Investing Options

Investment options

John Brennan and Rick Ciolino from Cape Ann Savings Bank talk with John Maher about investment options. They explain cash alternatives, bonds, stocks, mutual funds, exchange traded funds, and more. They cover the pros and cons of each of these types of investments and provide some insights on which investors may want to explore each of these investment options.

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Transcription Disclosure: Below is a transcript of the conversation between John Maher, John T. Brennan and Rick Ciolino. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi, I am John Maher. I'm here today with John Brennan, Senior Vice President of Trust and Financial Services, and Rick Ciolino, Trust Investment Officer at Cape Ann Savings Bank in Gloucester, Massachusetts. Today our topic is investment options. Welcome, John and Rick.

John Brennan: Hi John.

Rick Ciolino: Hi John.

Cash Alternatives

John Maher: So John Brennan, what are cash alternatives?

John Brennan: Cash alternatives are really the first step on the investment ladder, shall we say. They're typically very low risk. They're typically short term and they're usually relatively liquid.

Of course, you are familiar with dollar bills. That's of course cash-cash. Cash alternative might be a certificate of deposit that you buy at a bank that earns a little interest. Time-based deposit, the bank takes your money for a while, gives you a certain interest rate and gives it back at the end of the term.

The other would be say money market deposit accounts. Money market accounts are a lot like checking accounts, but they usually have some restrictions. What it means with the money market account, the more money you have in a money market account, the higher the interest rate. That might be a feature of that.

And then there might be restrictions on how many checks or how many withdrawals you could take. Because they don't want it to be just like a checking account where you're getting a better interest rate. And then there are money market mutual funds. These are the same thing really, but you might have some commercial paper underlying that, which is making up or trying to make sure that the underlying value of the investment is right around a dollar.

Finally, you might have something like US Treasury bills. US Treasury bills are very liquid. The US Treasury is issuing them all the time. They offer a modest, probably just below the inflation rate, interest rate. So that's what those are.

The advantage of cash alternatives is they're predictable. Earnings are really certain, you can liquidate them and get to your money right away. The disadvantage of them is there's typically low returns and sometimes those returns might be below the rate of inflation.

Bonds

John Maher: Our next option for investing is bonds. Rick, do you want to tell me a little bit about bonds and what they are?

Rick Ciolino: Sure. At its very basic level, it's something that an investor can purchase that is issued by a government or a corporation to raise money. So what often happens, whether it be through the government or whether it be through a corporation who's looking to raise money to fund their operations, they will issue a bond at an interest rate for a certain term to investors who are able to purchase them, collect income on them.

And typically, an interest payment over a certain period, it's usually a stated interest payment that you get. You get a certain amount of interest over a certain period of time. And at the end when it matures, it'll mature for the money back that you invested.

Risk Level of Bonds

John Maher: Is that a guaranteed investment or is there a risk to bonds?

Rick Ciolino: Bonds can be of a lot of different flavors. If you buy a Treasury bond, you'll be buying something that is basically risk-free. It's guaranteed by the government of the United States. If you buy something from a government agency, it can be mostly guaranteed. There might be a little bit more risk there.

You could buy corporate bonds at a lot of different levels, and you could look at the safety and the cash flow of the issuer to determine how much of a risk you're taking on that bond. Typically, the more risk that you take, and the longer term that you take, will allow you a higher interest rate. So it offers a lot of different opportunities on the scale potential rewards of the investor up and down the risk of scale.

Stocks

John Maher: Tell me a little bit about stocks, what they are, and how they're different from bonds.

Rick Ciolino: Stocks is usually where a corporation will go to raise money after they've reached their borrowing capacity. Basically, what a stock is, is it's giving out ownership or selling ownership of their corporation. If you're to buy a stock, you are actually buying a piece of that corporation so you are an owner.

Typically, what they'll do is it'll be issued at a certain level, and then it'll be traded on a stock market such as the New York Stock Exchange. And based on the earnings potential of the company will be the valuation of the stock.

Day Trading Vs. Investing

John Maher: When I was younger and I thought of what investing was, I got a picture of what it was from what I saw on TV and in movies where you might have some day trader on the phone constantly and going, "Oh, this stock, buy, buy, sell, sell," that sort of thing. What is the difference between day trading like that like what we see in movies, and really having a more stable investment portfolio?

Rick Ciolino: Night and day. If you're talking day trading, you're talking speculating. That's no different than gambling. A lot of investors do it. A lot of investors take risks and a lot of investors will try their hand at day trading and see if they have what it takes to become a trader and make money.

Typically, day trading is when you're dealing with the momentum of the stock market. You're dealing with the investor sentiment and the psychology of the stock market as opposed to really just focusing on fundamentals and buying companies that will increase in value over time because their values will increase over time.

Often, when you are looking at some of the most speculative stocks, they're not necessarily priced based on any stated value other than some momentum or some sort of popularity, for lack of a better word, in the markets.

Mutual Funds

John Maher: Moving on to the next option for investment, we want to talk a little bit about mutual funds. John Brennan, do you want to tell me a little bit about those?

