This article is part of the Retirement Financial Life Equation (RFLE) series. It was initially published on May 23, 2018, and updated in January 2026.
Once you’ve determined your investment approach and strategy, the next critical question becomes: What specific assets should you actually own? This is where the theoretical meets the practical—where your carefully crafted plan transforms into actual holdings in your portfolio. The investment landscape offers an overwhelming array of options: cash in various forms, bonds ranging from ultra-safe treasuries to riskier corporate debt, individual stocks across thousands of companies, real estate both direct and pooled, and literally thousands of mutual funds and ETFs to choose from.
Understanding the characteristics, risks, and appropriate uses of each asset type—along with how to hold them most efficiently—is essential to building the Current Wealth component of your Retirement Financial Life Equation. This article examines the major asset classes available to retirement investors, explains the crucial distinction between individual holdings and pooled investments such as mutual funds and ETFs, and explores the ongoing debate between active and passive management strategies that has fundamentally reshaped the investment industry over the past decade.
Cash
Because most of us receive our income in cash, this is where we start. There are various ways to hold some money. You can put it in your mattress or in a hole in the ground, but that is not recommended (see Matt. 25:24-28). You will have a zero or negative return due to inflation. You can also hold dollars in various types of financial institution accounts (e.g., bank or credit union deposits). Savings accounts and certificates of deposit usually pay more interest than checking accounts. As of late 2025, high-yield savings accounts are paying around 4.0-5.0% APY, and the best CD rates range from 4.0% to 5.1% depending on the term and financial institution. Cash savings can also benefit others, as it provides banks with the capital they need to lend for activities such as mortgages. Bank deposits also carry low risk due to FDIC (U.S. government) insurance (up to $250K).
Holding some cash is always prudent. However, given the relatively low returns relative to historical stock market performance and the ongoing risk of inflation, we need to look elsewhere for better long-term options, particularly when investing with a time horizon of 10+ years.
Bonds
Investing in bonds is a way of loaning money to businesses or governments. You can buy company bonds (debt issued to fund company operations and expansion) or government bonds (government debt to support everything from defense to welfare) with varying returns based on term, assigned risk, and market interest rates when they are issued. Most quality bonds currently yield in the 3.5-5.0 percent range as of late 2025, though they have been much higher during periods of high inflation and interest rates. Many years ago, I bought a twenty-year ‘zero-coupon (treasury) bond’ with an effective annual return of 12 percent! Of course, mortgage interest rates were in the 14-16 percent range at the time.
Company bonds are viewed as riskier than government bonds. Bonds have interest rates and default risks. The longer the term or the greater the risk of default, the higher the interest paid to bondholders. Non-U.S. government debt is riskier than U.S. Treasury Bonds, which are safer than corporate bonds. Bonds are considered riskier than cash (because companies can default), but safer than stocks. That’s why so many people diversify their stock holdings with bonds. I currently hold a significant portion of my IRA in bonds and cash, reflecting my more conservative approach as a retiree.
Company stock
When you buy a stock, you own a part of a company, which is called equity. Stock ownership is one of the most productive uses of your investment dollars, as it helps companies employ people and provide goods and services. Equity entitles you to a return based on the company’s profit and earnings distribution policy. However, these returns are not guaranteed; they can vary significantly from year to year. Larger, stable companies that have a history of paying dividends are considered less risky than newer, highly leveraged companies, which tend to be more speculative. Domestic companies are usually less risky than internationals (due to volatile political and economic environments), with emerging markets being the riskiest. Stocks are generally viewed as riskier than bonds because, if the company fails, you could lose all your money. However, investing in stocks is not the same as gambling. If you buy a lottery ticket, the probability of losing your money is greater than 99 percent (and the odds of winning the Powerball Lottery are a staggering 1 in 300 million!).
Real Estate
You could buy residential or commercial rental properties or mutual funds that invest in them. You may also consider your residence an ‘investment,’ but because mortgages involve high leverage, it’s better to view it as a way to provide for dependents and hospitality. Vacation homes may or may not be good investments, as they are usually highly leveraged and dependent on high rents during peak periods. Real estate is cyclical and subject to interest rate and economic risks. It can also entail significant maintenance and administrative overhead, which may detract from profits.
Small Business
This is not reflected in the framework, and you may not consider owning a small business an investment, but it can be. A small business can earn income that may increase in value before you retire, and can continue to provide income or be sold to provide income in retirement. Many small business owners also invest a portion of their income for retirement.
