10 best investments in 2021

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To enjoy a comfortable future, investing is absolutely essential for most people. As the economic fallout from the coronavirus pandemic has demonstrated, a seemingly stable economy can be quickly turned on its head, leaving those who haven’t prepared scrambling for income. But those who could hold on to their investments may have done quite well, as the market registered new all-time highs well into 2021.

But with bonds and CDs yielding so low, some assets at astronomical valuations and the economy still recovering, what moves should investors consider taking in the second half of 2021? One idea is to have a mix of safer investments and riskier, higher-return ones.

Why invest?

Investing can provide you with another source of income, fund your retirement or even get you out of a financial jam. Above all, investing grows your wealth — helping you meet your financial goals and increasing your purchasing power over time. Or maybe you’ve recently sold your home or come into some money. It’s a wise decision to let that money work for you.

While investing can build wealth, you’ll also want to balance potential gains with the risk involved. And you’ll want to be in a financial position to do so, meaning you’ll need manageable debt levels, have an adequate emergency fund and be able to ride out the ups and downs of the market without needing to access your money.

There are many ways to invest — from very safe choices such as CDs and money market accounts to medium-risk options such as corporate bonds, and even higher-risk picks such as stock index funds. That’s great news, because it means you can find investments that offer a variety of returns and fit your risk profile. It also means that you can combine investments to create a well-rounded and diversified — that is, safer — portfolio.

Here are the best investments in 2021:

  1. High-yield savings accounts
  2. Certificates of deposit
  3. Government bond funds
  4. Short-term corporate bond funds
  5. Municipal bond funds
  6. S&P 500 index funds
  7. Dividend stock funds
  8. Nasdaq-100 index funds
  9. Rental housing
  10. Cryptocurrency

Overview: Best investments in 2021

1. High-yield savings accounts

A high-yield online savings account pays you interest on your cash balance. And just like a savings account earning pennies at your brick-and-mortar bank, high-yield online savings accounts are accessible vehicles for your cash. With fewer overhead costs, you can typically earn much higher interest rates at online banks. Plus, you can typically access the money by quickly transferring it to your primary bank or maybe even via an ATM.

A savings account is a good vehicle for those who need to access cash in the near future.

Best investment for

A high-yield savings account works well for risk-averse investors, and especially for those who need money in the short term and want to avoid the risk that they won’t get their money back.

Risk

The banks that offer these accounts are FDIC-insured, so you don’t have to worry about losing your deposit. While high-yield savings accounts are considered safe investments, like CDs, you do run the risk of losing purchasing power over time due to inflation if rates are too low.

Liquidity

Savings accounts are about as liquid as your money gets. You can add or remove the funds at any time, though your bank may legally limit you to as few as six withdrawals per statement period, if it decides to do so.

2. Certificates of deposit

Certificates of deposit, or CDs, are issued by banks and generally offer a higher interest rate than savings accounts.

These federally-insured time deposits have specific maturity dates that can range from several weeks to several years. Because these are “time deposits,” you cannot withdraw the money for a specified period of time without penalty.

With a CD, the financial institution pays you interest at regular intervals. Once it matures, you get your original principal back plus any accrued interest. It pays to shop around online for the best rates.

Because of their safety and higher payouts, CDs can be a good choice for retirees who don’t need immediate income and are able to lock up their money for a little bit. But there are many kinds of CDs to fit your needs, and so you can still take advantage of the higher rates on CDs.

Best investment for

A CD works well for risk-averse investors, especially those who need money at a specific time and can tie up their cash in exchange for a bit more yield than they’d find on a savings account.

Risk

CDs are considered safe investments. But they do carry reinvestment risk — the risk that when interest rates fall, investors will earn less when they reinvest principal and interest in new CDs with lower rates, as we saw in 2020. The opposite risk is that rates will rise and investors won’t be able to take advantage because they’ve already locked their money into a CD.

Consider laddering CDs — investing money in CDs of varying terms — so that all your money isn’t tied up in one instrument for a long time. It’s important to note that inflation and taxes could significantly erode the purchasing power of your investment.

