You’re not alone if you’ve ever wondered, “where should I invest my money right now?”
Oftentimes, investors who ask this question are thinking about the investments that could prove to be the most advantageous in the current moment. This is normal; as humans, we have a natural predilection towards short-term thinking. (And who doesn’t want to the snag the next big investment?)
And while investors are right to wonder what investments make sense given the current economic and political climates, they may be surprised to hear that other, longer-term factors are just as important.
For example, prospective investors will generally want to consider an investment’s typical performance and risk characteristics over long periods. This may be a better use of time and energy than trying to predict short-term price movements—which is difficult to do and can be somewhat of a fool’s errand.
Instead, you may find it useful to learn the behavior of the available investment types, and then compare those patterns to whatever it is that you’re trying to accomplish, and along what timeline.
Luckily, choosing where to invest your money doesn’t have to be hard. Here are some considerations and easy ways to get started for anyone wondering, “where should I invest my money?”
Learning About Investment Options
There are several different ways to answer the questions, “where should I invest my money right now?” The first is to make a decision by investment type. In investing “speak,” these are called asset classes or asset types. Your portfolio mix will be your asset allocation, which is covered below.
Stocks, bonds, cash, and money market funds, and real estate are just a few of the asset classes available to investors. Generally, the first order of business is to determine which is most appropriate for the financial goals an investor has. In order to determine this, it’s important to understand how each investment type earns a return.
Common Investments for Your Money
First, a quick refresher on stocks and bonds:
A stock represents a share of ownership in a company. When an investor buys a share in a company, they own a small proportion of that company. Shareholders may even receive voting rights. This is why stocks are sometimes referred to as equities; investors now own equity in that company.
A stock can earn money in two ways. The first way is through the value of shares appreciating over time; this is called capital appreciation. The second is through periodic cash payments made to shareholders, called dividends.
Stock prices can be influenced by both internal and external factors, such as a new product launch or broader national or global events like a political event or natural disaster. Because the nature of business is highly unpredictable, stock prices can be volatile.
A bond, on the other hand, is an investment in the debt of a company or government. The bondholder earns a rate of return by collecting a rate of interest on that debt for a predetermined amount of time, such as 10 or 20 years. Because the terms are stated upon purchase, bond values generally tend to be less volatile than stocks, but have more modest returns. That said, bonds are not completely without risk, and it is possible for bonds to lose value.
When interest rates in an economy are low, overall, bonds will likely pay out a lower rate of interest. Currently, rates are quite low by historical standards, which is something investors may want to take into account.
Typically, stocks are considered to have a higher potential for returns over time, but that comes with the price of volatility—the possibility of an investment losing value, especially in the short-term. Bonds are often considered a safer, more stable investment that may be more appropriate for investors who aren’t as comfortable with the volatility of the stock market.
A big part of deciding where to invest has to do with determining your relative comfort level with each of the different asset classes.
Investing directly in stocks isn’t the only option available to investors. Mutual funds and ETFs can be ways to invest in the stock market. Think of funds as baskets that hold an assortment of some other investment type, such as those mentioned above—stocks, bonds, and real estate holdings. Funds provide investors an easy way to access diversified exposure to many investments at once, but they are not an asset class in and of themselves.
Funds can be an affordable and quick way to get (and stay) invested, which makes them popular with both new and seasoned investors. But even if you decide to use funds as the device for which you invest in different markets, the first order of business is to understand the fund’s underlying asset class.
For example, someone who purchases a mutual fund that holds 500 stocks, is invested in those 500 stocks—and very much invested in the stock market. If you buy an ETF of 1,000 bond holdings, then you are invested in those bonds. If you buy a fund with real estate holdings, well, you get the idea.
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Options for Cash
In some instances, it may make the most sense to keep the money for a particular goal in cash. It is helpful to understand what options are available for cash savings.
Savings accounts at a traditional bank or credit union: This is likely the most familiar option. Traditional and commercial banks remain popular for their large geographical footprint. Note that many traditional banks pay a low rate of interest on any cash holdings.
Online-only checking and savings accounts: A newer option for bankers, online-only banks and banking platforms may offer a slightly higher yield than a savings account at a commercial bank. Additionally, many do not require minimums or charge monthly maintenance or account fees. (One such option is opening a checking and savings account with SoFi, which pays a competitive rate of interest on deposits.)
Money market funds: Often found in brokerage accounts, a money market fund is a fund that holds cash and or other “very liquid investments,” like short-term government securities.
