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Investing

The differences between real estate, stocks, bonds & mutual funds

Shot of a group of businesswomen using a laptop during a meeting
Shot of a group of businesswomen using a laptop during a meeting
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Today, potential paths for investors range widely—traditional investments like mutual funds sit arm in arm with alternative investments such as non-fungible tokens (NFTs) and cryptocurrency. However, investments boil down to four main types: real estate, stocks, bonds and mutual funds.

Bonds are the most conservative option, with a guaranteed return if held to maturity. However, the returns are typically lower than with mutual funds, stocks, and real estate, which carry a more inherent risk. Some options also have a higher barrier to entry, like real estate, while investors can purchase stocks for just a few dollars.

Each of these investment options comes with a unique set of pros and cons that may influence your investing strategy.

What are the 4 types of investments?

1. Real estate

The most common way to become a real estate investor is to buy your own property to live in. Whether that's a house, a condo or a cash-generating duplex, most people dip their toes into real estate by purchasing something they live in themselves.

Right now, the real estate market is hot, which can be intimidating to homebuyers. It's still a seller's market, and many properties around the country continue to sell for more than the asking price.

However, real estate investing can take many forms, from buying a rental property to flipping houses to investing in a real estate investment trust. One of the biggest advantages of real estate investing is that it is a physical asset. Additionally, real estate can appreciate in value over time, providing investors with a solid return on their investment.

Real estate investing also can be very hands-on, requiring time and effort to find the right property and manage it effectively. Additionally, real estate investments are subject to market fluctuations. There's always a risk that the value of your investment could go down.

Despite these risks, real estate remains one of the most popular types of investments due to its physical presence and potential for high returns—making it a good option for investors who are looking for a long-term investment and are willing to put in the time and effort.

2. Stocks

When you buy a stock, you're purchasing a share of ownership in a publicly-traded company. Companies offer stocks for purchase through stock exchanges such as the New York Stock Exchange. Companies typically do this in order to raise capital to grow. If they do grow and become successful, the value of the stock generally increases.

Stocks are a great way to build long-term wealth, but they can be volatile and subject to market fluctuations, so the value of your investment can go down even if the company is doing well.

Stocks are one of the most popular types of investments. You also might see them referred to as equities; stock market and the equity market are synonymous. If you're willing to ride out the ups and downs, they offer the potential for high returns over the long run. However, if you prioritize stability, consider investing in bonds or other securities.

3. Bonds

When you buy a bond, you're lending money to a government or corporation. In exchange for your loan, they agree to pay you interest over a set period of time. Bonds often are considered to be one of the safer types of investments: They are not as volatile as stocks, and they are backed by the full faith and credit of the government or corporate issuer.

Bonds provide stability, but they do have some drawbacks. For example, they typically provide lower returns compared with stocks. Additionally, if interest rates rise, the value of your bond will go down. Nevertheless, bonds can be a great way to diversify your portfolio and reduce your overall risk.

Ultimately, bonds are a more conservative investment suited for investors who are looking for something steady and reliable. You do have to wait for the bond to reach maturity in order to withdraw the full value of it. However, you will collect interest along the way.

4. Mutual funds

Mutual funds pool money from many different investors and invest it in a variety of securities. Mutual funds are managed via professional money managers, who choose which assets to include in the fund. Mutual funds offer several advantages for investors, including diversification, liquidity and professional management.

Mutual funds typically have higher fees compared with other types of investments. However, you could have lower fees overall when investing in mutual funds compared with what you'd pay as an individual investor. That's because experienced fund managers make educated decisions on portfolio allocation, saving you from spending research time and having to make decisions on how to react to market and economic circumstances.

Mutual funds can be a great way to invest in a variety of different securities without having to do the research yourself. Plus, there are mutual funds for every objective, including stock funds, bond funds and mixed-asset funds. Whatever your level of experience as an investor, you can find a suitable fund that works for both your investing goals and your risk tolerance.

What other investments are available?

ETFs

Exchange-traded funds are similar to mutual funds in many ways. ETFs also pool money from many different investors and invest it in a variety of securities. However, they trade like stocks on an exchange, which means they can be bought and sold throughout the day. Additionally, ETFs often have lower fees compared with mutual funds. ETFs may require you to pay sales commission fees with every purchase, but these may still represent lower costs than those of mutual funds.