Liquidity

CDs aren’t as liquid as savings accounts or money market accounts because you tie up your money until the CD reaches maturity — often for months or years. It’s possible to get your money sooner, but you’ll often pay a penalty to do so.

3. Government bond funds

Government bond funds are mutual funds or ETFs that invest in debt securities issued by the U.S. government and its agencies.

The funds invest in debt instruments such as T-bills, T-notes, T-bonds and mortgage-backed securities issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac. These government bond funds are well-suited for the low-risk investor.

These funds can also be a good choice for beginning investors and those looking for cash flow.

Best investment for

Government bond funds may work well for risk-averse investors, though some types of funds (like long-term bond funds) may fluctuate a lot more than short-term funds due to changes in the interest rate.

Risk

Funds that invest in government debt instruments are considered to be among the safest investments because the bonds are backed by the full faith and credit of the U.S. government.

However, like other mutual funds, the fund itself is not government-backed and is subject to risks like interest rate fluctuations and inflation. If inflation rises, purchasing power can decline. If interest rates rise, prices of existing bonds drop; and if interest rates decline, prices of existing bonds rise. Interest rate risk is greater for long-term bonds.

Liquidity

Bond fund shares are highly liquid, but their values fluctuate depending on the interest rate environment.

4. Short-term corporate bond funds

Corporations sometimes raise money by issuing bonds to investors, and these can be packaged into bond funds that own bonds issued by potentially hundreds of corporations. Short-term bonds have an average maturity of one to five years, which makes them less susceptible to interest rate fluctuations than intermediate- or long-term bonds.

Corporate bond funds can be an excellent choice for investors looking for cash flow, such as retirees, or those who want to reduce their overall portfolio risk but still earn a return.

Best investment for

Short-term corporate bond funds can be good for risk-averse investors who want a bit more yield than government bond funds.

Risk

As is the case with other bond funds, short-term corporate bond funds are not FDIC-insured. Investment-grade short-term bond funds often reward investors with higher returns than government and municipal bond funds.

But the greater rewards come with added risk. There is always the chance that companies will have their credit rating downgraded or run into financial trouble and default on the bonds. To reduce that risk, make sure your fund is made up of high-quality corporate bonds.

Liquidity

You can buy or sell your fund shares every business day. In addition, you can usually reinvest income dividends or make additional investments at any time. Just keep in mind that capital losses are a possibility.

5. Municipal bond funds

Municipal bond funds invest in a number of different municipal bonds, or munis, issued by state and local governments. Earned interest is generally free of federal income taxes and may also be exempt from state and local taxes, too, making them particularly attractive for investors in high-tax states or high tax brackets.

Muni bonds may be bought individually, through a mutual fund or an exchange-traded fund. You can consult with a financial adviser to find the right investment type for you, but you may want to stick with those in your state or locality for additional tax advantages.

Municipal bond funds are great for beginning investors because they offer diversified exposure without the investor having to analyze individual bonds. They’re also good for investors looking for cash flow.

Best investment for

Municipal bonds are a good selection for investors who live in high-tax states, allowing them to avoid levies and generate income. Their lower yields may make them less attractive to investors in low tax brackets or low-tax states.

Risk

Individual bonds carry default risk, meaning the issuer becomes unable to make further income or principal payments. Cities and states don’t go bankrupt often, but it can happen, and historically muni bonds have been very safe — although a rough 2020 challenged that safety a bit.

Bonds may also be callable, meaning the issuer returns principal and retires the bond before the bond’s maturity date. This results in a loss of future interest payments to the investor. A bond fund allows you to spread out potential default and prepayment risks by owning a large number of bonds, thus cushioning the blow of negative surprises from a small part of the portfolio.

Liquidity

You can buy or sell your fund shares every business day. In addition, you can typically reinvest income dividends or make additional investments at any time.

6. S&P 500 index funds

If you want to achieve higher returns than more traditional banking products or bonds, a good alternative is an S&P 500 index fund, though it does come with more volatility.

The fund is based on about five hundred of the largest American companies, meaning it comprises many of the most successful companies in the world. For example, Amazon and Berkshire Hathaway are two of the most prominent member companies in the index.

