Episode 9: Stocks vs Bonds: Boost Your Investment IQ

In the ninth episode of the Melby Money Show, host Shaun Melby demystifies the world of investing, focusing on the fundamental differences between stocks and bonds. He explains how a balanced portfolio of these investments can boost your financial future. The episode covers the latest economic updates, including GDP growth and inflation trends, and provides actionable advice on how to get started with investing. Listeners will also learn about capital gains and how to make informed financial decisions. Join Shaun as he breaks down financial concepts in an engaging and easy-to-understand way.

00:00 Introduction to the Melby Money Show
00:45 The Power of Early Investing
01:01 Understanding Stocks and Bonds
01:36 Current Economic Events
02:18 Impact of GDP on Personal Finance
03:13 Inflation and Its Effects
03:57 Practical Financial Advice
05:02 Sponsor Message: Capital Gains
06:13 Stocks vs. Bonds: A Deep Dive
10:38 Getting Started with Investing
12:37 Conclusion and Next Steps

This podcast is for informational and educational purposes only.  This podcast is not financial advice.

Transcript

Welcome to the ninth episode of the Melby Money Show. I'm your host, Shaun Melby. Imagine you're at a party and someone offers you two mystery envelopes. One promises a chance to own a piece of the hottest tech company while the other guarantees a steady stream of cash for years to come. Sounds intriguing, right?

Welcome to the world of stocks and bonds, the building blocks of smart investing that can seriously level up your financial game. You might be thinking investing, that's for old people with gray hair and big bank accounts, but here's a mind blowing stat for you. If you start investing with just $500 a month at age 25, you could have over a million dollars by the time you're 65.

You heard that, right. A [00:01:00] million bucks. And that's where understanding stocks and bonds comes in. The financial world can seem like it's speaking a whole different language sometimes, but once you get through the jargon, you'll be amazed at how much control you can have over your financial future. Whether you're dreaming of launching your own startup, buying that dream house, Or just want to stop stressing about money.

This knowledge is your secret weapon. So buckle up. We're about to break down the differences between stocks and bonds in a way that'll actually make sense, and maybe even a little fun. By the end of this episode, you'll have the inside scoop on how these two investment rockstars can work together to help you build wealth, even if you're just starting out.

But first, let's talk about what's in the news with current events.

 What if I told you the U. S. economy is growing steadily, but not quite as fast as some expected? Let's unpack the latest GDP numbers and what they mean for your wallet. The Bureau of Economic Analysis released its advance estimate for the 3rd quarter of 2024, and it's giving us a lot to think about. The U. S. economy grew at an annual rate [00:02:00] of 2. 8 percent in Q3. Now, that's a bit lower than the 3 percent economists were expecting, but it's still showing solid growth. These are what is called real GDP numbers. And what that means is they are the numbers adjusted for inflation. So with inflation already factored in, let's put this in context. In the second quarter, we saw growth of 3%. So we're seeing a very slight slowdown, but here's the thing. We're still outpacing the average growth rate of 2. 1 percent that we've seen since the start of this century. It's like we're running a marathon at a steady pace, not sprinting, definitely not falling behind. So what's driving this growth? Few key factors. One, consumer spending is still going strong. Americans are spending on both goods and services with notable increases in prescription drugs, motor vehicles, and healthcare services.

Number two, exports are up, especially in capital goods. We're selling more big ticket items to other countries. Federal [00:03:00] spending increased, with defense spending leading the charge. But it's not all rosy. We saw a downturn in private inventory investments, and a larger decrease in residential fixed investment.

It's like we're building fewer houses, but buying more stuff. Now let's talk inflation, the topic on everyone's mind in the last couple years. The good news is it's cooling down the personal consumption expenditures price index or PCE which is the Fed's preferred inflation gauge Increased by 1. 5 percent in quarter three down from 2. 5 percent in quarter two The most recent year over year number from September was 2. 1 percent That's a significant drop and could influence the Fed's decisions on interest rates Looking ahead, most economists expect growth to moderate. We're not speeding towards a recession, but we might see slower growth in the coming quarters.

