You probably have things you want to do with your money down the road: buy a house, save for retirement, fund college for your kids, maybe even go on a trip or do a remodel. Are you wondering if investing can help you achieve those goals or where to start?
We have good news: It’s never too early or too late to start investing your money, and it can pay off with returns which you can then re-invest. There are also a number of different investment options, so you can find a portfolio strategy that makes sense for you. The less good news is that it can all be a little confusing. We’re here to help.
You can choose to put your money into lots of different investment options, but you should first know what you want out of your investments: What are your financial goals? Then try to build a portfolio that achieves those goals, balancing risk and return, and maintaining a diversity of assets.
A portfolio is the term used to refer to all your investments and holdings. Diversifying your portfolio usually means putting your money in a variety of assets. Assets is just the word for what you own, but an asset class is a bunch of assets that are similar to each other, such as stocks or commodities.
Here are a few of the most common types of investments:
Bonds are essentially loans you make to a company or a government—federal or local—for a fixed period of time. In return for loaning them money, they promise to pay it back to you in the future and pay you interest in the meantime.
Because bonds are typically backed by the full faith and credit of the government or large companies—and are rated in terms of their quality and credit-worthiness—they’re often considered lower risk than stocks.
However, the risk varies. Because the federal government is less likely to go bankrupt than an individual company, treasury bonds are the least risky investment but also have a lower return.
There are a few general types of bonds available for most investors.
Treasury bonds: These are bonds issued by the U.S. government. Treasury bonds are mostly issued for 30-year periods , in increments of $100, and the interest rate is determined at auction.
Municipal bonds: Local governments or agencies can also issue their own bonds. For example, a school district or water agency might take out a bond to pay for improvements or construction and then pay it off, with interest, at whatever terms they’ve established.
Corporate bonds: Corporations also issue bonds. These are typically given a credit rating, with AAA being the highest.
Mortgage and asset-backed bonds: Sometimes financial institutions bundle mortgages or other assets, like student loans and car loans, and then issue bonds backed by those loans and pass on the interest.
When you think of investing, you probably think of the stock market, but stocks are just one of the many different types of investments available.
A stock is a share in a public company. You can own one share or many, giving you ownership of a certain portion of that company.
Only public companies trade on the stock market; private companies are privately owned—and can sometimes still be invested in, though that’s a different type of investment discussed below.
A stock makes money in two ways: It could pay a dividend if the company decides to pay out part of its profits to its shareholders, or you could sell the stock for more than you bought it, if it goes up in value—that’s known as a capital gain.
You can choose to pursue stocks that you think will grow over time—either because they’re undervalued or because they’re growth stocks—or you can choose stocks for their dividends.
Although stocks and bonds are the more traditional assets to invest in, there are other types of investments known under the broad category of “alternatives.” These are not necessarily tied to the stock or bond market, so can provide some diversification potential.
While there are lots of things you can put your money into with the potential for growth, here are some alternative investment options you might encounter.
Owning real estate, either directly or as part of a real estate investment trust (REIT) or limited partnership, gives you a tangible asset that can increase in value over time.
If you become invested in real estate outside of your own home, rent payments can be a regular source of income. However, real estate can also be risky and labor-intensive.
A commodity is simply a raw material that has value and can be bought or sold—things like corn, coffee, copper. There are a number of commodity exchanges where you can make trades.
You can even choose to buy something directly and hold it, like gold for example. If that seems confusing, another option is to invest in funds that themselves invest in commodities for you.
Direct investments in private companies
Only public companies sell shares of stock, however private companies do also look for investment at times—it typically comes in the form of private rounds of direct funding. If the company you invest in ends up increasing in value, that can pay off, but it can also be risky.
A cryptocurrency is a kind of digital currency that uses encryption and coding techniques to secure the funds. These currencies operate independently of a bank and there are a number of them out there: Bitcoin is the most well-known.
Because cryptocurrencies are one of the newest forms of investment options and there are many of them, it will likely require more research before choosing to invest. Cryptocurrencies can be high risk, but they also have the potential for high return.
Investment Funds and Other Products
There are a number of types of investment products that bundle other assets or get into more complicated types of financial contracts.
Some of these are very easy to understand and could be useful in your portfolio; others are more complicated—like futures contracts, which are agreements to buy or sell something (a security or a commodity) at a fixed price in the future.
A mutual fund is a bundle of many different assets into one basket. Buying a share in the fund gives you access to all the diverse asset classes in the fund, without requiring you to have the money to buy each of them individually.
There are many kinds of mutual funds with different mixes of assets aimed at different financial goals or tied to different market indexes.
Exchange traded funds (ETFs) are essentially a kind of mutual fund, but one that’s traded on an exchange, giving you the flexibility to buy and sell throughout the day. They also come in a range of asset mixes.
An annuity is an insurance contract that you pay upfront and, in turn, receive set payments later, typically during retirement.
There are fixed annuities, which guarantee a set payment, and variable annuities, which put your payments into investment options and pay out down the road at set intervals.
Investment Account Options
In addition to there being different types of investments you can put your money in, there are also different types of investment accounts, each with their own benefits.
That means your money, whether in a 401(k), IRA, or a personal investment account, can be invested in any of the different types of assets mentioned above (or others).
But the type of account you put your investments in also impacts what kinds of returns you’ll see and if you move closer to your financial goals.
A 401(k) is a retirement account provided by your employer. You can often put money into a 401(k) account via a simple payroll deduction, and in a traditional 401(k), your contribution isn’t taxed as income. Many employers will also match your contributions to a certain point. The IRS puts caps on how much you can contribute to a 401(k) annually.
IRA stands for “individual retirement account”—so it isn’t tied to an employer. There are IRS guidelines for IRAs, but, essentially, they’re retirement accounts for individuals. IRAs allow people to set aside money pre-tax for retirement without needing an employer-backed 401(k).
Roth v. Traditional
Both 401(k) plans and IRAs come in two forms: Roth or traditional. A traditional account typically means contributions are tax-deductible and future withdrawals are taxed as ordinary income.
A Roth account essentially allows you to make qualified withdrawals down the road without paying tax on them, but all contributions now are made with post-tax income.
A brokerage account is a taxed account through which you can buy most of the investments discussed here: stocks, bonds, mutual funds. You may pay a fee on the trades you make and you can be taxed on realized gains.
You can, of course, invest your money any way you see fit, and you might also consider enlisting the help of a wealth manager or financial advisor who can provide financial planning and advice, and then manage your portfolio and wealth. Typically, these advisors are paid a fee based on the assets they manage.
There are even a number of investment options out there not listed here—like buying into a venture capital firm if you’re a high-net-worth individual or putting funding into your own business—but for most investors, especially those just getting started, you’ll find the most common investment options above.
Which Types of Investments Make Sense for You?
It can still seem a bit overwhelming to figure out what kinds of investments will help you achieve your goals.
There are different investment strategies for every generation—depending on where you are in your career, what your goals are, how far away retirement is, etc.
SoFi Invest® allows SoFi to create a portfolio for you aimed at your goals without having to dive deep into market details. A live advisor can help you figure out what makes sense for you—without you having to pay management fees.
Deciding how involved you want to be, you can opt to actively invest in thousands of publicly traded securities or create a diverse market-indexed portfolio.
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