Like nearly any fund, an S&P 500 index fund offers immediate diversification, allowing you to own a piece of all of those companies. The fund includes companies from every industry, making it more resilient than many investments. Over time, the index has returned about 10 percent annually. These funds can be purchased with very low expense ratios (how much the management company charges to run the fund) and they’re some of the best index funds.

An S&P 500 index fund is an excellent choice for beginning investors, because it provides broad, diversified exposure to the stock market.

Best investment for

An S&P 500 index fund is a good choice for any stock investor looking for a diversified investment and who can stay invested for at least three to five years.

Risk

An S&P 500 fund is one of the less-risky ways to invest in stocks, because it’s made up of the market’s top companies and is highly diversified. Of course, it still includes stocks, so it’s going to be more volatile than bonds or any bank products. It’s also not insured by the government, so you can lose money based upon fluctuations in value. However, the index has done quite well over time.

The index closed 2020 near all-time highs after a strong rebound and started strong in 2021, so investors may want to proceed with caution and stick to their long-term investment plan, rather than rushing in.

Liquidity

An S&P 500 index fund is highly liquid, and investors will be able to buy or sell it on any day the market is open.

7. Dividend stock funds

Even your stock market investments can become a little safer with stocks that pay dividends.

Dividends are portions of a company’s profit that can be paid out to shareholders, usually on a quarterly basis. With a dividend stock, not only can you gain on your investment through long-term market appreciation, you’ll also earn cash in the short term.

Buying individual stocks, whether they pay dividends or not, is better-suited for intermediate and advanced investors. But you can buy a group of them in a stock fund and reduce your risk.

Best investment for

Dividend stock funds are a good selection for almost any kind of stock investor, but can be better for those who are looking for income. Those who need income and can stay invested for longer periods of time may find these attractive.

Risk

As with any stock investments, dividend stocks come with risk. They’re considered safer than growth stocks or other non-dividend stocks, but you should choose your portfolio carefully.

Make sure you invest in companies with a solid history of dividend increases rather than selecting those with the highest current yield. That could be a sign of upcoming trouble. However, even well-regarded companies can be hit by a crisis, so a good reputation is finally not a protection against the company slashing its dividend or eliminating it entirely.

Liquidity

You can buy and sell your fund on any day the market is open, and quarterly payouts are liquid. To see the highest performance on your dividend stock investment, a long-term investment is key. You should look to reinvest your dividends for the best possible returns.

8. Nasdaq-100 index funds

An index fund based on the Nasdaq-100 is a great choice for investors who want to have exposure to some of the biggest and best tech companies without having to pick the winners and losers or having to analyze specific companies.

The fund is based on the Nasdaq’s 100 largest companies, meaning they’re among the most successful and stable. Such companies include Apple and Facebook, each of which comprises a large portion of the total index. Microsoft is another prominent member company.

A Nasdaq-100 index fund offers you immediate diversification, so that your portfolio is not exposed to the failure of any single company. The best Nasdaq index funds charge a very low expense ratio, and they’re a cheap way to own all of the companies in the index.

Best investment for

A Nasdaq-100 index fund is a good selection for stock investors looking for growth and willing to deal with significant volatility. Investors should be able to commit to hold it for at least three to five years.

Risk

Like any publicly traded stock, this collection of stocks can move down, too. While the Nasdaq-100 has some of the strongest tech companies, these companies also are usually some of the most highly valued. That high valuation means that they’re likely prone to falling quickly in a downturn, though they may rise again during an economic recovery.

Liquidity

Like other publicly traded index funds, a Nasdaq index fund is readily convertible to cash on any day the market is open.

9. Rental housing

Rental housing can be a great investment if you have the willingness to manage your own properties. And with mortgage rates hitting all-time lows recently, it could be a great time to finance the purchase of a new property, though the unstable economy may make it harder to actually run it, since tenants may be more likely to default due to unemployment.

To pursue this route, you’ll have to select the right property, finance it or buy it outright, maintain it and deal with tenants. You can do very well if you make smart purchases. However, you won’t enjoy the ease of buying and selling your assets in the stock market with a click or a tap on your internet-enabled device. Worse, you might have to endure the occasional 3 a.m. call about a broken pipe.

