Investing can help you build wealth, but you need to balance potential gains against the risk. Those with short-term goals or who are saving for retirement should consider safe investments such as savings accounts and FDIC-protected CDs.
Others, particularly those with a high risk tolerance and long time horizon, may want to diversify their portfolios by including higher-risk choices such as stocks. Check out how to invest for more information.
1. Stocks
Stocks, also known as company shares, are a crucial component to many investment portfolios. They represent partial ownership in a company and may pay dividends or experience price appreciation. Different types of stocks have unique characteristics and benefits.
Before investing, it’s important to understand your current financial situation. Assess your budget, emergency savings, and debt to determine how much you can dedicate to investing. Then, set attainable investment goals that align with your short- and long-term needs. Finally, self-assess your risk tolerance to identify how comfortable you are with the ups and downs of the stock market. This can help you determine which type of stocks to buy and which ones to avoid. It’s also a good idea to diversify by investing in both growth and value stocks, as well as domestic and international equities.
2. Bonds
In a bond, you lend your money to a government or company that promises to pay you back plus interest at a set date known as the maturity date. Bonds provide a lower risk alternative to stocks but have less potential for growth. They’re typically held for the long term and are considered one component of a balanced investing portfolio.
The percentage of bonds in your overall investment portfolio depends on your investing goals, risk tolerance and time horizon. Because bonds are less volatile than stocks, they can help reduce the impact of market dips on your overall portfolio. However, they also tend to offer lower returns than stocks over the long term. So it’s important to carefully research each bond before making a purchase.
3. Real estate
Real estate is a common way to diversify an investment portfolio and generate rental income. There are many ways to invest in property, including direct purchase (homeownership, real estate investment trusts or REITs), wholesaling (buying properties with the intention of selling them quickly for profit) and house flipping (adding value to a property then reselling it for a profit).
Becoming a landlord is a labor-intensive strategy that requires finding tenants, handling repairs, negotiating with contractors and dealing with other property management issues. However, many real estate investments don’t require such hands-on involvement, such as mortgage-backed securities or REIT ETFs, which offer a more beginner-friendly way to get exposure to the market. It’s important to understand the risks of investing in real estate, especially since it is an illiquid asset and profits aren’t guaranteed.
4. Peer-to-peer lending
Investing in peer-to-peer lending cuts out the middle man by connecting borrowers and investors directly. Investors can access loan listings and evaluate borrower profiles, rates and risk levels. They can also diversify by choosing loans with different credit ratings and spread their investments across multiple borrowers.
P2P lending can offer a solid return, but it’s important to be aware of the risks. They include the possibility of bad debts, the loss of invested capital in a solvent wind down and legal or tax changes that can affect the returns on your investments.
Also, remember that your real investment returns will vary with inflation. It is often wiser to take lower investment returns in order to beat inflation rather than chasing ever higher investment returns that carry more risk.
5. Money market accounts
Similar to a savings account, money market accounts provide a safe place to park short-term savings and offer competitive interest rates. Typically, your deposits are insured by the Federal Deposit Insurance Corp. at banks or the National Credit Union Administration at credit unions. Many MMAs also come with check-writing privileges and a debit card.
Investing in a money market account may be worth it if you need quick access to your savings, are saving for a down payment on a home or car, or want to supplement retirement funds by contributing outside your 401(k) and individual retirement account (IRA). But before opening one, compare fees and withdrawal restrictions to find the best option.
You should also look for a bank that waives monthly maintenance fees, as these can negate the interest you’re earning. Also, pay attention to minimum deposit and balance requirements to ensure you can qualify for the highest yields.