To enjoy a comfortable future, investing is absolutely essential for most people.
Why invest? Investing can provide you with another source of income, help fund your retirement or even get you out of a financial jam in the future. Above all, investing helps you grow your wealth — allowing your financial goals to be met and increasing your purchasing power over time.
Or maybe you’ve recently sold your home or come into some money, then it’s a wise decision to let that money work for you and grow over time.
You have 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 growth stocks, S&P 500 index funds and REITs. 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 diverse – that is, safer – portfolio.
What to consider
Risk tolerance and time horizon each play a big role in deciding how to allocate your investments.
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.
Those with stronger stomachs and workers still accumulating a retirement nest egg are likely to fare better with riskier portfolios, as long as they diversify. Be prepared to do your homework and shop around for the types of accounts that fit both your short- and long-term goals.
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If you’re looking to grow your 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. Below are a range of investments with varying levels of risk and potential return.
Here are the best investments in 2020:
- Certificates of deposit
- Money market accounts
- Treasury securities
- Government bond funds
- Municipal bond funds
- Short-term corporate bond funds
- Dividend-paying stocks
- High-yield savings account
- Growth stocks
- Growth stock funds
- S&P 500 index fund
- Rental housing
- Nasdaq 100 index fund
- Industry-specific index fund
Overview: Best investments in 2020
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. You may be able to earn up to nearly 2.25 percent interest on these types of investments, as of Jan. 2020.
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.
Risk: CDs are considered safe investments. However, 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. 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 at your money sooner, but you’ll often pay a penalty to do so.
A money market account is an FDIC-insured, interest-bearing deposit account.
Money market accounts typically earn higher interest than savings accounts and require higher minimum balances. Because they’re relatively liquid and earn higher yields, money market accounts are a great option for your emergency savings.
In exchange for better interest earnings, consumers usually have to accept more restrictions on withdrawals, such as limits on how often you can access your money.
These are a great option for beginning investors who need to build up a little cash flow and set up an emergency fund.
Risk: Inflation is the main threat. If inflation rates exceed the interest rate earned on the account, your purchasing power could be diminished. In addition, you could lose some or all of your principal if your account is not FDIC-insured (though the vast majority are) or if you have more than the $250,000 FDIC-insured maximum in any one account.
Liquidity: Money market accounts are considered liquid, especially because they come with the option to write checks from the account. However, federal regulations limit withdrawals to six per month (or statement cycle), of which no more than three can be check transactions.
[READ: How to determine your net worth]
The U.S. government issues various types of securities to raise money to pay for projects and pay its debts.
These are some of the safest investments to guarantee against loss of your principal.
Treasury bills, or T-bills have a maturity of one year or less and are not technically interest-bearing. They are sold at a discount from their face value, but when they mature, the government pays you full face value. For example, if you buy a $1,000 T-bill for $980, you would earn $20 on your investment.
Treasury notes, or T-notes, are issued in terms of two, three, five, seven and 10 years. Holders earn fixed interest every six months and then face value upon maturity. The price of a T-note may be greater than, less than or equal to the face value of the note, depending on demand. If demand by investors is high, the notes will trade at a premium, which reduces investor return.
Treasury bonds, or T-bonds are issued with 30-year maturities, pay interest every six months and face value upon maturity. They are sold at auction throughout the year. The price and yield are determined at auction.
All three types of Treasury securities are offered in increments of $100. Treasury securities are a better option for more advanced investors looking to reduce their risk.
Risk: Treasury securities are considered virtually risk-free because they are backed by the full faith and credit of the U.S. government. You can count on getting interest and your principal back at maturity. However, the value of the securities fluctuates, depending on whether interest rates are up or down. In a rising rate environment, existing bonds lose their allure because investors can get a higher return from newly issued bonds. If you try to sell your bond before maturity, you may experience a capital loss.
Treasuries are also subject to inflation pressures. If the interest rate of the security is not as high as inflation, investors lose purchasing power.
Because they mature quickly, T-bills may be the safest treasury security investment, as the risk of holding them is not as great as with longer-term T-notes or T-bonds. Just remember, the shorter your investment, the less your securities will generally return.
Liquidity: All Treasury securities are very liquid, but if you sell prior to maturity you may experience gains or losses, depending on the interest rate environment. A T-bill is automatically redeemed at maturity, as is a T-note. When a bond matures, you can redeem it directly with the U.S. Treasury (if the bond is held there) or with a financial institution, such as a bank or broker.
Government bond funds are mutual funds 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.
Risk: Funds that invest in government debt instruments are considered to be among the safest investments because the securities 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.
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.
According to the Financial Industry Regulatory Authority (FINRA), muni bonds may be bought individually, through a mutual fund or an exchange-traded fund (ETF). 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 provide diversified exposure without the investor having to analyze individual bonds. They’re also good for investors looking for cash flow.
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. 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.
Choosing 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.
Corporations sometimes raise money by issuing bonds to investors.
Small investors can get exposure by buying shares of short-term corporate bond funds. 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.
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.
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. 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.
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 earn 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.
Risk: As with any stock investments, dividend stocks come with risk. They’re generally 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.
Liquidity: You can buy and sell your stock on any day the market is open, and quarterly payouts, especially if the dividends are paid in cash, are liquid. Still, in order 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.
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 earn much higher interest rates at online banks. As of Jan. 2020, you can find accounts paying above 2 percent.
A savings account is a good vehicle for those who need to access cash in the near future.
