Answers to six questions about investing in the stock market

1 What’s short-term investing?

Short-term investing is a strategy to consider that can help you save for goals that are 12 to 36 months away—or less. If you plan to use your money in less than three years, you’ll want to know it’s going to hold its value, which may mean you hold more in cash and cash equivalents than bonds and stocks. Examples can include high-yield savings accounts, money market accounts, stable value funds, and certificates of deposit.

When you want your money to be available in the near future, consider prioritizing investments that:

• Can be easily converted to cash or remain in cash
• Don’t change in value too much, if at all
• Offer some rate of return
• Have a low risk of losing money

2 What’s long-term investing?

A long-term investing strategy can help you achieve financial goals further into the future such as a down payment for a home, college savings for children, or retirement savings. When you have more time to reach your goal, then you may be willing and able to take more investment risk in the hope of greater returns. 

The primary difference between the investments you choose in short- and long-term strategies is the associated amount of risk and potential for return.

Short-term strategy versus long-term strategy

If your goals are further in the future, you can consider choosing from other asset classes—which means types of investments—offering a potentially higher return than cash but also coming with more risk, such as:

• Stocks and stock funds
• Bonds and bond funds
• Real estate and real estate funds
• Cash and cash equivalents (yes, short-term investments, too)

3 What are funds?

Funds are combinations of investments. For example, you can consider choosing an individual stock, or you can choose a stock fund that combines many different stocks. How you choose to diversify your choices and allocate your investment will vary, depending on how far your goals are into the future.

Funds are combinations of investments

For example, investing to have $40,000 for a house down payment in five years is very different than hoping to have $3 million for retirement in 35 years. Your choices for your down payment may be more balanced among stocks, bonds, and cash. But because you have more time until you retire, your retirement savings may have a greater allocation to stocks. 

This example is for illustrative purposes only and may not be reflective of your situation. Individual circumstances may vary.

4 What are mutual funds and exchange-traded funds?

Mutual funds and exchange-traded funds (ETFs) are investments that include a mix of asset classes—such as cash, bonds, and stocks. Financial professionals, who are often called portfolio managers, oversee the fund and use the money invested in the fund to select the individual investments within it.

ETFs tend to follow a more passive strategy, while mutual funds are often more actively managed. Both investments can help with portfolio diversification since each one has a mix of different holdings. They may be used frequently for employer-sponsored retirement plans because of their diversification characteristics and professional management. In a qualified retirement plan, such as a 401(k), your employer chooses a list of investments, which may include mutual funds and ETFs, and participants select among the options.

It's important to note that there are material differences between investing in an ETF versus a mutual fund. ETFs trade on the major stock exchanges at any time during the day. Prices fluctuate throughout the day, like stocks. ETFs generally are tax efficient and have lower operating expenses, no investment minimums, no sales loads, and brokerage commissions. 

Mutual funds trade at closing NAV when shares are priced once a day after the markets close. Operating expenses may vary. Most mutual funds have investment minimums and are less tax efficient than ETFs. Many mutual funds have sales charges, and they have no brokerage commissions.

All mutual funds are subject to market risk and will fluctuate in value. Investments in exchange-traded funds (ETFs) and, in particular, certain single-stock or commodity-based ETFs may not be suitable for all investors. Participants pay an ETF transaction fee when buying or selling ETFs in their company’s qualified retirement plan with John Hancock. Refer to the fund’s fact sheet for details. Neither asset allocation nor diversification guarantees a profit or protects against a loss. 

5 What’s an index?

An index is a group of investments that represents a specific market or piece of a market. Indexes can help give you an idea of how certain segments of the economy are working. 

Three of the most common indexes include:

• Standard & Poor’s 500—Tracks the performance of 500 of the largest publicly traded companies in the United States.
• Dow Jones Industrial Average—Includes 30 large companies traded on the New York Stock Exchange and tracks their performance.
• NASDAQ Composite—Includes nearly all stocks listed on the NASDAQ stock exchange.

Indexes are unmanaged and cannot be invested in directly. 

6 What are active and passive investing?

Active and passive investing are two investment strategies that differ based on how much time and effort is spent managing them.

• Active investing—The objective is to outperform a benchmark, such as the S&P 500 Index, by taking advantage of short-term opportunities with the goal of making a profit. It requires knowledge, awareness, and hands-on management to try and accurately time when to buy and sell an investment.
• Passive investing—The objective is to match the performance of a benchmark, not outperform it. Investors who take a passive approach might consider a mutual fund or ETF that follows a key index.

Using knowledge to help make better decisions

Understanding how anything works is like using building blocks—you build a strong foundation, and then build on it one block at a time. If you’re following our stock market investing series, you’ve now learned:

• The basics of the stock market and why it’s important
• The concepts of asset allocation and diversification
• Understanding the stock market and investing

As you start thinking about your financial goals and investment strategies, it’s also important to understand that your investments can increase and decrease in value, and what you can consider when that happens—which is the subject of the next article in our series.