It's like we're shifting from fifth gear to fourth. Still moving forward, just not as rapidly. So what does that mean for you and your money? Let's break it [00:04:00] down. One, the job market is likely to remain stable. With steady economic growth, we're not seeing signs of major layoffs. Two, your purchasing power might improve.

With inflation cooling faster than wage growth is slowing, your money might go a bit further. Three, the Fed might lengthen the span that lowers its interest rates.

This could be good news if you're looking to borrow or refinance, it just might take a little longer to get there.

And four, investment strategies might need tweaking. With changes in economic growth patterns, different sectors might outperform others. Remember, economics is never a sure thing. We've got to stay nimble and keep our financial houses in order. That means staying on top of your budget, keeping your emergency funds stocked, and making smart diversified investments for the long haul.

 Take a close look at your spending and saving patterns. Are they aligned with the steady growth environment? Are there areas you could adjust, take advantage of lower inflation or prepare for potentially slower growth? Whether GDP is exceeding expectations or falling a bit short, what matters most is how you [00:05:00] manage your own finances.

Now a word from today's sponsor.

 Today's episode is brought to you by capital gains ever sold something for more than he paid. Congrats. You just entered the world of capital gains. Capital gains are the profit you make when selling an asset. It's not just for stock traders. It affects anyone who's made money from investments. If you sell an asset you've held for over a year, you've got long term capital gains.

These often come with a lower tax rate. Sell within a year? That's a short term gain. Usually taxed at your regular income rate. But here's the thing, capital gains can pop up in unexpected places. Sold your house for a profit? Capital gain. That vintage guitar collection finally paid off?

You guessed it, capital gain. And don't forget, the amount of your gain can impact your tax bracket. A big windfall might bump you into a higher tax bracket, so planning ahead is key. Getting a handle on capital gains gives you the know how to make your money work smarter, not harder. It's about timing your sales, understanding your tax implications, and making informed decisions about your investments.[00:06:00] 

Remember, understanding capital gains isn't just for Wall Street. It's for anyone who wants to keep more of what they earn. Whether you're saving for retirement, planning a big purchase, or just trying to grow your wealth, capital gains knowledge is power.

 All right, let's break down stocks and bonds in a way that'll make your next happy hour conversation way more intriguing. Think of the stock market as a giant pizza party where everyone's invited. When you buy a stock, you're essentially grabbing a slice of that pizza, or in this case, a piece of the company.

You become a part owner, riding the waves of that company's successes and sometimes its failures. It's like owning a tiny fraction of Tesla or Apple without having to deal with the day to day operations of working at the company. Now, bonds are a whole different ballgame. Imagine your friend needs cash to start a food truck business.

You lend them money, and they promise to pay you back with interest. That's basically what a bond is, but instead of your friend, it's usually a company or the government borrowing the money.

You're not owning anything. You're just lending out your cash and expecting it back with a little extra for your trouble. [00:07:00] Here's where it gets interesting. Stocks are like that adventurous friend who's always up for skydiving. There's potential for a massive rush, but also a chance you might end up with a few bruises.

The value of your stock can soar if the company does well, but it can also tank if things go south, possibly even lose everything if the company goes belly up. Bonds, on the other hand, are more like that reliable friend who always shows up on time.

The generally steadier and less likely to give you heart palpitations when you check your investment app. While these are less risky investments, they're not risk free. You do run the risk of a company going out of business and your bond goes with it, so why bother with either? Well, stocks give you the chance to really grow your money over time and maybe even score some dividends.

Think of them as bonus slices of pizza. Bonds, while typically less exciting, can provide a steady stream of income and act as a cushion when the stock market decides to do its rollercoaster impression. It's all about finding the right mix for your financial [00:08:00] goals and how much excitement you can handle in your investment journey.

Now that we've got the basics down, let's zoom in on what really sets stocks and bonds apart. When it comes to potential returns, stocks are like that friend who's always chasing the next big thing. They can offer higher rewards, but they come with a side risk that might keep you up at night.

On average, stocks have historically returned about 10 percent annually over the long haul. But remember, that's an average. Some years you might be popping champagne while others you've reached for antacids. What's interesting is if you look back over the last 100 years, there are very few instances where the annual return was around 10%.

