When it comes to investing, the biggest hurdle to overcome after you’ve decided how much you want to save or invest is what to invest your money in exactly. There are so many different investment options today, it can be very intimidating trying to decide how you want your hard earned dollar to be invested to best fit your goals and needs. Let’s take a look a some of the most used investment options.
Stocks are probably the most widely known options when people think of investing. In today’s digital world, it’s extremely easy to open an account online, with your broker, or your financial institution and set up an automatic transfer to a brokerage account where you can buy just about any stock in a company that you want. If you’re not familiar with stocks, when you buy a share of a company, you are essentially owning a small piece of that company. You have the right to vote on certain issues such as board members for that company. When you own shares of a stock, the value of your stock can fluctuate for a variety of reasons. If the company is doing well and raising their earnings estimates, then your company stock should go up. If the economy is not doing good, and the company you own stock in is reporting bad earnings, then it will likely go down in value. There are many reasons company stocks go up or down in price. It could be company specific, economy specific, or industry specific. If you choose to invest in individual stocks, you have to understand you must do the homework on that company to make sure they are a good solid company financially and are aware of the risks you are taking by owning the company. Some stocks are more volatile than others depending on their industry or size. Buying individual stocks also has concentration risk because you are susceptible to company specific risk versus owning a large number of stocks where you are spreading your risk among several companies. If you choose to own individual stocks, you need to treat them as long term investments and not trade in and out of them.
Bonds are another asset class you can choose from when trying to select where to invest your funds as well. Stocks are typically referred to as equity, where bonds are typically referred to as fixed income. Bonds are essentially debt you can buy from companies. Actually, you can own debt issued by the U.S. Government referred to as Treasuries, your local governments referred to a Municipal bonds, or by Companies referred to as Corporate bonds. The way bonds work is when you buy a bond you typically buy them in increments of $1,000, they usually have a term when they mature, and a coupon rate which is the interest you earn. The riskier the bonds the higher the interest rate. Treasuries are considered the safest bonds since they are backed by the U.S. Government. Municipals are probably next in safety. Corporates can vary depending on the type of company that issued the bonds you purchase. Some companies are A rated and some are B or lower rated. The lower the rating, the riskier the bond or the higher risk you run of that company going into default or bankrupt. A lot of people consider bonds to be safe, but if you aren’t careful which companies you buy bonds in, that bond can lose value just as easily as the stock would lose value. Another variable when dealing with bonds you must be aware is interest rate risk. If you buy a bond and hold it to maturity, you should receive your regular coupon payments during the term then receive your principal back when it matures. While you own the bond, the interest rate environment can cause the price of your bond to fluctuate significantly. Bonds have an inverse relationship to interest rates. If rates go up, the value of your bond goes down and vice versa. As long as you hold to maturity, that’s not an issue. If you have to sell your position before the maturing date, then you may have to take less than you put into the bond if you need the money. Bonds can actually be more complex to understand than stocks. Typically having a portfolio with a mix of stocks and bonds helps to reduce your overall portfolio risk. Bonds typically react opposite than stocks generally speaking. As stocks are going down in value, bonds should hold steady or appreciate in value. That is not always the case, just like in 2022 where bonds had their worst performance year on record while stocks also had a very challenging year. The idea is that when stocks go down, the bonds should help soften the downside with the coupons and stability of their price.
Mutual funds are probably the most familiar to most people especially if they have a company sponsored retirement plan. Mutual funds can be made up of 100’s of different stocks and/or bonds. They’re usually issued by an investment company who hires professionals to manage the funds to invest according to that mutual funds objectives. For instance, if you buy a growth mutual fund, that fund manager is going to buy stocks that are growth focused and may be U.S. based or may have non-U.S. companies. Either way, if you look up the fund it will tell you in its prospectus how the fund manager invests those funds. Some mutual funds have a built in asset allocation for you. For instance, you may be able to buy a balanced mutual fund that has a sixty percent stock allocation and forty percent bond allocation. The fund will own a variety of stocks and bonds within the same mutual fund. The best part about mutual funds are that you can diversify your money even if you have a small amount to start with. If I put $1,000 into a mutual fund, I may own hundreds of stocks with that $1,000.00. If I wanted to go buy 100 different individual stocks, there’s no way I could do that because some stocks may be $1,000 just for 1 share. Another advantage to mutual funds is they are managed by professionals. You are eliminating a lot of the hard work by owning a mutual fund. You still need to make sure that fund meets your goals and risk tolerance, but you are eliminating the concentration risk by being diversified.
Exchange traded funds are another type of vehicle that have become very popular. One of the biggest differences in Mutual Funds and ETF’s are that ETF’s are not managed, but rather track a specific index like the S&P 500. You cannot simply go out and buy all the stocks in the S&P 500, but you can buy an ETF that tracks the S&P 500. Another difference between the two types of funds is that the expense for the fund is usually less. ETF’s have gained popularity over the years as studies suggest fund managers do not beat the market indexes typically. If fund managers do not beat the market, then why should you pay to have them manage the fund when you can simply own the index. I personally believe there is room for both types of funds in most portfolios. You have to do your homework on funds just like you do on individual stocks and bonds. A well managed mutual fund with a great track record can outperform the similar index during different cycles in the markets. I like to utilize both types of funds for different asset classes in my portfolios.
Precious metals are another option to consider when investing. Precious metals typically refer to gold and silver. There are several different ways you can own them. You can literally buy physical gold or silver in coins or bars. You may be able to purchase the physical metals through your broker, an online site, or your local jeweler. If you don’t want to own the physical, you can buy an Exchange Traded Fund that tracks the performance of the metal or metals. You can also buy stocks that are involved in the mining for the metals. Precious metals are considered more of an inflation hedge because over time they typically keep up with inflation which means they preserve your wealth.
Real Estate has been another place people have been looking to invest their funds especially when interest rates were at all time lows. If you’re a savvy in real estate and have the capital to deploy, you can buy individual properties and manage them or pay a company to manage the property for you. If you don’t like the idea of actively having to manage real estate, then you can choose several other options. You can look at Real Estate Investment Trusts that basically manage everything for you and you get to benefit from any price appreciation and income in the form of dividends from the real estate portfolio. Real Estate Investment Trusts or REIT’s may specialize in different types of properties such as multifamily apartment buildings, commercial office space, public storage buildings, or maybe hospitals. You can also look at stocks that are focused on real estate, like home builders or home improvement stores.
These are the main types of vehicles that you can choose to invest your money. There are actually several other types of vehicles that you can choose from. The investment world has gotten very creative with their product offerings. Some vehicles have built in buffers where you have some downside protection to a limit or they may have a cap on the upside with built in downside protection. Basically, they give you some downside protection in exchange your upside is limited as well. These types of vehicles can be very useful if used properly and if the product is understood. These types of vehicles are only available typically through an advisor.
With so many different investment vehicles available, it has made it difficult for investors to wade through all these options especially if they are trying to do it by themselves. I highly recommend working with an advisor if you are not sure where to put your money. If you start out by making a poor investment decision or maybe don’t understand fully the vehicle to invest, it could cause you to be discouraged with the entire process of investing. That’s not going to help you meet your long term goals, so let’s not go down that road. Find an advisor that can help you implement your plans and help you invest your money accordingly.