If you find yourself daunted by the prospect of stepping into the financial world, you’re not alone. According to Bankrate, many Americans are in the same boat as you, with up to a third of millennials afraid of investing. Every kind of financial investment comes with its own risk. Generally, index funds may be worth considering if you’re new to the game.
However, to be truly successful in the long haul, you will definitely need to pay close attention to two crucial factors: risk and time. Some investments have quick turnarounds and lower returns, while others will pay off handsomely if you’re willing to wait. Riskier investments often promise high returns and the potential for greater disaster.
Learning about the types of investments out there can help ease your mind and help you diversify your investment portfolio. Diversification involves choosing multiple financial assets to create a plan that puts your money to good use without testing your nerves. If you want to delve deep into finance and become a professional investor or advisor, consider studying to get certified as a CFA. A comprehensive program that combines business, accounting, and finance teaches you the skills you need to manage a diverse portfolio manage assets and risk. If you’re still unsure how to start, consider Wiley CFA for help to get started.
So let’s get right into it. Here are the major investment types you need to know about:
1. Mutual Funds
Mutual funds are the most common entry point for new investors. Created by financial planners, who pool together resources from like-minded people to invest in markets, these funds provide a stable and level-headed way to begin investing. They can either be passively managed index funds, where you passively track market indexes such as the DOW Jones, or actively managed (for a fee).
Whether you choose to become a financial planner yourself or let someone manage your mutual fund, review its past performance and read the fine print before you put money in. Some planners have found ways to circumvent Securities and Exchange Commission (SEC) guidelines with hedge funds, so make sure you know exactly what you’re signing up for.
2. Certificates of Deposit (CDs)
Cash investments are often the easiest to wrap your head around, but simply putting away your savings account may not be the best way to go about it. Consider the effects of inflation. Over time, the money that you put away actually loses value, and the interests usually provided by a savings account can barely keep up with this.
On the other hand, CDs can provide a more viable way to manage your cash investments. In this investment mode, you give your bank a fixed amount of money for a set period, ranging from a few months to 5 years. At the end of the term, you get a guaranteed amount of interest and keep the money you put in.
You don’t have to worry about risks, as CDs are a safe bet and FDIC-insured for up to $250,000, which means that your money is safe even if the bank that sold you the CD collapses. However, there are steep penalties for withdrawing money early, so make sure you only put in spare cash that you won’t need for the foreseeable future.
3. Stocks & Bonds
Stocks and bonds are similar financial products you can purchase as a direct way to communicate with another organization, cutting out intermediaries such as banks or fiscal planners. They provide a tried and tested method to show support for organizations and institutions in whom you believe. However, the two are slightly different and offer divergent avenues to investing. Statista reports verify that over half of all Americans have invested in the last decade.
Publicly traded companies
issue stocks to share their success with people and raise capital for growth. When you buy stocks in a company, you are banking on its success, and receive a share of its profits, paid out in dividends. You can either purchase common stocks, which give you voting rights, or preferred stocks, which put you further up the list when dividends are doled out. However, this form of investing comes with its risks. Stocks can depreciate quickly if the company loses its reputation in the market or shuts down.
Bonds emerge as the safer option of the two. Like stocks, they also represent a vote of confidence on your part. However, instead of giving you a share of profits, they are a type of loan you give to an institution typically tied to the government. Bonds issued by the US Treasury fall into this category. Bonds like these pay you back the total amount you have invested and pay you a reasonably healthy interest. The government sets these rates, making this a reasonably safe investment type.
4. Real Estate
Owning land is perhaps one of the most conventional forms of investment. People may purchase properties using a combination of their funds and bank loans to refurbish and ‘flip’ them for a profit or to retain them as rental properties. Recently, there have been some innovations in this investment mode, with people pooling together resources to crowdfund purchases, especially for large projects.
If you are not up for investing time and money fixing a property, you can also look into Real Estate Investment Trusts (REITs). These are significant revenue-generating properties like hotels or shopping malls that offer regular payouts on your invested amounts. Many brokerage firms can help you diversify into this kind of investment. Just remember that this kind of investment is for the long haul and that you shouldn’t expect to be able to withdraw your money for a while.
Crypto is a reasonably new and highly speculative type of investment that has gained favor with investors in recent years. Although understanding this highly technical field may take you some time, in its simplest form, it is a digital representation of value harvested by ‘digital miners’ working round the clock, stored on digital ‘blockchains’ that can verify authenticity while maintaining privacy.
Cryptocurrencies such as Bitcoin and Ethereum fluctuate in value rapidly but promise rapid growth for the brave of heart. Tread carefully if you make this type of investment, and ensure you brush up on your technical know-how before jumping in.
Where you choose to put your money should be based on thorough research of the type of investment you are selecting before committing yourself. Ask yourself how much risk you are comfortable taking, whether you want quick returns or have the patience to sit on your investment for a few years.
Never put all your eggs in one basket and diversify with mutual funds, stocks & bonds, real estate, cryptocurrencies, and CDs to ensure that you can go about your life in a level-headed manner while reaping the rewards of letting your money work for you.
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