Bonds in contrast are more like that friend who's content with a steady job and a reliable paycheck. They typically offer lower returns than stocks, but they're less likely to ghost you when the economy takes a nosedive. Government bonds, for example, might yield around 2 3 percent annually. The U. S. 10 year treasury at the time of this recording is right around 4.

3%. When it comes to making money from these investments, stocks and bonds play at different [00:09:00] roles. Stocks can pay you in two ways, through price appreciation, the value of your shares going up, and dividends, a slice of the company's profits paid out to the shareholders.

It's like getting a raise at work and a bonus check all at once. Bonds on the other hand generate income through interest payments. It's a set schedule, kind of like your Netflix subscription, but in reverse.

The money's coming to you. Now, here's where things get really compelling. Stocks and bonds often move in opposite directions, especially when the economy hits a rough patch. When everyone's freaking out about a recession, stocks might take a nosedive, but bonds can actually increase in value as investors seek safety.

It's like stocks and bonds are playing a financial seesaw. This is why having both in your portfolio is smart. It's all about balance.

Understanding how stocks and bonds behave in different economic climates is important to building a portfolio that can weather any storm. By mixing both, you're essentially creating a financial shock absorber for your money. It's not about picking one over the other.

It's about finding the right combo that matches your goals and how much financial turbulence you can [00:10:00] handle. Diversification isn't just a fancy word financial advisors use to sound smart. It's your ticket to sleeping easier at night while your money works hard for you.

Let's bring this down to earth with some real world examples. Think of Apple. It's not just the maker of your iPhone, it's also stock you can own. When you buy Apple stock, you're betting on the company's future success. If they release the next must have gadget, your stock value could increase.

On the flip side, if they face a major setback, your investment might take a hit. Now consider a US treasury bond. It's like lending money to Uncle Sam. It's not as exciting as owning a piece of a tech giant, but it's rock solid in terms of getting your money back with interest.

So how do you actually get started with stocks and bonds? For stocks, you can use user-friendly apps like Robinhood or Acorns to dip your toes in the water. These platforms let you buy fractional shares, meaning you can own a piece of Amazon without dropping thousands on a single share. For bonds, you might want to look into bond ETFs, which are exchange traded funds, which gives [00:11:00] you exposure to a bunch of bonds in one package. Vanguard's total bond market ETF is a popular choice for beginners. And this will be something I explore in my next episode, ETFs over individual stocks.

But that is for another day. When it comes to research, don't let fancy financial jargon intimidate you. Start by following companies you already know and use, read their quarterly reports, check out financial news sites, and maybe even listen to earnings calls. For bonds, keep an eye on interest rates.

When rates go up, Bonds typically go down and vice versa. And here's a tip. Don't just chase the hottest stock or highest yielding bond. Think about how each investment fits in your overall financial picture and does it make sense for you to invest in it? Investing isn't about getting rich overnight.

It's about building wealth over time. Start small. Be consistent and don't put all of your eggs in one basket. Maybe begin with a 80 20 split between stocks and bonds if you're young and can handle some risk, meaning [00:12:00] 80 percent of your portfolio is in stocks, 20 percent is in bonds.

As you get older, or if you're more risk averse, you might shift to a 60 40 mix or even 50 50. For my younger clients, I tend to not have much, if any of a bond position, if this is an investment meant for retirement.

But if the money is going to be needed in a few years, that's when I really dial down the risk and increase my bond holdings. All that to be said, the key is to start now, even if it's just with a small amount. Your future self will thank you for taking that first step towards financial freedom. So what are you waiting for? It's time to turn today's money into your ticket to long term financial success. 

Thank you for joining me on this episode of the Melby Money Show. And we look forward to continuing this conversation in future episodes. If you have any questions, you'd like me to answer on the show. You can email them to shaun@melbymoney.com. 

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So future episodes show up in your feed. And if you feel compelled to leave a review or rating. I'd appreciate that. As well as getting feedback will only help make this [00:13:00] podcast the best it can be. If you've enjoyed the episode so far, feel free to tell a friend about the show. Farewell and I'll see you on the next episode of the Melby Money Show. [00:14:00]