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.
- Inflation is running rampant, interest rates are set to rise and the stock market is still topsy-turvy.
- One of the best ways to navigate this financial maelstrom is through a risk-adjusted strategy of saving and investing.
- Some of the best types of investments include high-yield savings accounts, government I-bonds and well-diversified ETFs.
- Investors who can afford more risk may also look into alternative investments like commodities and cryptocurrencies to boost their returns.
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.
One of the best ways to secure your financial future is to invest, and one of the best ways to invest is over the long term. It may have been tempting over the past few years to deviate from a long-term approach and chase quick returns. But with the market’s current high valuations, it’s more important than ever to focus on investing for the long haul while sticking to your game plan.
Investors today have many ways to invest their money and can choose the level of risk that they’re willing to take to meet their needs. You can opt for very safe options such as a certificate of deposit (CD) or dial up the risk – and the potential return! – with investments such as stocks, mutual funds or ETFs. Or you can do a little of everything, diversifying so that you have a portfolio that tends to do well in almost any investment environment.
Investors face a new set of challenges as begins. US inflation is at its highest level in 40 years. China appears ready to tolerate slower growth today in exchange for a more resilient economy tomorrow. Risk asset valuations remain elevated and, despite a recent increase, interest rates remain near historic lows. Navigating this environment successfully will require skill and close attention to market dynamics. But we believe compelling opportunities exist.
Investing in the stock market is one of the best ways to grow your wealth. Typically, experts recommend a well-diversified investment portfolio that bundles safe and risky securities together. In the long run, such a portfolio can generate growth and better hedge against market and economic volatility.
But already, 2022 has proven that it’s not a typical year. Inflation is on the rise. Bond yields are going up while CD rates remain abysmally low. And the Federal Reserve is debating up to three interest rate hikes this year to curb the runaway economy. All that to say: Knowing where to park your money right now isn’t easy.
We think US equities could still generate strong returns but the balance of risk and reward points to diversifying into other regions, global thematic strategies and sub asset classes, such as small caps. We highlight three key reasons: unique risks to US equities, weaker drivers of recent US equity returns and the potential opportunity cost of not investing in other markets.
US equities have two particular vulnerabilities versus other regions: valuations and concentration. Valuations for US stocks are high relative to their own history and relative to other regions the S&P 500 still trades at a premium even after adjusting for its larger weightings to higher valued sectors, such as technology.
Some of the key drivers of recent US equity outperformance may not be as pronounced going forward. The US equity market benefitted from the extraordinary growth and performance of the technology sector over the past decade.
Record-low interest rates over much of the last decade also helped fuel both corporate growth and the equity rally in the US, but rates are now set to rise.
For active investors, US equities can still offer exposure to secular growth trends and companies that can benefit in an environment of rising inflation and interest rates. But the cost of missing out on strong secular growth opportunities in other regions could be high. As alpha becomes more important in a lower return environment, investors may benefit from having the widest opportunity set possible and not limiting investments to the US.
The current market cycle has been hot and fast. So much so, in fact, that investors are now confronting a very different dynamic for the year ahead—early-cycle timing, midcycle conditions and late-cycle valuations, with exuberance to boot.
Modern investors aren’t limited to just steak-and-potato stocks and bonds. If you’re looking at the best type of investments, you may find you’re better served by a well-diversified portfolio that dabbles in a little more risk (or a little less).
But before you invest, you should consider significant factors in your life, such as your:
- Risk tolerance
- Time horizon
- Knowledge and comfortability with investing
- Your financial situation
- And your goals and purpose
You’ll also want to consider the potential risks, rewards, and financial impact of each type of investment. Then, you can make an informed decision about which ones make the most sense for you.
15 Types Of Investments
1. High-yield savings accounts
High-yield savings accounts keep your money liquid while generating a little return. Although they rarely keep pace with inflation, this is one of the best places to park cash you need to access quickly, such as your emergency fund.
2. Certificates of Deposit (CDs)
If you don’t need to access your savings in a hurry and want to capture a little more growth, a CD may do the trick. These accounts are issued by banks at a higher fixed interest rate than most savings accounts. (Right now, the best CDs are paying around 1.25%). They also enjoy FDIC insurance protection, making them ideal for risk-averse investors who want to minimize the eroding power of inflation.
3. I-Bonds & stock fund
I-bonds are a type of government debt issued by the U.S. Treasury. Unlike traditional savings bonds, I-bonds adjust their interest rate every six months to keep pace with inflation, making them hands-down one of the best types of investments in 2022’s inflationary environment.
That said, I-bonds do come with limitations. To start, you have to hold them for at least five years to keep all the interest you earn.
A stock fund is an excellent choice for an investor who wants to be more aggressive by using stocks but doesn’t have the time or desire to make investing a full-time hobby. And by buying a stock fund, you’ll get the weighted average return of all the companies in the fund, so the fund will generally be less volatile than if you had held just a few stocks.
A bond can be one of the safer investments, and bonds become even safer as part of a fund. Because a fund might own hundreds of bond types, across many different issuers, it diversifies its holdings and lessens the impact on the portfolio of any one bond defaulting.
4. Index funds
Index funds are investments that track various indexes in general composition and returns. For instance, you can buy an index fund that tracks the S&P 500 or the Nasdaq-100. Some index funds specialize in specific sectors or industries, allowing you to add exposure to areas of interest.
Index funds come with perks like high diversity, low expense ratios (fees), and ease of access for individual investors. You can buy funds that trade as either ETFs or mutual funds.