Durables and precious metals
These include antiques, jewelry, and art, which can have practical uses and bring enjoyment, but are not always good investments. Precious metals, such as gold and silver, may help mitigate some of the risks of inflation or economic breakdown, but they are highly speculative investments due to their high volatility. Holding some of these provides diversification to an investment portfolio, but having too much can lead to hoarding, as the money isn’t being put to productive use. Notice the fear-motivation tactics behind many of the ads you see for buying gold on TV.
Holding options
You have many options for the types of assets you can purchase and how you can own them. As of late 2025, there are approximately 7,000 mutual funds and over 4,000 ETFs in the U.S. financial marketplace, with that number continuing to grow rapidly – particularly as traditional mutual fund companies are now adding ETF share classes to their existing funds. Most people will own between 5 and 15 different funds.
Having such a large number of options is both beneficial and problematic: beneficial, in that you have many choices, and problematic, in that you can be highly targeted in your investment strategy. According to Forbes, if you want to invest in specialized sectors or themes, you have plenty of options – though some are pretty esoteric.
The bad part is that so many choices can make decision-making overwhelming. Plus, many people make their investment portfolios too complex, making them difficult to manage effectively. There is no magic number, but most people need fewer than ten mutual funds or ETFs to have a well-balanced portfolio. It’s even possible to do it with just two or three, and some people hold only one (typically something like a Vanguard LifeStrategy Fund or a Fidelity Target Date Fund). This can be an optimal approach for many people.
Asset holding alternatives
Most of the asset types discussed in Part One can be bought and sold as individual holdings and held in various kinds of bank and brokerage accounts. You can also purchase them along with other investors as part of a basket of similar pooled assets. Most are not quite as esoteric as the oddball examples I gave earlier.
Individual Holdings
Cash deposit accounts (such as checking, savings, CDs, and money market accounts) are considered individual holdings, but financial institutions pool cash assets and use them for specific purposes (lending, investing, etc.). The cash that I hold in my Fidelity IRA is in a very low-interest FDIC-insured savings account. I do that for safety, not to earn interest.
You are not going to earn a lot from traditional checking accounts, but you can do reasonably well with high-yield savings accounts and CDs. A 1-year FDIC-insured CD currently yields between 4.0% and 5.1% APY, depending on the institution. High-yield savings accounts are offering similar rates in the 4.0-5.0% range. You are effectively accepting somewhat lower returns than historical stock returns in exchange for the safety and liquidity these products provide.
You can purchase individual stocks and bonds on the various exchanges using a brokerage account. As we shall see later, you can choose individual stocks with specific objectives in mind, but most people invest for retirement with the goal of share price growth (“capital gains”). Income, in the form of stock dividends, is usually secondary. Dividends can be reinvested to purchase additional shares, which is the stock investing version of compound interest.
The good news for investors is that online discount brokerages now offer zero-commission trading on stocks and ETFs. Fidelity, Charles Schwab, E-Trade, TD Ameritrade, and most other major brokerages charge $0 for stock and ETF trades. Options trades typically incur a small per-contract fee (normally $0.50- $0.65 per contract). This represents a dramatic change from when I first wrote this article, when commissions ranged from $4.95 to $6.95 per trade. Zero-commission trading became the industry standard in 2019, making it much more affordable to build and maintain a diversified portfolio.
However, it’s essential to understand that “zero commission” doesn’t mean there are no costs. Brokers make money through other means, including payment for order flow (PFOF), cash-balance interest, and premium services. For most buy-and-hold investors, these behind-the-scenes costs are minimal compared to the old commission structure.
Basic online trading is now essentially free, a huge benefit for investors. However, I make a distinction between trading and investing. Trading is buying a stock and selling it shortly afterward to pocket a gain from an increase in value. Some people sell when a stock has lost value to cut their losses.
Investing is buying a stock and holding it for an extended period, perhaps decades. You don’t sell just because it’s up 10 percent one day or down 12 percent the next. You are investing over the long term because you believe the company will remain competitive and profitable, and hopefully continue to grow, over the long haul, despite the occasional bumps in the road.
Trading (stock picking, buying, and selling) requires greater knowledge, time, and effort and can be riskier than the pooled-asset alternatives I discuss here. For that reason, as wise stewards, we have to be careful about taking undue risks with the Master’s wealth. God expects us to put his money to work, but not necessarily to turn a quick profit (which is just as likely to result in a loss, perhaps more so). We must be on guard against the temptation to get rich quickly in the stock market, which is what market bubbles are all about. Plus, such a motivation can drown out the more rational counsel to set aside little by little from our current abundance for future needs such as retirement (Prov. 6:6-8).
