Faith Morrow
There are many types of funds to invest in, and the best choice depends on your financial goals, risk tolerance, and time horizon. Here are some popular options:
- Stock Funds: These funds invest in a collection of stocks, often based on specific themes or categories. They offer diversification and are suitable for investors seeking a balance between higher returns and moderate risk.
- Bond Funds: Bond funds invest in a variety of bonds from different issuers, providing diversification and reduced risk compared to individual bonds. Bond funds are considered relatively safe and offer stable returns, typically lower than stock funds.
- Mutual Funds: Mutual funds pool money from multiple investors to purchase a diverse range of stocks, bonds, or other assets. They are ideal for long-term wealth accumulation and offer lower fees than actively managed funds.
- Index Funds: Index funds are a type of mutual fund or ETF that passively tracks a stock market index, such as the S&P 500. They aim to replicate the index's performance at a lower cost, making them a popular choice for beginners.
- Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds but trade on stock exchanges, offering more flexibility in buying and selling throughout the day. They are often used to invest in indexes and provide diversification at a lower cost.
- Robo-Advisor Portfolios: Robo-advisors use algorithms to build and manage investment portfolios based on your goals, risk tolerance, and time horizon. They offer a hands-off approach to investing and typically invest in low-cost ETFs.
- Target-Date Funds: These funds automatically adjust their asset allocation over time, becoming more conservative as you approach your target retirement date. They are commonly used in retirement plans and are suitable for investors seeking a simplified investment strategy.
| Characteristics | Values |
|---|---|
| Risk | Lower risk = lower returns, higher risk = higher returns |
| Time horizon | Shorter time horizon = safer investments, longer time horizon = riskier investments |
| Knowledge | Savings accounts and CDs require little knowledge, market-based products such as stocks and bonds require more knowledge |
| Amount to invest | The more money to invest, the more worthwhile it is to investigate higher-risk, higher-return investments |
What You'll Learn
High-yield savings accounts
- You can typically earn much higher interest rates at online banks than at traditional brick-and-mortar banks.
- You will likely have easy access to your money by quickly transferring it to your primary bank or via an ATM.
- Rates may run above inflation for much of the year, so you may gain purchasing power.
- Interest rates: Look for accounts with above-average interest rates, but also consider how long the rate lasts.
- Minimum balance: Check the fine print to understand the minimum balance required to avoid service fees and earn the maximum APY.
- Fees: Many high-yield savings accounts have no fees, but some do. Be sure to know the fee structure before opening an account.
- Accessibility: Consider whether you prefer a traditional bank with physical branches or an online-only bank, which often offers higher interest rates and lower fees.
- UFB Direct High Yield Savings: Best for APY at all balance tiers.
- Laurel Road High Yield Savings: Best for a 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: Offers the best interest rate on our list.
- 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.
Please note that interest rates on high-yield savings accounts are variable and can fluctuate at any time.
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Long-term certificates of deposit
CDs are ideal for those who want to save for the long term without taking on too much risk. They're a good choice for retirees who don't need immediate income and can lock up their money for a fixed period. The longer the term, the higher the interest rate you can expect.
When considering a long-term CD, look for one with a competitive interest rate and a term that fits your investment strategy. Avoid committing to a long-term CD if you think you might need the money sooner. It's also important to consider the minimum deposit required and any associated fees or charges.
While CDs offer stability and security, there are a few things to keep in mind. Firstly, your money is locked in for the term, and early withdrawal usually incurs a penalty. Secondly, while CDs generally offer higher interest rates than savings accounts, they may not keep up with inflation, which can eat away at the value of your investment over time.
Overall, long-term CDs are a good option if you're looking for a safe and predictable investment with a fixed interest rate and term.
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Long-term corporate bond funds
Long-term corporate bonds have an average maturity of 10 years or more, making them a strategic choice when interest rates are falling. They are issued by corporations to raise capital and are packaged into bond funds that may include bonds from hundreds of companies. This diversification reduces the risk of any single bond significantly impacting your portfolio.
When considering long-term corporate bond funds, it's essential to focus on investment-grade bonds to minimise the chances of companies defaulting on their bonds. While these funds are not FDIC-insured, the diversification inherent in bond funds helps mitigate individual credit risks.
Some of the best long-term corporate bond funds include the Vanguard Long-Term Corporate Bond ETF and the iShares 10+ Year Investment Grade Corporate Bond ETF. These funds offer broad exposure to the corporate bond market and are backed by reputable fund managers.
Before investing in long-term corporate bond funds, it's important to assess your risk tolerance, time horizon, and financial goals. These funds are suitable for those seeking stable returns over the long term, ideally with a time horizon of at least three to five years to ride out any market volatility.
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Dividend stock funds
- International Seaways Inc (INSW)
- Pennymac Mortgage Investment Trust (PMT)
- Franklin BSP Realty Trust Inc. (FBRT)
- Seven Hills Realty Trust (SEVN)
- AG Mortgage Investment Trust Inc (MITT)
- Altria Group Inc. (MO)
- Insteel Industries, Inc. (IIIN)
- Eagle Bancorp Inc (MD) (EGBN)
- Alexander's Inc. (ALX)
- Artisan Partners Asset Management Inc (APAM)
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Value stock funds
The goal of value investing is to profit from a rise in the share price of a company once the market recognises its true value. This rise in share price is expected to occur when the market corrects its inefficiencies, which caused the company's shares to be undervalued in the first place.
Some examples of value stock funds include:
- The Vanguard Equity-Income Fund Investor Shares (VEIPX)
- The ClearBridge Large Cap Value Fund (SAIFX)
- The Invesco S&P 500 Enhanced Value ETF (SPVU)
- The iShares Edge MSCI USA Value Factor ETF (VLUE)
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Frequently asked questions
Exchange-traded funds (ETFs) are a good option for beginners as they are diversified, low-cost, and easy to trade on major stock exchanges. Mutual funds are similar but are less liquid and price their shares only once a day. Index funds are another good option for beginners as they are diversified, low-cost, and aim to match the performance of a market index like the S&P 500.
For long-term investing, consider dividend stock funds, value stock funds, and S&P 500 index funds. Dividend stocks pay out a portion of a company's profits to shareholders, usually on a quarterly basis. Value stock funds invest in stocks that are more bargain-priced in the market. S&P 500 index funds are based on about 500 of the largest American companies and have historically returned about 10% annually.
For short-term savings, consider high-yield savings accounts and certificates of deposit (CDs). High-yield savings accounts can be found at online banks and offer higher interest rates than traditional bank savings accounts. CDs are issued by banks and offer a higher interest rate than savings accounts, but you need to lock up your money for a specific period.
For higher returns, consider investing in individual stocks or alternative assets like private equity, fractional ownership of real property, cryptocurrencies, and other non-traditional investments. However, these options come with higher risk, so make sure you understand the risks involved before investing.