However, ETFs can be very volatile and subject to market fluctuations. Nevertheless, ETFs can be a way to invest in a variety of different securities without having to delve into your own research.

Dividend stocks

A dividend stock pays regular cash dividends from the company's profits, giving shareholders a way to receive regular income from their investment. There are two main types of dividend stocks: cash dividends and stock dividends. When you have a cash dividend, the company sends you cash as a return for good profits. If it's a stock dividend, the company will reward you with more stock.

Index funds

Index funds are a type of investment that tracks a specific market index, such as the Dow Jones Industrial Average or the S&P 500. When you buy shares of an index fund, you don't buy a specific market index itself but an index fund that tracks it. An index fund will typically perform very closely to how the index itself performs.

Because they are mostly passively managed and only attempt to replicate the performance of the underlying market index, index funds typically have lower fees than actively managed funds.

Investors tend to choose index funds for their portfolios if they want instant diversification, low fees and portfolio simplification. Because you don't need to pick individual stocks with an index fund, they require less time to research.

In addition, they tend to be more tax efficient and provide better diversification. For these reasons, index funds are often a good choice for long-term investors.

Municipal bonds

Municipal bonds are a type of debt investment offered by local and state governments to fund various projects for local residents. These bonds work as loans that support infrastructure, such as highways and bridges, as well as schools and parks. These bonds tend to offer lower yields than comparable corporate bonds due to lower default risks, but they are often exempt from federal taxes and most state and local taxes (if you're a resident), making them attractive for individuals in higher income tax brackets.

Many municipal bonds have call features. This means the issuer can redeem the bond prior to the stated maturity date. Issuers typically recall bonds for a premium when interest rates drop, choosing to reissue them at a lower interest rate. So, while you might lose this higher level of interest income, you're often compensated by receiving a payment higher than the face value.

Keep in mind that investing in bonds for interest income during a falling rate environment can make it more difficult to generate sufficient income. For non-callable municipal bonds, falling rates can push up bond prices; in turn, investors earn a premium for selling them into the market.

Annuities

An annuity is an insurance product meant to provide a stream of payments to the investor at regular intervals. The payments may last for a specific period of time or for the rest of the annuitant's life. Annuities may help support your retirement planning by providing a guaranteed source of income, ensuring you won't outlive your money.

There are four types of annuities that you can consider, depending on your needs. They work based on two primary needs: determining when you want to start receiving payments and the growth potential you're seeking. Depending on the type of annuity you choose, it may or may not be subject to market volatility.

This isn't an exhaustive list of alternative investments—but it begins to show the wide world beyond the main types of investments.

How can you purchase investments?

In order to purchase stocks, bonds and mutual funds, you'll first need to open a brokerage account. This will give you a place to store your money and make trades.

You can open a brokerage account with a traditional financial institution such as an investment firm, or with an online broker. Once you have an account, you're able to deposit money and start investing it.

Before you begin investing, make sure you understand the risks involved. Many investors aim to develop a diversified portfolio featuring different types of investments. While diversification helps mitigate risk from market fluctuation, it doesn't remove it entirely.

If you have questions about the type of investments that are best for you, consult with a Thrivent financial advisor. They can help you develop a plan no matter where you're at in life—from making first time investment decisions to putting a retirement plan into place. They also can offer guidance on how to manage your investments and ensure you're staying on track to reach your goals.

Want to get started on your own? Take this quiz to uncover your risk tolerance and understand your investing style.

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Investing involves risks, including the possible loss of principal. The product and summary prospectuses for applicable securities (including mutual funds held in an account) and the Thrivent Investment Management Inc. Managed Accounts Program Brochure , contain information on investment objectives, risks, charges, and expenses, which investors should read carefully and consider before investing. Available at thrivent.com.

Refer to the Thrivent Investment Management Inc. Form CRS Relationship Summary for more information about us; our relationships and services; fees, costs, conflicts, and standard of conduct; disciplinary history; and additional information. Refer to the Thrivent Investment Management Inc. Regulation Best Interest Disclosure document for information on fees, products, services, potential conflicts of interest, and additional information. Both are available upon request from your financial advisor or professional and on Thrivent.com/disclosures.

Thrivent and its financial advisors do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.

The principal underwriter for Thrivent Mutual Funds is Thrivent Distributors, LLC. Member FINRA. Asset management services provided by Thrivent Asset Management, LLC. Both are subsidiaries of Thrivent Financial for Lutherans.

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