I am NOT saying that you should never hold individual assets, nor am I saying that you should never ‘trade’ stocks or bonds. However, I do think we have to be careful of our motives and always ask ourselves, “Is this what the Lord wants me to do with his money?” Although it is not uncommon for people to hold cash, stocks, bonds, and other assets individually as investments, it is more common for individuals to buy ‘pools’ of assets of similar types, and some have both.
Advantages of pooled asset investments
Pooled assets offer some significant advantages over individual holdings. Investopedia lists the major benefits of investing in pooled investments over individual holdings as diversification (invest in many different stocks or bonds in a single fund), customization (securities selections targeted at particular investor goals, time horizons, and risk profiles), oversight (day to day monitoring of the markets and initiating buying and selling activities), and affordability (ability to purchase otherwise unaffordable securities).
Another feature of pooled asset investments is that, assuming they aren’t brand-new, extensive historical performance data will be available. This data can make choosing one much easier for the average investor, whether or not they are working with an advisor. Plus, most investment managers have powerful incentives to make good decisions and turn a profit; in fact, for many, their jobs depend on it.
These asset pools, which are sold as individual securities or shares, are as follows:
Mutual funds and Exchange-traded funds (ETFs)
Both are baskets of securities, typically holding equities or bonds, as well as real estate and commodity funds. They usually hold assets of the same type (e.g., “small-cap stocks” or “long-term bonds”) and provide diversification within that asset class, as I noted above.
Mutual funds trade at the end of the day, whereas ETFs trade in real time like stocks. I will get into this in more detail in a bit, but most mutual funds are actively managed; i.e., fund managers select and time buying and selling of positions to maximize return. Actively managed funds may have an up-front sales charge (called a “load”) and usually charge a management fee of between 0.5 and 1.5 percent, though some are lower. Some mutual funds are passively managed; i.e., they are tied to the performance of a particular market index. If you buy an index fund, you are purchasing some or all of the securities that are part of that market.
ETFs are typically passively managed, although actively managed ETFs have become increasingly popular and now account for a significant share of new ETF launches. ETFs are known for their low cost (typically 0.03 to 0.50 percent for passive funds, though active ETFs may charge more) and no up-front sales charges. However, because they can be traded like stocks during market hours, there may be greater temptation to buy and sell at inappropriate times. Most people make mutual fund or ETF choices based on diversification and maximizing return for a given risk appetite.
Closed-End Funds (CEFs)
These are similar to mutual funds and ETFs, which are “open-end funds,” but CEFs issue a fixed number of shares that are not redeemable by investors. Existing shares are traded in the markets. CEFs are actively managed pooled investments, and many use leverage (borrowed capital) to enhance returns. That can make them riskier. CEF management fees are higher than those of mutual funds (typically in the 1.5-3.0% range). CEF distributions can be higher than those of other types of funds, as payouts can include the usual: interest payments (from fixed-income portfolio holdings), dividends from equity holdings, and realized capital gains; however, unlike other funds, they may also include the return of capital. Because they tend to be more complex than their mutual fund and ETF counterparts, invest in them with care (professional advice is strongly recommended).
Ethical and ‘green’ investment funds
These are just a specific type of mutual fund. The fund managers make stock selections based on ethical criteria. You may choose one to avoid any allocation of your money to companies whose products you disagree with (e.g., cigarettes). However, be aware that some so-called ‘ethical funds,’ especially those that identify themselves as ‘socially or environmentally responsible,’ may have investment philosophies that are not in alignment with biblical teachings or principles.
Asset management styles
Mutual funds and ETFs are managed differently. The most significant distinction is between active and passive management, which describes the level of involvement that asset managers have in the day-to-day management of the fund.
Until the mid-70s, all mutual funds were actively managed. That’s when the Vanguard Group, under the leadership of John Bogle, introduced the First Index Investment Trust, later renamed the Vanguard 500, because it was based on the S&P 500 Stock Market Index. There were none until 1984, when Wells Fargo launched a second index fund.
But how things have changed! As of 2025, passive index funds and ETFs have largely reached parity with actively managed funds in total assets. According to Investment Company Institute data from late 2025, indexed mutual funds and ETFs held approximately $18.6 trillion in assets, while active funds held about $17.2 trillion. The Vanguard 500 Index Fund now has assets of over $500 billion, making it one of the largest funds in the world.
The shift toward passive investing has been dramatic. In recent years, index funds have attracted the majority of new capital into equity funds, whereas actively managed funds have experienced net outflows. This trend has been driven by lower costs, strong performance, and growing investor awareness of the difficulty of consistently outperforming market benchmarks.