But if you hold your assets over time, gradually pay down debt and grow your rents, you’ll likely have a powerful cash flow when it comes time to retire.

Best investment for

Rental housing is a good investment for long-term investors who want to manage their own properties and generate regular cash flow.

Risk

As with any asset, you can overpay for housing, as investors in the mid-2000s found out. With low interest rates and a tight housing supply, housing prices ran up in 2020 and 2021, despite the economy’s struggles. Also, the lack of liquidity might be a problem if you ever needed to access cash quickly. You may have to come up with serious cash for some expenses, such as a new roof or air conditioning, if they’re needed. Of course, you’ll run the risk of the property sitting empty while you’re still paying the mortgage.

Liquidity

Housing is among the least liquid investments around, so if you need cash in a hurry, investing in rental properties may not be for you (though a cash-out refinance or home equity loan is possible). And if you sell, a broker may take as much as 6 percent off the top of the sales price as a commission.

10. Cryptocurrency

Cryptocurrency is a kind of digital electronic-only currency that is intended to act as a medium of exchange. It’s become popular in the last decade, with Bitcoin becoming the leading digital currency. Crypto has become a hot property in the last few years in particular, as dollars have flown into the asset, pushing up prices and drawing even more traders to the action.

Bitcoin is the most widely available cryptocurrency, and its price fluctuates a lot, attracting many traders. For example, from a price below $10,000 a coin at the start of 2020, Bitcoin soared to around $30,000 at the start of 2021. Then it doubled from there soon after, before falling back.

Unlike other assets listed here, it’s not backed by the FDIC or the money-generating power of either a government or company. Its worth is determined solely by what traders will pay for it.

Best investment for

Cryptocurrency is good for risk-seeking investors who wouldn’t mind if their investment goes to zero in exchange for the potential of much higher returns. It’s not a good choice for risk-averse investors or those who need any kind of safe investment.

Risk

Cryptocurrency has very significant risks, including ones that could turn any individual currency into a complete zero, such as being outlawed. Digital currencies are highly volatile and may fall (or rise) precipitously even over very short time frames, and the price depends entirely on what traders will pay. Traders also run some risk of being hacked, given some high-profile thefts in the past. And if you’re investing in cryptocurrencies, you’ll have to pick the winners that manage to stick around, when many could well disappear entirely.

Liquidity

Cryptocurrencies are generally liquid, especially the major ones such as Bitcoin and Ethereum, and you can buy and sell them at any time of day. However, the commissions on them tend to be very high (relative to typical investments such as stocks), and you’ll need to see significant appreciation simply to break even. So it’s important to find the best broker to minimize these costs.

What to consider

As you’re deciding what to invest in, you’ll want to consider a number of factors, including your risk tolerance, time horizon, your knowledge of investing, your financial situation and how much you can invest.

If you’re looking to grow wealth, you can opt for lower-risk investments that pay a modest return, or you can take on more risk and aim for a higher return. There’s typically a trade-off in investing between risk and return. Or you can take a balanced approach, having absolutely safe money investments while still giving yourself the opportunity for long-term growth.

The best investments for 2021 allow you to do both, with varying levels of risk and return.

Risk tolerance

Risk tolerance means how much you can withstand when it comes to fluctuations in the value of your investments. Are you willing to take big risks to potentially get big returns? Or do you need a more conservative portfolio? Risk tolerance can be psychological as well as simply what your personal financial situation requires.

Conservative investors or those nearing retirement may be more comfortable allocating a larger percentage of their portfolios to less-risky investments. These are also great for people saving for both short- and intermediate-term goals. If the market becomes volatile, investments in CDs and other FDIC-protected accounts won’t lose value and will be there when you need them.

Those with stronger stomachs, workers still accumulating a retirement nest egg and those with a decade or more until they need the money are likely to fare better with riskier portfolios, as long as they diversify. A longer time horizon allows you to ride out the volatility of stocks and take advantage of their potentially higher return, for example.