Certificate of deposit (CD): A certificate of deposit is a savings account that holds money for a fixed amount of time, like one year or three years. A fixed rate of return is paid out during that period. Generally, there is a penalty to cash out a CD prior to expiration.
When considering cash as an asset class, consider the risk and reward tradeoff, just as one would for any other investment type. Although cash might not be risky when considered in terms of volatility, it does not come without risk. Cash carries the risk of losing value over the long-term due to the effects of inflation, or prices rising over time.
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Creating a Goals-Based Strategy
Contrary to how many new investors are encouraged to think about investing, it may not make sense to try and pick “hot” stocks right out of the gates.
Instead, take a step back and consider the bigger picture view, and ask whether stocks are even appropriate given your goals and investing timeline. This decision on which combination of asset classes to be invested in, and in what proportions, is called asset allocation.
How does one determine asset allocation?
Start by thinking of each “bucket” or “pot” of money independently. For example, maybe someone has $1,000 set aside for retirement and another $1,000 that they’d like to use as a down payment for a home. Think about this intuitively; these are very different goals with different timelines and therefore, may require different investing strategies.
Next, consider the financial goals, risk tolerance, and investment time horizon for each bucket. This can sound pretty boring especially if you’ve been conditioned to believe that you should invest in whatever is currently the most talked-about or “hottest” investment.
Risk vs. Reward
The asset allocation decision really boils down to an examination of an investment’s risk and reward characteristics in order to determine whether it’ll work on a personal level. Here’s what’s so important to understand: with investing, risk and reward are two sides of the same coin. Investors cannot have one without the other. For more reward potential, an investor will have to take more risk. There is no such thing as an investment that produces returns with no risk.
Let’s consider, again, the two hypothetical investment goals from above: $1,000 for a down payment and $1,000 for retirement. How do goals lead one down the path of where to invest?
First, the $1,000 for a down payment: If the money is designated for use in the next few years, the risk of losing any money in a volatile investment may outweigh the potential to earn investment returns. Therefore, it might be best to keep this money in a lower-risk investment or cash equivalent.
Next, the $1,000 for retirement. Many retirement investors have the goal of reasonable growth over the long-term. Because of this long time horizon, there should be enough time to grow beyond spates of short-term volatility. Therefore, it may be suitable to create a portfolio that is primarily invested in the stock market or a combination of stocks and bonds.
Retirement investors close to retiring may opt considering some exposure to bonds for both diversification purposes and to lower the overall volatility of the portfolio. Ultimately, a person’s comfort level with the stock market will determine their specific stock and bond allocations. And it’s worth noting that investing strategy isn’t stagnant. As a person ages, their goals and investing strategy will likely need to evolve with them.
Opening the Right Account
Here’s another way to answer the question, “where should I invest my money?” By doing so, in an appropriate account type, at a brokerage bank or on an investing platform.
Just as it makes sense to keep cash in a bank account, the same must be done with investments. But with investments, opening the right account can be a bit trickier.
It is not uncommon to hear someone refer to a 401(k) or a Roth IRA as if it is an investment. But retirement accounts are not investments—they are accounts. Granted, they are fancy, tax-advantaged accounts that hold investments, but they are still accounts.
Money is contributed to any investment account in cash, and then those proceeds are used to purchase investments, like stocks, mutual funds, and ETFs. (In a plan sponsored by a workplace plan, like a 401(k), the investing might happen automatically, hence the confusion about it being an investment itself.)
It is also possible to invest in an account that is not designated for retirement. At a brokerage bank, these are often simply referred to as brokerage accounts. If you use a trading platform, it may be referred to as an individual or a wealth account.
Retirement accounts offer some sort of tax benefit, like tax-free growth on your investments, which make them suitable vehicles for long-term goals. But because they offer a tax benefit, there are more rigid rules for use. For example, some retirement accounts, like 401(k) and Traditional IRAs, levy a 10% penalty on money withdrawn before retirement age (there are some exceptions to this withdrawal fee). Also, there are limits to how much money can be contributed annually to retirement accounts.
Weighing Your Options
For short-term goals that require more flexibility, a non-retirement account may be a better choice. Because there are no special taxation benefits, there are generally no rules about when money can be withdrawn or how much can be contributed. Because of this, non-retirement accounts can also be a good place to invest for folks who have met their maximum contribution amount for the year in their retirement accounts.
As for where to open an account, new investors may want to focus on a bank or platform where they are able to keep costs low. There’s not a whole lot that investors can control, like investment performance, but how much they pay in fees is one of them. Between low-cost brokerage banks and millennial-friendly online trading platforms like SoFi Invest®, there are lots of options for investors.
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