Active Management
Active management means that the fund manager selects investments and manages their buying and selling to beat the market. Despite the growth of passive investing, many actively managed funds remain and play essential roles in investor portfolios, particularly in less efficient market segments.
Actively managed funds cover virtually all asset categories and can vary significantly in the management fees they charge. One well-known and respected fund is the Vanguard Wellington Fund (VWENX/VWELX), which offers low costs for an actively managed fund. Another great fund I held for a long time in my IRA is the Fidelity Contrafund (FCNTX). These funds have demonstrated the ability to deliver solid returns over long periods.
Active fund management has advantages, particularly for certain types of funds under specific market conditions. Some believe that the markets aren’t always ‘efficient’ (i.e., they don’t price stocks and bonds perfectly), and active managers try to exploit those inefficiencies by finding ‘bargains’ that deliver better returns. They hold more of the investments they expect to outperform (i.e., they’re overweight), which may bring them out of alignment with the benchmark. Actively managed funds typically conduct in-depth research and analysis on the companies they invest in, which they believe will lead to outperformance. Sometimes, even the market is to “buy low and sell high” to further optimize gains.
Passive Management
Passive management is usually associated with low-cost index funds, so-called because they track the performance of their respective market indices. Their goal is not to “beat the market” but to deliver market returns at a lower cost than actively managed funds.
Passively managed index funds are composed of stocks or bonds that partially or fully represent a specific market index. For example, the Vanguard 500 Index Fund mentioned above fully represents the S&P 500 Market Index, which comprises the 500 largest companies in the U.S. However, all index funds are not created equal. They use different benchmarks and methods of correlation, and their management fees can vary. Because their goal is to match an index’s performance, differences in costs can be a critical factor in overall performance and, ultimately, in selection criteria.
For example, one of the most popular large-cap dividend ETFs, the iShares Select Dividend ETF (DVY), currently pays a dividend and charges a 0.39 percent fee. A similar fund I own in my IRA is the Schwab U.S. Dividend Equity ETF (SCHD), which charges a fee of only 0.06 percent. They appear virtually identical, but DVY tracks the Dow Jones U.S. Select Dividend Index, whereas SCHD tracks the Dow Jones U.S. Dividend 100 Index, which is slightly different.
Passively managed index funds have continued to grow dramatically. According to recent data, passive funds are now attracting the lion’s share of new investment dollars. Between 2020 and 2025, passive equity funds and ETFs attracted hundreds of billions in net new assets, whereas active funds experienced consistent outflows.
Examples of passively managed index funds are the Vanguard Total Stock Market Index Fund (VTSAX/VTI) and the Fidelity Total Market Index Fund (FSKAX). Fidelity has even introduced a series of zero-fee index funds (the ZERO funds, such as FZROX, FNILX, FZILX, FZIPX) that charge no expense ratio, making them among the lowest-cost investment options available.
Active versus passive management – which is better?
There is much debate over which is better: active or passive management. There are advocates in both camps. For example, Dave Ramsey has historically advocated actively managed mutual funds with strong track records. In contrast, John Bogle, the founder of the Vanguard Group, who died in 2019, consistently advocated low-cost index fund investing throughout his career.
The evidence increasingly suggests that, for most investors, passive index investing yields better returns after fees. Studies consistently show that approximately 80-90 percent of actively managed funds do not regularly beat their market benchmarks over extended periods. Additionally, actively managed funds tend to charge higher fees than their passively managed counterparts, and costs accumulate significantly over time.
Investors seeking market exposure at the lowest possible cost are increasingly choosing index funds. Companies like Vanguard, Fidelity, and Schwab are seeing massive influxes. Fidelity Investments, where I have my IRA, is one of the largest and most successful providers of actively managed mutual funds. It is also one of the largest providers of passive investments. Like many investors, I think there is a role for both, so I currently have a mix of active and passive funds in my IRA.
Using actively managed funds can help you outperform a particular index, but it can also underperform. With a passive fund, you know you are going to get whatever the market gives you, and probably at a lower cost. However, neither can guarantee outperforming their benchmarks, and each has done better in some areas than others. For example, bond funds and specific, specialized sectors may be areas where active management can add value.
There are also some essential differences between the bond and equity markets, as well as in how the indexes are constructed. How the securities are priced can favor skilled active bond fund managers.
So, I tend to favor passive index funds for stocks and consider both active and passive options for bonds and alternative investments. Most of my stock funds are passive index funds, but several of my fixed income funds are actively managed. For example, I have held PIMCO’s actively managed bond fund (BOND), which is classified as a “total return” bond fund (see the following article for more on this classification). However, I also hold passively managed bond ETFs.