5. Other Exchange-Traded Funds (ETFs)
Exchange-traded funds are similar to index funds in that they invest in a large basket of securities. Then, they package their investments into individual shares that trade on an exchange just like a regular stock. Many ETFs buy into a particular index, sector, or commodity, allowing investors to specialize a portion of their portfolio.
ETFs share several perks with index funds, including their low costs and easy portfolio diversification.
A stock fund is an excellent choice for an investor who wants to be more aggressive by using stocks but doesn’t have the time or desire to make investing a full-time hobby. And by buying a stock fund, you’ll get the weighted average return of all the companies in the fund, so the fund will generally be less volatile than if you had held just a few stocks.
6. Dividend stocks
Dividends are small cash sums paid to shareholders out of a company’s profits to reward them for owning stock. These payouts make them one of the best types of investments for boosting gains and minimizing the effects of inflation.
A dividend stock is simply one that pays a dividend — a regular cash payout. Many stocks offer a dividend, but they’re more typically found among older, more mature companies that have a lesser need for their cash. Dividend stocks are popular among older investors because they produce a regular income, and the best stocks grow that dividend over time, so you can earn more than you would with the fixed payout of a bond.
As an investor, dividend stocks let you earn a little cash in the short-term while also benefiting from long-term rises in share price. You can also reinvest your dividends right back into your portfolio.
7. Value stocks
With the market running up so much in the last couple years, valuations on many stocks have been stretched. When that happens, many investors turn to value stocks as a way to be more defensive and still potentially earn attractive returns.
Value stocks are those that are cheaper on certain valuation metrics such as a price-earnings ratio, a measure of how much investors are paying for every dollar of earnings. Value stocks are contrasted against growth stocks, which tend to grow faster and where valuations are higher.
8. Target-date funds
Target-date funds are a great option if you don’t want to manage a portfolio yourself. These funds become more conservative as you age, so that your portfolio is safer as you approach retirement, when you’ll need the money. These funds gradually shift your investments from more aggressive stocks to more conservative bonds as your target date nears.
Target-date funds are a popular choice in many workplace 401(k) plans, though you can buy them outside of those plans, too. You pick your retirement year and the fund does the rest.
9. Alternative investments and cryptocurrencies
In investing, there’s often an inverse correlation between risk and reward. The riskier the investment, the more you may stand to make. Often, that risk isn’t negligible – you may stand to lose your whole investment off one hiccup in the market.
But if you want to make money in a volatile economy, alternative investments like commodities and cryptocurrencies can prove lucrative. However, you may still want to minimize total exposure to these two categories to avoid taking on too much risk.
10. Investing in commodities
Commodities are a broad category of investments that include:
- Agricultural products like beef and grains
- Precious metals
- Oil and natural gas
- Raw materials like lumber and iron
The price of a commodity is usually dependent on supply and demand factors. As a result, they’re typically more profitable during a supply chain crunch, such as we’ve seen this year. But they’re still risky – a slight change in geopolitical situations, natural disasters, and droughts can all drastically impact your profits.
11. Investing in cryptocurrency
Another alternative investment that has proven profitable for some investors is cryptocurrency, particularly Bitcoin. Over the past few years, more investors have flooded this new space, sending prices soaring and drawing more speculation and investment.
As a result, some coins reached new all-time highs and made millionaires out of a lucky few.
Unlike other assets, crypto isn’t backed by FDIC insurance or the intrinsic value of an underlying company. Ultimately, these assets are only worth what a trader will pay for it. Not to mention, investors run the risk of being hacked or selecting the wrong coins that fade into oblivion.
12. Growth stocks
In the world of stock investing, growth stocks are the Ferraris. They promise high growth and along with it, high investment returns. Growth stocks are often tech companies, but they don’t have to be. They generally plow all their profits back into the business, so they rarely pay out a dividend, at least not until their growth slows.
Growth stocks can be risky because often investors will pay a lot for the stock relative to the company’s earnings. So when a bear market or a recession arrives, these stocks can lose a lot of value very quickly. It’s like their sudden popularity disappears in an instant. However, growth stocks have been some of the best performers over time.
13. Real estate
In many ways, real estate is the prototypical long-term investment. It takes a good bit of money to get started, the commissions are quite high, and the returns often come from holding an asset for a long time and rarely over just a few years.
Real estate can be an attractive investment, in part because you can borrow the bank’s money for most of the investment and then pay it back over time. That’s especially popular as interest rates sit near attractive lows. For those who want to be their own boss, owning a property gives them that opportunity, and there are numerous tax laws that benefit owners of property especially.
14. Small-cap stocks
Investors’ interest in small-cap stocks – the stocks of relatively small companies – can mainly be attributed to the fact that they have the potential to grow quickly or capitalize on an emerging market over time. In fact, retail giant Amazon began as a small-cap stock, and made investors who held on to the stock very rich indeed. Small-cap stocks are often also high-growth stocks, but not always.
Like high-growth stocks, small-cap stocks tend to be riskier. Small companies are just more risky in general, because they have fewer financial resources, less access to capital markets and less power in their markets (less brand recognition, for example). But well-run companies can do very well for investors, especially if they can continue growing and gaining scale.
15. Robo-advisor portfolio
Robo-advisors are another great alternative if you don’t want to do much investing yourself and prefer to leave it all to an experienced professional. With a robo-advisor you’ll simply deposit money into the robo account, and it automatically invests it based on your goals, time horizon and risk tolerance. You’ll fill out some questionnaires when you start so the robo-advisor understands what you need from the service, and then it manages the whole process. The robo-advisor will select funds, typically low-cost ETFs, and build you a portfolio.
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by Yana Keller
