Investments: Where Does The Money Go?

People invest their money in a variety of ways, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and small businesses. Some people also choose to invest in precious metals, art, or cryptocurrencies. The goal of investing is typically to generate future income, increase value and equity, and build wealth over time through the benefits of compounding and long-term growth. While investing can be intimidating for beginners, it is a common way for average people to become millionaires. It is important to have financial discipline before investing, such as being comfortable with your budget and ensuring you are free of high-interest debt.

Stocks

There are two main kinds of stocks: common stock and preferred stock. Common stock entitles owners to vote at shareholder meetings and receive dividends. Preferred stockholders usually don’t have voting rights but they receive dividend payments before common stockholders do, and they have priority over common stockholders if the company goes bankrupt and its assets are liquidated.

There are several types of stocks:

• Growth stocks have earnings growing at a faster rate than the market average. They rarely pay dividends, and investors buy them in the hope of capital appreciation. A start-up technology company is likely to be a growth stock.
• Income stocks pay dividends consistently. Dividends are a portion of the company’s earnings paid to shareholders. Investors buy them for the income they generate. An established utility company is likely to be an income stock.
• Value stocks have a low price-to-earnings (PE) ratio, meaning they are cheaper to buy than stocks with a higher PE. Value stocks may be growth or income stocks, and their low PE ratio may reflect the fact that they have fallen out of favour with investors for some reason. People buy value stocks in the hope that the market has overreacted and that the stock’s price will rebound.
• Blue-chip stocks are shares in large, well-known companies with a solid history of growth. They generally pay dividends.

The potential benefits of investing in stocks include potential capital gains from owning a stock that grows in value over time, potential income from dividends paid by the company, and lower tax rates on long-term capital gains.

The potential risks of investing in stocks include share prices for a company falling, even to zero, and the value of your shares going up and down.

There are several ways to buy stocks:

• Direct stock plans through companies: some companies allow you to buy or sell their stock directly through them without using a broker.
• Dividend reinvestment plans: these plans allow you to buy more shares of a stock you already own by reinvesting dividend payments into the company.
• Discount or full-service brokers: brokers buy and sell shares for customers for a fee, known as a commission.
• Stock funds: these are a type of mutual fund that invests primarily in stocks. Stock funds are offered by investment companies and can be purchased directly from them or through a broker or adviser.

Before investing in a stock, it’s a good idea to research the company and the stock’s performance history. Information you should consider researching includes annual reports, prospectuses, and stock reports.

Investing in stocks is a powerful way to grow your wealth over time. It is important to set clear investment goals, determine how much you can invest, decide how much risk you can tolerate, pick an account at a broker that matches your trading style, fund your stock account, and start trading.

Real estate

Rental Properties

Investing in rental properties is a good option for individuals with DIY skills, patience, and time to manage the property. It requires a substantial down payment and cash on hand to cover maintenance and vacancy periods. However, rental properties provide regular income, potential appreciation, and tax deductions for many expenses.

REIGs are ideal for those who want to own rental real estate without the hassle of managing it themselves. They pool money from multiple investors to purchase rental properties, with a company handling the maintenance and tenant management. REIGs provide income and appreciation while being more hands-off than owning rentals directly.

House Flipping

House flipping involves buying undervalued properties, renovating them, and selling them quickly for a profit. It can be lucrative but requires significant experience in real estate valuation, marketing, and renovation. Flippers also need to be able to accurately estimate repair costs to ensure profits.

REITs are ideal for investors who want exposure to real estate without the traditional transaction. They are companies that own and operate income-producing properties, such as malls or office buildings. REITs are traded on major exchanges, pay high dividends, and are a common retirement investment. They are more liquid than physical real estate but still provide stable, long-term returns.

Online Real Estate Platforms

Online real estate investing platforms, also known as real estate crowdfunding, allow investors to pool their money with others to invest in large commercial or residential deals. These platforms offer diversification into real estate with a relatively modest investment. However, they tend to be illiquid and have management fees that reduce profits.

Investing in real estate can be a great way to build wealth and generate passive income. However, it is important to remember that not all real estate investments are low risk. It requires research, patience, and a long-term strategy to be successful.

Retirement plans

Defined Contribution Plans:

Defined contribution plans, such as 401(k)s, 403(b)s, and 457(b)s, are the most common type of retirement plans offered by employers. These plans allow employees to contribute a portion of their salary to an individual account within the company plan, often through payroll deductions. Employers may also match a certain percentage of the employee's contributions. The main advantage of defined contribution plans is that they are easy to set up and offer tax advantages. Additionally, employees can contribute more per year compared to individual retirement accounts (IRAs). However, these plans may have limited investment options and higher management fees.

Traditional IRAs:

Traditional Individual Retirement Accounts (IRAs) are tax-advantaged plans that allow individuals to contribute pre-tax dollars, providing tax breaks. Contributions can be invested in a range of assets, and taxes are paid upon withdrawal during retirement. Traditional IRAs offer a wider range of investment choices compared to workplace retirement plans, and there is no income limit for contributions. However, the annual contribution limit for IRAs is lower than that of 401(k)s. Additionally, the tax benefits may be reduced for individuals with a retirement plan through their employer.

