Investments: Where Is The Money Going?

People are investing in a variety of things at the moment, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and cryptocurrencies. The best approach for an individual depends on their risk tolerance, the amount of money they have to invest, and their time horizon, among other factors.

For example, stocks are considered riskier but can offer higher returns, while bonds are generally less volatile and provide a fixed income. Mutual funds and ETFs are types of funds that invest in a combination of stocks, bonds, and other assets, offering easy diversification and lower risk.

Additionally, some people are investing in alternative options like rental properties or robo-advisors, which provide automated investment portfolio management.

It's important to remember that investing involves risk, and individuals should carefully consider their financial goals, risk tolerance, and conduct thorough research before making any investment decisions.

High-yield savings accounts

When choosing a high-yield savings account, it's important to consider the interest rate, initial deposit, minimum balance, and fees. Many high-yield savings accounts have no monthly service fees, minimum opening deposit, or minimum balance requirements. However, some do charge monthly maintenance fees, which can range from $5 to $20, so it's important to read the fine print.

• UFB Direct High Yield Savings: Best for customer ratings and APY at all balance tiers.
• Varo Savings Account: Best for monthly fees, automated savings tools, and younger bank customers.
• LendingClub Bank High-Yield Savings: Best for Trustpilot ratings and no monthly fees.
• Laurel Road High Yield Savings® account: Best for the full banking experience.
• Bask Bank Interest Savings Account: Best for no minimum deposit.
• TAB Bank High Yield Savings: Best for no monthly service fee and high APY.
• Salem Five Direct eOne Savings: Best for large balances and no monthly fee.
• Popular Direct High-yield Savings Account: Best for long-term savings and fully online banking.
• First Foundation Online Savings Account: Best for branch access and ATM fee reimbursement.
• Synchrony Bank High Yield Savings: Best for app ratings.

Exchange-traded funds (ETFs)

ETFs can be structured to track anything from the price of a commodity to a large and diverse collection of securities. There are ETFs based on almost any kind of security or asset available in financial markets. For example, stock ETFs track shares of companies in one industry or sector, bond ETFs invest in treasuries of a certain maturity, foreign exchange ETFs buy currencies of one nation or region, and hybrid ETFs mix and match multiple asset types.

ETFs can be ultra-wide or ultra-narrow in focus. They can attempt to track a broad market index like the S&P 500 or the performance of an entire country's economy, or they can specialize in a small group of companies in one subsector. Some common types of ETFs include index ETFs, foreign market/country ETFs, industry or sector ETFs, bond ETFs, commodity ETFs, and currency ETFs.

ETFs have become some of the most popular vehicles for buying and selling all sectors of stocks, bonds, and commodities. They are traded on public stock exchanges, so investors can make their own trades through an individually owned account or by buying and selling shares through a low-cost smartphone app. There are currently about 2,000 ETFs on the market, with a market capitalization of more than $2.3 trillion.

Some funds are leveraged ETFs, which are high-risk vehicles that track a specific index and are designed to do two or three times the performance of the index. Leveraged ETFs can be quite profitable, but they can also lose an investor's money quickly if the market shifts direction unexpectedly. As a result, leveraged ETFs are only wise for short-term traders.

ETFs have some disadvantages. Investors pay an annual expense ratio that can range from 0.01% to more than 1%, and buying and selling ETFs can be more expensive than buying individual stocks. Additionally, investors who make frequent trades of ETFs can see their profits reduced by the combination of trading costs and the ETF expense ratio.

Despite these disadvantages, ETFs offer several benefits. They provide access to many stocks across various industries, low expense ratios, fewer broker commissions, and risk management through diversification. ETFs also exist that focus on targeted industries, and they are available on most online investing platforms, retirement account provider sites, and investing apps.

Dividend stocks

Dividends can be paid out in cash, which is the most common form, or as stock shares, or through dividend reinvestment programs (DRIPs), where dividends are reinvested back into the company. Dividends are also taxed differently, depending on how long you've been a shareholder and the type of account the dividend stocks are in. Qualified dividends, where you've held the stock for at least 60 days before the ex-dividend date, are taxed at the long-term capital gains rate. Nonqualified dividends are taxed at the short-term capital gains rate, which is usually higher.

When investing in dividend stocks, it's important to look at a company's track record of dividend payments and increases, rather than just choosing companies with the highest current yield. It's also important to do your research on each company and ensure they have consistent earnings and healthy finances.

Some examples of dividend stocks include Verizon, AT&T, Prudential, Truist, Ford, and Walgreens.

Real estate

Investing in real estate is a great way to diversify your portfolio and there are many ways to do so. Here are some of the most common methods:

Rental Properties

This strategy is ideal for those with DIY skills, patience, and time to manage tenants and the property. While financing can be obtained with a low down payment, it requires substantial cash on hand to finance upfront maintenance and cover periods of vacancy or non-payment. Once the property starts generating income, this can be leveraged to acquire more properties, creating multiple income streams.

REIGs are ideal for those with some capital who want to own rental real estate without the hassle of managing it. They are similar to small mutual funds, pooling money from multiple investors to buy rental properties. A single investor can own one or multiple units, while the company collectively manages all the units, handling maintenance, advertising, and interviewing tenants. In exchange, the company takes a percentage of the monthly rent.

House Flipping

House flipping involves buying undervalued properties and selling them quickly for a profit. It requires significant experience in real estate valuation, marketing, and renovation. Flippers often aim to sell properties within six months, so those unable to offload properties quickly may face snowballing losses.

REITs are ideal for investors seeking portfolio exposure to real estate without making a traditional property transaction. They are bought and sold on major exchanges like stocks. Corporations must pay out 90% of taxable profits as dividends to maintain REIT status, avoiding corporate income tax. REITs provide regular income and can offer investors entry into non-residential investments such as malls or office buildings.

Online Real Estate Platforms

Online real estate investing platforms, also known as real estate crowdfunding, allow investors to join others in investing in large commercial or residential deals. They provide an opportunity to diversify into real estate without a large stake, but investments tend to be illiquid with lock-up periods, and management fees can reduce profits.

Bonds

There are three main types of bonds: corporate bonds, municipal bonds, and US treasuries.

Corporate bonds are issued by private and public corporations. They are considered lower-risk and lower-return investments than stocks, which makes them an essential component of a balanced investment portfolio, especially for older or more conservative investors. The interest rate that determines the payment is called the coupon rate. The coupon rate is the rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage. The coupon rate is fixed but the appeal of that bond and its coupon rate on the secondary market changes with economic conditions. If interest rates rise, bonds issued with lower coupon rates become less attractive to potential buyers, who could get a higher rate of return on a new bond. Subsequently, the bond’s price declines.

Municipal bonds, or "munis", are issued by states, cities, counties, and other government entities. They are backed by revenues from a specific project or source, such as highway tolls or lease fees.

US treasuries are issued by the US Department of the Treasury on behalf of the US government. They are considered a safe and popular investment as they carry the full faith and credit of the US government. Treasury Inflation-Protected Securities (TIPS) are notes and bonds whose principal is adjusted based on changes in the Consumer Price Index.

Frequently asked questions