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 earning less upon reinvestment due to inflation.
Liquidity: Savings accounts are about as liquid as your money gets. You can add or remove the funds at any time, but like money market accounts, federal regulations limit most withdrawal transactions to six per month.
Growth stocks are one segment of the stock market that has performed well over time.
These stocks tend to be made up of tech companies that are growing sales and profits very quickly, such as Alphabet (parent of Google), Amazon and Apple. Unlike dividend stocks, growth stocks rarely make cash distributions, preferring instead to reinvest that cash in their business to grow even faster.
These types of stocks are among the most popular for an obvious reason: The best of them can return 20 percent or more for many years. But you’ll have to analyze them for yourself to try and figure out which ones are poised to do well.
Buying individual growth stocks is better-suited for intermediate and advanced investors because of the stocks’ volatility and the need to carefully analyze them before buying.
Risk: Growth stocks are some of the highest-flying stocks in the market, but they’re also highly volatile. When investor sentiment turns – when the market declines, for example – growth stocks tend to fall even more than most stocks. Plus, unlike government-backed banking products, there’s no guarantee against losing your money. So if you pick the wrong stock, it could become worthless.
Liquidity: Growth stocks — like many stocks trading on a major U.S. exchange — are highly liquid, so you can buy or sell them on any day the stock market is open.
For investors who don’t want the hassle of analyzing and selecting individual growth stocks, an alternative is buying a fund of growth stocks.
Growth-stock funds can be good for beginners and even advanced investors who want a broadly diversified portfolio. Investors can select an actively managed fund where professional fund managers select growth stocks to beat the market, or they can choose passively managed funds based on a pre-selected index of growth stocks.
Either way, funds allow investors to access a diversified set of growth stocks, reducing the risks of any single stock doing poorly and ruining their portfolio. The result is an average of the performance of all the stocks in the fund — and over time, that’s likely to be good.
Risk: Investing in a growth-stock fund is less risky than selecting and owning a few individual growth stocks. With a fund, the professionals do all the stock selection and management, minimizing the risk that you might select the wrong investments. However, while diversification prevents any single stock from hurting your portfolio much, if the market as a whole drops, the fund is likely to decline, too. And stocks are well-known for their volatility.
Liquidity: Growth-stock funds are highly liquid, much like the stocks they invest in. You’ll be able to move in and out of the investment on any day that the market is open.
If you don’t want a growth stock fund but still want higher returns than more traditional banking products, a good alternative is an S&P 500 index fund.
The fund is based on the 500 largest American companies, meaning it is comprised of many of the most successful companies in the world.
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 to buy.
An S&P 500 index fund is an excellent choice for beginning investors, because it provides broad, diversified exposure to the stock market.
Risk: An S&P 500 fund is one of the least-risky ways to invest in stocks, because it’s made up of the market’s top companies. 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.
Liquidity: An S&P 500 index fund is highly liquid, and investors will be able to buy or sell them on any day the market is open.
REIT stands for real estate investment trust, which is a fancy term for a company that owns and manages real estate.
REITs generally don’t pay taxes as long as they pass along most of their income as dividends to their shareholders.
These companies can be a good option for investors who are looking for an easy way to own real estate without the hassle of actually managing it. So those looking for passive income or cash flow, such as retirees, may find REITs especially attractive.
REITs are usually divided into subsectors, so investors can own the type that they like. For example, popular subsectors include housing REITs, hotel REITs, data center REITs, retail REITS and even tower REITs (for all those mobile communication towers.)
Risk: Investors should stick with publicly traded REITs, which are traded on major exchanges, and stay away from private or non-public REITs that have lesser protections and higher expenses. Like all publicly traded stocks, a REIT’s value can decline, though the best-managed REITs should move higher over time.
As with other dividend stocks, look for REITs that have a history of steadily raising their dividend over time, rather than selecting the REIT that has the highest current yield.
Liquidity: Like other publicly traded stocks, REITs can be converted to cash whenever the stock market is open. However, you’ll have to take whatever price the market is offering at the time.
13. Rental housing
Rental housing can be a great investment if you have the willingness to manage your own properties.
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 with a click of the mouse. Worse, you might have to endure the occasional 3:00 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 have a powerful cash flow when it comes time to retire.
Risk: As with any asset, you can overpay for housing, as investors in the mid-2000s quickly found out. Also, the lack of liquidity might be a problem if you ever needed to access cash quickly.
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. On top of this, a broker may take as much as a 6 percent cut off the top of the sales price as a commission.
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.
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.
A Nasdaq 100 index fund is a good choice for beginners.
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.
Do you like an industry but don’t know want to (or can’t) pick the winners? A good option for you could be an industry-specific index fund.
These funds give you narrow, yet diversified exposure to the industry without requiring you to analyze every company in it. If the industry does well, then the fund will probably do well, too.
An industry-specific index fund is typically an ETF, and some of these have low expense ratios, meaning the ongoing cost of the fund is reasonable.
This kind of index fund can be good for beginners and more advanced investors who want exposure to a specific area.
Risk: The big advantage of an industry fund is that it allows the investor to select an industry to invest in, rather than a specific company. However, this kind of narrow exposure to one industry means that a negative development may hurt all the companies in the industry, lessening the benefits of diversification.
Liquidity: This fund can be converted to cash on any day the market is open.
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. So that range means you’ll need to understand the pros and cons of each investment option 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.)
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.