Roth IRAs:

Roth IRAs are a newer version of traditional IRAs, offering different tax advantages. Contributions are made with after-tax dollars, and withdrawals during retirement are tax-free. There are no income restrictions on Roth 401(k)s, but Roth IRAs have income limits for direct contributions. Additionally, Roth IRAs offer the flexibility to withdraw contributions without penalties, making them suitable for emergency funds. However, the contribution limits for Roth IRAs are the same as for traditional IRAs.

Spousal IRAs:

Spousal IRAs are a strategy for married couples to maximize their retirement savings. If one spouse is not working or earns significantly less, they can open a spousal IRA and contribute based on the household income. This allows non-working spouses to build their own retirement savings and take advantage of the benefits of either a traditional or Roth IRA.

Annuities:

Annuities are insurance contracts that can supplement retirement savings. Fixed annuities, in particular, offer predictable benefits, tax-deferred growth, and sometimes a death benefit. Annuities are not subject to IRS contribution limits, allowing individuals to invest as much as they want for their future. However, they may be complex and lock individuals into a long-term strategy.

Employer-Sponsored Plans:

Employer-sponsored retirement plans, such as 401(k)s, 403(b)s, and 457(b)s, are valuable benefits offered by employers. These plans allow employees to contribute pre-tax dollars, and some employers may match a portion of the contributions. Additionally, Roth options are available for tax-free withdrawals during retirement. It's important to consider tax implications when deciding between traditional and Roth accounts.

Tax-saving investment vehicles

There are several types of tax-saving investment vehicles available, which can be used to save for retirement or other financial goals. Here are some options:

• Health Savings Accounts (HSA): HSAs are triple-tax-free accounts, offering tax-deductible contributions, tax-deferred growth, and tax-free distributions for qualified medical expenses. This makes them an attractive option for high-income individuals, especially those with high-deductible health plans.
• Traditional Retirement Accounts: These accounts provide tax deductions on contributions (pre-tax) but distributions are taxed. They are often used by high-income individuals to get upfront tax deductions at high/top tax rates.
• Roth-style Accounts: These accounts are not deductible when contributions are made (funded with after-tax dollars) but offer tax-free distributions. They are suitable for those who expect to be in a lower tax bracket during retirement, as the Roth-style account will only win relative to a traditional account if the tax rates at distribution are higher or equal to the contribution tax rates.
• 529 College Savings Plans: These plans are tax-deferred during the accumulation phase and tax-free at distribution, making them ideal for funding children's college education. They are similar to Roth-style accounts but lack tax deductions on contributions.
• Non-qualified Deferred Annuities: These annuities provide tax-deferred growth outside of a retirement account. While they come with additional costs for annuity guarantees, low-cost options like Investment-Only Variable Annuities (IOVAs) are available and can be worthwhile for tax-inefficient, high-return investments.
• Cash Value Life Insurance: While less common due to the rise of low-cost annuities, cash value life insurance can still be used as a tax-deferral vehicle, especially for those seeking a blended need for savings and a death benefit.
• Brokerage Accounts: Holding investments in a taxable brokerage account can also provide tax-deferred growth, especially for long-term growth assets. Capital gains are only taxed upon sale, and certain investments like zero-dividend growth stocks can avoid taxation until liquidation.

It's important to note that the availability and suitability of these tax-saving investment vehicles may vary depending on an individual's location, income, age, and other factors. It's always recommended to consult with a financial advisor to determine the best investment strategies for your specific circumstances.

Art

Tips for Investing in Art

• Research: Visit art galleries, museums, fairs, and artists' studios to determine what you like and to develop an understanding of the art market. Read art critics to find up-and-coming artists, and review art prices from auction houses.
• Establish contacts: Build relationships with gallery owners, art critics, artists, and other collectors to educate yourself.
• Ignore the hype: Buy art based on the quality of the work, not trends.
• Don't limit yourself: Artwork can take many forms beyond canvases. Consider investing in other formats, such as photography, costumes, and archaeological items.
• Buy what you like: The artwork you purchase will most likely be displayed in your home or office for years to come, so make sure you like it.

However, art can be a good way to diversify your portfolio away from traditional stocks and bonds. The art market's unique ability to regulate its own supply and demand results in relatively stable prices for artworks, even during financially rocky periods.

If you are unsure about investing directly in art, another option is to invest in mutual funds that invest specifically in works of art.

If you have a true find hanging on your wall and you're ready to part with it, your best shot at a decent payout will be a fine art auction house, which will typically charge around 13% to over 30% of your sale price for auctioning your piece.

Online Platforms

Online art marketplaces are enabling contemporary art from all around the world to be accessed by global audiences and investors, presenting a great opportunity for those looking to diversify their portfolios, build their assets, or begin their journey into art investment.

Frequently asked questions