There are a variety of ways you can invest your money. With so many options available, it can quickly become confusing, making it difficult for you to differentiate between the best investment vehicles and the options you should avoid. Below, we’ll break down some investment tips to consider before you decide how to build your investment portfolio. We’ll also discuss the best types of investments for your money right now to get the most return.
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Best Investment Tips to Consider
Each investment comes with its own risks and returns. Having a variety of investments helps diversify your portfolio and lowers your overall risk. While there are investments that yield higher returns than others, it is important to take a few key factors into account prior to allocating your money one way or the other. To make investments wisely, consider the following factors.
There are two types of timelines associated with investing: long-term and short-term. Short-term investments typically last one year or less, while long-term investments are vehicles that tie up your funds for more than a year. The timeline you’re working with can drastically limit your investment possibilities. If you’re working with a short-term timeline, you should invest your money in safe, stable vehicles that keep your money easily accessible. If you’re working on a long-term timeline, you have more flexibility when it comes to your investments and can put your money into more volatile assets.
Risk tolerance is the extent to which a portfolio can put up with market shifts. A diverse portfolio can be a profitable one. If you’re willing to take some risks, you could stand to earn a substantial return. If you invest in stocks, you’re exposing your money to short-term swings but a higher profit if you let your money withstand market fluctuations in the long-term. Ultimately, your return depends on where you invest your money and how well your investment vehicles weather risk.
The amount of money you have on hand is key in deciding where to invest that money. It’s important to understand that different investments come at different costs, such as minimum balances for certain types of accounts or initial investment requirements for hedge funds. Knowing how much money you have to allocate towards your investments can limit or broaden your choices.
Just as available funds determine the types of investments you can make, your experience with investing can limit or expand investment opportunities. If you invest on your own, you’re saving on any fees associated with hiring a professional. If you need help from an investment advisor or robo-advisor, these costs can cut into your payoff potential.
Best Investments Right Now
There are investments that are extremely stable and then there are those that lack any stability whatsoever. Similarly, there are funds that have large initial investment requirements and those that require very little. Determining your best investment options depends entirely on your financial goals; with that said, the best way to invest is to build a diverse portfolio, and the following types of investment vehicles will help you do just that.
Money Market Accounts
Money market accounts are a great short-term investment option for beginners who need to build up cash. They are similar to a savings account, but with higher interest rates and higher minimum balances. The money you place into a money market account is relatively liquid, but you are limited to six withdrawals a month, and no more than three of those transactions can be checks.
Inflation is the main risk with money market accounts, as it can diminish your purchasing power. Additionally, if your account isn’t FDIC-insured or if you surpass the maximum secured amount of $250,000, you could lose some or all of your principal.
Certificate of Deposit (CD)
A certificate of deposit is a relatively long-term investment that keeps your money in a federally insured savings account with a fixed rate of interest. CDs are sold based on maturation terms. The most common maturation periods last one, three, or five years. CDs keep your money safe for a future date when you know you’ll need the money, such as a wedding or the down payment on a home.
Once the money matures based on the CD’s term, you can remove it from the account along with the accrued interest. CDs are extremely safe investments because your money is guaranteed to fetch a certain amount of interest. However, when it comes to liquidity, your money is tied up for the term of the CD. You can make an early withdrawal but at a cost.
Stocks are investments in a company that pays dividends to shareholders. Because you can buy or sell on any given day, stocks are a highly liquid asset. Stocks can be growth or dividend, and each type comes with its own level of volatility.
Dividend stocks allow you to earn long-term and short-term. Growth stocks often come from companies that are growing quickly. These companies rarely distribute cash, as they want to use that money to reinvest in the company. Both stock options are recommended for investors with experience, as they’re extremely risky. If the market declines, so do stock prices, and you could stand to lose money if a company goes bankrupt.
Bonds are loans to companies or the government that pay a fixed interest rate over one to 30 years. Also known as a fixed-income securities, bonds are a relatively safe investment when compared to stocks. However, bonds do come with some risk due to issues like fluctuating interest rates and inflation. There are several types of bonds to choose from, including government, municipal, and corporate bonds. Like stocks, bonds are an extremely liquid asset that can be bought and sold daily.
Mutual funds allow you to spread your money across multiple investments like stocks, bonds, and other assets. They are considered one of the safest investments because your money isn’t all in one place, so you’re able to hedge against any single investment performing poorly. Ultimately, the risk and liquidity of your mutual fund depend on where your money is invested.
Where you choose to invest your money depends on your budget, timeline, risk tolerance, and overall experience. Conduct research to decide which investment options are right for you.
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