes due .well short-term bond funds

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tend to be extremely safe and short in term and generally carry bonds which

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come due within a year or less. and some bond funds with super short durations

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like less than 90 days are for the most part considered extremely safe. and the [least risky bonds on a graph]

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industry buzzword here is money market fund. and yes it's like there is a market

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for money. some bond funds are able to take on a lot of risk or at least

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relatively more risk than other bond funds. but generally speaking the

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riskiest of the bond mutual funds is meaningfully less risky than a very

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conservative safeish all equity mutual fund. and one key thing to think about

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when you think of risk here there's risk of losing your money of course. debts

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that are due tomorrow are relatively safe when compared with debts due 30

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years from now. a lot can happen in 10,000 plus days. if you invest in a

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risky equity take a stock it's not like one in a million odds it goes bankrupt.

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risky equities go bankrupt all the time. but bonds yeah it really is more like [short term and long term debts compared]

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one in a million kind of odds that they go fully bankrupt. if you invest in the

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safest of bond funds like government bond funds which only keep Treasury

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bills and notes and other forms of what they call government paper you know

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things backed by The Full Faith and Credit of the US government to tax it's

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hard working money earning taxpaying citizens, well you suffer what is called

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inflation risk. if you only invest in super safe stuff and compound at 2% a

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year when you could have taken some risk in a blend of bonds and stocks while the

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risk is that your investment performance underperforms the rate of inflation we

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all live under. that is if you're banking on your bank savings account and 2% or

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something like that working for you when you're old, you'll never get to your

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financial promised land. inflation will make your retirement savings nut worth [man complains that he may apply at McDonalds]

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less and less. if you only made like 2% a year for all that time inflation might

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have been 3% a year and you actually lost wealth or buying power relative to

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what everything actually costs. let's jump to the perspective of taking equity

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risk in just buying an all equity no bond index or mutual fund that

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basically tracks the performance of the overall stock market think the S&P 500.

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over long periods of time like decades the overall stock market has

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historically compounded at about 10 percent a year with dividends reinvested.

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but it's a hugely volatile Beast. some years the markets up 20 percent other

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years it's down 10, but over time it goes up Lots. if you held only cash in a

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savings account you'd be very safe but only get a 2% return over time. you'd

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have paid a huge price for that safety. how much? well in fact we give up 8% a [year to year returns on a list]

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year in compounding and after 27 years of saving well you end up with 1/6 the

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amount you'd have saved had you taken that 8% a year extra risk. remember the

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rule of 72? you divide the interest rate you're getting into 72 and that's the

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number of years it takes to double. so 8 into 72 is 9 it means that in 27 years

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you double your nut 3 times. got it? so equity risk is not a bad thing over time

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there was a time and a place and generally speaking if you have lots and

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lots of time to compound your investment well historically the stock market is a

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great place to be. alright moving fully onto equities now the short-term

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riskiest equity funds are generally those which invest in growth. that is

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they invest in companies which generally don't pay a dividend, so there's no

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cushion as to how low the stock can go if they hit a speed bump in their growth [ high risk stock companies explained]

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trajectory. a given stock trading on hopes and dreams and momentum of the

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promise of curing cancer can be trading at $200 a share one day only to discover

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in the next day's FDA trial results that well it's only succeeding in growing

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hair on the knuckles of Norwegian women. and while the next print of the stock is

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closer to 10 bucks a share, so you can lose your shirt quickly on any one stock

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so when you think about investing with risk spread among many long-term bets

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you think about the diversity and range of investments you make when it comes to

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risky stocks as being leans into growth the areas in the future of the world. so

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the would be cancer curing knuckle hair growing stock is just one stock and a

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big fat basket of growth stocks in a mutual fund. so don't let the fall of

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just one stock and a bath of hundreds terrify you too much. and

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note that we've made a big deal of short-term risk here instead of just

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risk. why? because over time investing in growth stocks has been a really good

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thing in America. the S&P 500 is growthie. let us gaze lovingly at what nine to ten [men do business, exchanging money]

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percent of your compound growth looks like over a hundred ish years.

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if you extracted the non dividend paying portion of it the growth year portion of

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the S&P 500 has grown it's somewhere between twelve and fifteen percent a

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year for a very long time. compare that with a median bond fund growth scenario

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of four to six percent. huge gaps over time in varied investment turns yes, most

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investors don't marry entirely one flavor of investment, they like to spread

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the wealth between bonds and stock. almost literally. so how do you decide

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between bonds and stocks? well generally speaking old people tend to lean more

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toward bonds because they can't take much more risk. and young people toward

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equities. yeah why well time. if you're on the way out the door, so to speak you

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don't want to do anything too risky you just want to play it safe and keep a

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roof over your head in your twilight years. if you're young well you've got

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the luxury of taking big risks failing starting over again if need be so you [young man crashes and burns on a bicycle]

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can more safely invest in equities because over time, well growth will bail

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you out of mistakes. you make when you're young and in the scheme of things

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investing in equities is not even in the top hundred riskiest things you'll do

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when you're young. [list of risky things gets checked off]

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