John Brennan: Sure. A mutual fund is typically made up of stock. What a mutual fund is, let's say you have some money, but not an enormous amount. But what you want to do is you want to diversify your money across maybe a sector, automotive, or biotech, or something like that.

What you do is, you take that money and it's pooled into a fund with other investors. That fund in turn invests your collected dollars according to a stated investment strategy. You own a portion of that fund, so you mutually own part of a larger investment. And that investment then in turn invests in multiple companies, say the S&P 500, say an investment sector, or something like that.

That mutual funds investment strategy would be spelled out in something called a prospectus. And it would tell you the blueprint of how the fund manager is going to invest the money. So hopefully you are getting what you want when you invest in that specific fund. For thousands of mutual funds out there doing all kinds of different things from wildly speculative investments to very conservative investments. So there's all kinds of flavors.

Exchange-Traded Funds

John Maher: And our next investment option is exchange-traded funds or ETFs. What are those?

John Brennan: An exchange-traded fund, it's typically based on an index. I guess I should use my S&P 500 example for this because exchange-traded funds might track something like the S&P 500. They might track something like the Barclays Aggregate. Now, these indexes are there to tell you how the market performed. On any particular day, they're like a temperature reading on the stock market.

So an ETF is often a passive investment vehicle, meaning it's tracking something. It's typically cheaper, unlike a mutual fund. Mutual funds, when you want to sell your mutual fund, you have to wait until the end of the day, and that funds trading is done. Then you could pull out. An ETF, you can trade throughout the day. So it's a little more liquid I suppose, and manageable that way.

Other Types of Investments

John Maher: Okay. Finally, what are some other types of investments that people might find themselves taking?

Rick Ciolino: You can invest in anything, but there are a lot of different types of investments that you may want to consider, especially when you start looking at ways to diversify a portfolio to reduce the risk. One very popular investment that we use from time to time is real estate.

It's usually done through a group of assets such as a mutual fund or an exchange-traded fund where you can invest in a certain type of real estate. That might allow you to have an investment that works a little bit differently than stocks and bonds, and allow you some growth or some income, that by working differently, might help diversify the portfolio and still give you some income.

There are many different types of investments. There are some things that we use other than real estate, we might invest in some commodity. Gold plays a role in the markets. It tends to do well when things are going poorly because people panic and they want the quality of gold. You might invest in other types of commodities such as agriculture or other types of metals because they may be important to industry or important to... Is in agriculture and feeding the world.

There are a lot of different types and a lot of different types of what they call derivatives, which are derived from stocks and bonds. These will trade such as options in futures and can add risk or can add hedging and de-risking abilities. So there are a lot of different options that we use when we're investing in portfolios to try to balance out a portfolio and diversify it.

Investing in Art and Collectibles

John Maher: What about investing in something like collectibles or art, fine art or something like that?

John Brennan: It's doable. There's actually a guy who recently sold a mint collection of unopened Star Wars figurines circa 1978. He had a complete set, it went up for auction and he made some money. But when you think about it, an investment like that, you have to store it, you bear the risk, you have to make sure the mice don't get into it, you have to make sure the packages don't deteriorate. But it is kind of an investment. You could consider fine art an investment. And in fact, not only can you buy a painting directly, there are some investment vehicles where you can buy a portion of a painting.

The thing about collectibles, is collectibles are taxed at a very high rate when they are sold. So something like a coin collection or a stamp collection, butterfly collection, they are a form of investment, but they tend to have a less favorable tax treatment than some of the financial vehicles we've described.

Rick Ciolino: If you don't mind me adding, liquidity plays a big difference in the different types of investing. You'll find the collectibles, as you'd assume, liquidity can be really hard to come by where you're buying.

John Brennan: You might not find the perfect buyer for that Darth Vader that you hope to.

John Maher: Right.

Rick Ciolino: Exactly. Where if you want to sell a share of Apple that's traded in millions of shares on a daily basis, it's very easy to get in and out.

John Maher: I suppose the risk with collectibles as well is things can go in and out of favor very quickly. Maybe Star Wars is really popular right now, but maybe in a few years, it won't be. And all of a sudden, these things that you've collected and spent money on over the years and kept on in good shape, like you said, John, all of a sudden it's not worth as much as maybe even what you paid for it originally. So it depends on what the whims of the market and whether or not you could find the right buyer, like you said.

John Brennan: I'll give you an example on that, John, which is Beanie Babies. Beanie Babies were created to be collectible. They first came out, there was a market frenzy and people bought a lot of them. And then people said, "These are just kind of little dinky stuffed animals," and they lost their popularity. The market for them collapsed, so yes, you are absolutely correct.

Contact Cape Ann Savings Bank to Talk About Investment Options

John Maher: All right. Well, that's really a great discussion on different investment options. Thanks for your time John and Rick.

Rick Ciolino: Thank you, man.

John Brennan: Sure thank you.

John Maher: For more information, you can contact Cape Ann Savings Trust and Financial services at 978-283-7079, or visit the website at capeannsavings.bank.

Investments purchased through the Cape Ann Savings Trust and Financial Services department are not FDIC insured, not FDIC guaranteed, not bank guaranteed, and may lose principal value.