Time horizon

Time horizon simply means when you need the money. Do you need the money tomorrow or in 30 years? Are you saving for a house downpayment in three years or are you looking to use your money in retirement? Time horizon determines what kinds of investments are more appropriate.

If you have a shorter time horizon, you need the money to be in the account at a specific point in time and not tied up. And that means you need safer investments such as savings accounts, CDs or maybe bonds. These fluctuate less and are generally safer.

If you have a longer time horizon, you can afford to take some risks with higher-return but more volatile investments. Your time horizon allows you to ride out the ups and downs of the market, hopefully on the way to greater long-term returns. With a longer time horizon you can invest in stocks and stock funds and then be able to hold them for at least three to five years.

It’s important that your investments are calibrated to your time horizon. You don’t want to put next month’s rent money in the stock market and hope it’s there when you need it.

Your knowledge

Your knowledge of investing plays a key role in what you’re investing in. Investments such as savings accounts and CDs require little knowledge, especially since your account is protected by the FDIC. But market-based products such as stocks and bonds require more knowledge.

If you want to invest in assets that require more knowledge, you’ll have to develop your understanding of them. For example, if you want to invest in individual stocks, you need a great deal of knowledge about the company, the industry, the products, the competitive landscape, the company’s finances and much more. Many people don’t have the time to invest in this process.

However, there are ways to take advantage of the market even if you have less knowledge. One of the best is an index fund, which includes a collection of stocks. If any single stock performs poorly, it’s likely not going to affect the index much. In effect, you’re investing in the performance of dozens, if not hundreds, of stocks, which is more a wager on the market’s overall performance.

So you’ll want to understand your knowledge and its limits as you think about investments.

How much you can invest

How much can you bring to an investment? The more money you can invest, the more likely it’s going to be worthwhile to investigate higher-risk, higher-return investments.

If you can bring more money, it can be worthwhile to make the time investment required to understand a specific stock or industry, because the potential rewards are so much greater than with bank products such as CDs.

Otherwise, it may not simply be worth your time. So you may stick with bank products or turn to ETFs or mutual funds that require less time investment. These products can also work well for those who want to add to the account incrementally, as 401(k) participants do.

How to invest your stimulus check

If you’ve received a stimulus check and are thinking about investing it, you’ll want to consider a few questions first. Investing is for money that you can live without, not for money you need soon:

  • Do you have immediate expenses that you may have trouble paying?
  • Do you have an emergency fund with at least six months of spending saved up?
  • Do you have substantial outstanding debt?

It’s important to have your current financial situation under control before you can invest.

You have multiple ways to invest your money, including the options above. If you want to invest in stocks, bonds or funds, you’ll need to have an account with a broker. If you’d prefer to have someone else do the investing for you, one excellent option is to turn to a robo-advisor. You’ll pay a small management fee and the robo-advisor handles the rest.

If you’re a new investor, consider sticking with investment choices that are on the safer side. Investments such as an S&P 500 index fund or Nasdaq-100 index fund tend to be safer than a portfolio of a few individual stocks. A robo-advisor can help you with these choices, too, and the cost is reasonable.

Bottom line

Investing can be a great way to build your wealth over time, and investors have a range of investment options, from safe lower-return assets to riskier, higher-return ones. That range means you’ll need to understand the pros and cons of each investment option and how they fit into your overall financial plan in order to make an informed decision. While it seems daunting at first, many investors manage their own assets.

But the first step to investing is actually easy: opening a brokerage account. Investing can be surprisingly affordable even if you don’t have a lot of money. (Here are some of the best brokers to choose from if you’re just getting started.)

Recap of the 10 best investments in 2021

  1. High-yield savings accounts
  2. Certificates of deposit
  3. Government bond funds
  4. Short-term corporate bond funds
  5. Municipal bond funds
  6. S&P 500 index funds
  7. Dividend stock funds
  8. Nasdaq-100 index funds
  9. Rental housing
  10. Cryptocurrency

Learn more:

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

Written by
James Royal
Senior investing and wealth management reporter
Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
Edited by
Senior wealth editor
Reviewed by
Senior wealth manager, LourdMurray