Investments: Are They For Everyone?

Investing can be intimidating, especially for beginners. However, it is a great way to grow your money and there are many options to choose from, depending on your goals, risk tolerance, and the amount of money you have to invest.

Some common types of investments include stocks, bonds, mutual funds, exchange-traded funds (ETFs), certificates of deposit (CDs), and high-yield savings accounts. Each of these options has its own level of risk and potential return, so it's important to understand the pros and cons of each before deciding where to put your money.

For example, stocks generally offer higher potential returns but come with higher risk. On the other hand, options like high-yield savings accounts and CDs are considered safer but typically provide lower returns. Mutual funds and ETFs are good choices for those who want to diversify their investments, while bonds can provide a steady stream of income with lower risk.

Before investing, it's crucial to consider your short-term and long-term financial goals, risk tolerance, and the amount of money you can invest. Consulting a financial advisor can also help guide you towards investments that match your goals and risk tolerance.

High-yield savings accounts

The best high-yield savings accounts have no monthly maintenance fees, no minimum balance or deposit requirements, and high APYs. Some of the best high-yield savings accounts include:

• UFB Direct High Yield Savings: Best for APY at all balance tiers
• Laurel Road High Yield Savings® account: Best for full banking experience
• Varo Savings Account: Best for automated savings tools
• LendingClub Bank High-Yield Savings: Best for Trustpilot ratings
• Bask Bank Interest Savings Account: Best for no minimum deposit
• TAB Bank High Yield Savings: Best for no monthly fee
• Popular Direct High-yield Savings Account: Best for fully online banking
• First Foundation Online Savings Account: Best for ATM fee reimbursement
• Synchrony Bank High Yield Savings: Best for app ratings

Exchange-traded funds (ETFs)

ETFs are considered ideal for young investors and are often recommended to new investors because they are more diversified than individual stocks. They can be structured to track anything from the price of a commodity to a large and diverse collection of securities. They can even be designed to track specific investment strategies.

• Access to many stocks across various industries
• Low expense ratios and fewer broker commissions
• Risk management through diversification
• Actively managed ETFs make decisions about which securities to include in the portfolio
• They are traded in the markets during regular hours, just like stocks
• Easy to trade—you can buy and sell any time of the day, unlike most mutual funds that trade at the end of the day
• Transparency—most ETFs are required to publish their holdings daily
• More tax-efficient—ETFs typically generate a lower level of capital gain distributions relative to actively managed mutual funds

Some disadvantages of ETFs include:

• Trading costs: If you invest small amounts frequently, there may be lower-cost alternatives to investing directly with a fund company in a no-load fund
• Illiquidity: Some thinly traded ETFs have wide bid/ask spreads, which means you'll be buying at the high price of the spread and selling at the low price
• Tracking error: While ETFs generally track their underlying index fairly well, technical issues can create discrepancies

Mutual funds

There are four main types of mutual funds: money market funds, bond funds, stock funds, and target date funds. Money market funds are considered low-risk as they can only invest in specific high-quality, short-term investments. Bond funds aim for higher returns and thus carry more risk. Stock funds invest in corporate stocks and can be further categorised into growth funds and income funds. Growth funds focus on stocks with high financial gains, while income funds invest in stocks that pay regular dividends. Finally, target date funds hold a mix of stocks, bonds, and other investments, gradually shifting their strategy over time.

It's important to note that mutual funds carry risks. Investors may lose some or all of their investment if the securities held by the fund decrease in value. Additionally, fees and expenses can impact returns, with higher-cost funds needing to perform better to generate the same returns as low-cost funds.

When investing in mutual funds, individuals can buy shares directly from the fund itself or through a broker. These shares are "redeemable," meaning investors can sell them back to the fund at any time.

Bonds

There are three main types of bonds: corporate, municipal, and treasury bonds. Corporate bonds are issued by companies to raise capital for initiatives like expansion and research and development. Municipal bonds are issued by cities, towns, or states to raise money for public projects such as schools, roads, and hospitals. Treasury bonds, also known as T-bonds, are issued by national governments and are considered the safest type of bond.

Overall, bonds are a good option for those looking for a more stable and predictable investment. They provide a steady income stream and are a way to preserve capital. However, it's important to carefully consider the risks associated with bonds and to diversify your investments to mitigate these risks.

Stocks

Over half of Americans (approximately 158 million, or 61% of U.S. adults, own stock. However, stock ownership is not equally distributed. The top 1% holds 49% of stocks, worth $19.73 trillion, while the bottom 50% of U.S. adults hold only 1% of stocks, worth $41 billion. Stock ownership is also split along racial lines, with white Americans owning 88.8% of stocks, while Black Americans and Hispanic Americans own 0.7% and 0.6% respectively.

There are several benefits to investing in stocks. Firstly, stocks historically offer higher returns compared to alternatives like bonds or gold, averaging around 10% annually since 1926. Stocks also tend to outpace inflation, safeguarding wealth over the long term. Secondly, the stock market has created an enormous amount of wealth over the years. For example, $10,000 invested in the stock market 50 years ago would have grown to more than $380,000 today. Thirdly, market timing matters less than time in the market; staying invested is crucial for long-term success. Finally, stocks can provide regular passive income through dividend payments, enhance your investment portfolio, and allow you to start small with fractional shares.

However, there are also risks associated with investing in stocks. The biggest risk is stock market volatility. The stock market doesn't go up every year, and some drops can be significant. For example, the S&P 500 typically falls three out of every 10 years. Additionally, investing in stocks may not be suitable for everyone, especially those who need a fixed income stream or have high-interest debt. It's important to consider your financial situation and risk tolerance before investing in stocks.

Frequently asked questions