Stocks, bonds and mutual funds can all be valid investment types based on your wants and needs. Let’s take a brief look at each and see the differences.

Stocks (Equities) — Units of ownership in a corporation. Many factors influence the value of a stock, but a company’s earnings generally have the biggest impact. As earnings increase, the value of the stock typically increases, too.

Bonds — Loans or debt instruments issued by governments or corporations to raise money. These instruments are issued for a stated period, during which interest payments are made to the bondholder. Bonds may be bought or sold, and may gain or lose value, as investment property.

Mutual Funds — Professionally managed investment vehicles that pool money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities. The fund is overseen by a board of directors or trustees charged with ensuring that it is managed in the best interests of investors, and with hiring the mutual fund manager, who buys and sells assets in accordance with the mutual fund's investment objective. Because a mutual fund buys and sells a large number of investment shares at a time, management costs are designed to be lower per investor than they would be if an individual investor purchased individual stocks and bonds.

Risk vs. reward

Different kinds of investments mean putting your money at different levels of risk. Greater risk equals potentially greater reward. Here’s a simplified way of looking at risk versus reward.

Short-term investments    Bonds    Balanced    Large-cap    Smid-cap    Small-cap    International    Specialty funds
Chart displaying increasing levels of risk and reward for different investment categories. From lowest risk and reward to highest – capital preservation, bonds, large cap stocks, mid cap stocks, small cap stocks and international stocks.

Investment categories

Short-term investments (fixed accounts/cash) — Short-term investments are sometimes referred to as cash equivalents because they can be easily sold (converted to cash) without affecting their value. While these short-term investments are generally less risky than stocks or bonds, their returns are also usually much lower and may not keep pace with inflation. A variety of investment types can be generally categorized as short-term investments, including certificates of deposit (CDs), money market accounts (MMAs) and Treasury bills (T-bills). The Plan’s short-term investment option is a stable value fund. Because the value of the securities held by stable value funds will fluctuate, there is the risk that an investor will lose money by investing in stable value funds.

Bond funds — Bond funds are made of bonds purchased from a government entity or corporation that agrees to pay back the original amount paid along with interest on a specified date. Many bonds are generally more stable than stocks and provide a steadier flow of income. However, they also typically provide a lower rate of return. High-yield bond securities are typically subject to greater risk and price volatility than funds which invest in higher-rated securities.

Balanced funds — Balanced funds typically invest in a combination of stocks (which tend to be higher risk), bonds (which tend to be more stable), and, occasionally, short-term investments. This is similar to an asset allocation approach, but the asset mix is never adjusted in response to the investor’s age or risk tolerance. This fund is aimed at preserving proportionate levels of risk, safety and gains.

Large-cap funds — Large-cap refers to companies with market values (or capitalization) greater than $10 billion. Because these tend to be large, established corporations, their stocks generally offer lower risk than stocks from mid- and small-cap companies.

Small/Mid (Smid)-cap funds — These funds include stock in companies with market values (or capitalization) up to $10 billion. These stocks are typically more volatile than large-cap stocks.

Small-cap funds — Small-cap refers to companies with market values (or capitalization) under $2 billion. Small companies can often grow much faster than big companies, but their stocks also tend to be riskier.

International funds — These funds include stock in companies located outside of the United States. These stocks may trade on either the U.S. or foreign stock exchanges and are generally considered higher-risk investments. Risks include currency fluctuations, political instability, differences in accounting standards, and foreign regulations.

Specialty funds1 — Specialty funds are mutual funds investing primarily in the securities of a particular industry, sector, type of security or geographic region. Funds that focus on real estate investing are sensitive to economic and business cycles, changing demographic patterns and government actions.

Allocation (Asset allocation) — The strategy of spreading investment funds across asset classes, such as cash and fixed income, bonds and stocks to help minimize risk. This may help manage the risk of investing in part because these investment categories respond to changing economic and political conditions in different ways. The use of asset allocation does not guarantee returns or protect from potential losses.

Annualized return — The rate of return for a given period that is less than one year, but computed as if the rate were for a full year.

Asset Classes (Types) — The investments available for participant contributions and assets. In general, asset classes may be divided into stocks, bonds and cash and cash-like products including money market instruments, Treasury bills and CDs. Retirement plans typically offer mutual funds comprised of stocks, bonds, cash or a mixture of them.

Capital Gains— The profits paid to shareowners from the sale of stocks and/or bonds.

Class of Shares — The types of listed company stock that are differentiated by the level of voting rights that shareholders receive. A company may have several different share classes, or classes of stock, such as Class A, Class B, Class C, etc. Load mutual funds have three share classes: Class A, Class B and Class C. Each have different sales charges, 12b-1 fees and operating expense structures.

Diversification — The portfolio strategy designed to spread risk by allocating assets among a variety of investments, such as short-term investments, bonds and stocks.

Dollar Cost Averaging — The investment strategy that invests fixed amounts at set intervals, such as monthly or biweekly. Over the long term, a particular investment is purchased with a fixed dollar amount on a regular schedule, regardless of the share price. This assumes more shares are purchased when prices are low, and fewer shares are bought when prices are high.

Expense Ratio — The annual fee all mutual funds or exchange-traded funds charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs and all other asset-based costs incurred by the mutual fund. Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. The expense ratio, which is deducted from the mutual fund's average net assets, is accrued on a daily basis. It should be taken into consideration when choosing mutual funds.

Market Timing — The frequent movement between and among mutual funds to potentially capitalize on perceived or anticipated market trends. Market timing does not ensure profitability and, because it often operates to the detriment of other investors, fund managers may assess fees on sales of funds held for short periods.

Net Asset Value (NAV) — Regarding mutual funds, it’s the market value, or price, of a share. It’s calculated daily by dividing the total net assets of the mutual fund by the number of shares outstanding.

Rate of Return — The percentage of change in an investment, including appreciation or depreciation and dividends or interest, over a given time period. Most rates of return of funds within a retirement plan are expressed on an annual basis ("annualized"), unless stated otherwise.

Rebalance — The strategy to sell investments that have been performing well and invest more into those that have fallen behind – a buy low, sell high approach. It won't change how future contributions are invested and is sometimes referred to as an end-result exchange.

Rollover (Pretax) — The Amounts transferred to the plan from an eligible retirement plan or IRA. Reinvestment of assets into an IRA that an individual receives from a qualified tax-deferred retirement plan. It must be reinvested into an IRA within 60 days to avoid tax and penalties.

Roth Contributions — The designated employee after-tax pay that’s contributed to a participant’s 401(k), 403(b) or governmental 457 plan account. Subject to certain restrictions, distributions of earnings from the Roth account may be taken tax free. There are several different types of Roth accounts including and not limited to IRAs, 457(b) and 401(k).

Stable Value Fund — The investment option that's focused on the preservation of capital. Comparable to a Money Market Fund, it’s a conservative option with low risk and low reward.

[1] Includes real estate, energy, health care and other industry-specific funds.
Investing involves risk and you could lose money.
Asset allocation, rebalancing and diversification do not guarantee to make a profit or avoid loss in a down market.