Smart Investment Strategies: Where To Begin?

Investing is a great way to grow your money, but it comes with risks. The best investment for you depends on your risk tolerance, timeline and other factors. Here are some options for where to make smart investments:

- High-yield savings accounts: While not technically an investment, these accounts offer higher interest rates than traditional bank savings accounts, providing a good option for those with short-term savings goals or who don't want to take any risks.

- Certificates of deposit (CDs): CDs are federally insured savings accounts that offer a fixed interest rate for a defined period, making them a good option for those who want to safely grow their money for a specific purpose. However, there is usually a fee for early withdrawal.

- Government bonds: These are a relatively safe form of fixed-income investment, backed by the full faith and credit of the government. They offer a steady stream of payments but typically have lower returns than other investments.

- Corporate bonds: These are similar to government bonds but are issued by companies rather than the government, making them slightly riskier. They can offer potentially higher yields, depending on the company's likelihood of going out of business.

- Money market funds: These funds invest in high-quality, short-term government, bank or corporate debt, offering a little more market risk than savings accounts. They are suitable for money that may be needed soon or as a holding pen for future investments.

- Mutual funds: Mutual funds pool money from multiple investors to buy stocks, bonds or other assets, providing an inexpensive way to diversify your investments. Some funds focus on specific types of investments, such as technology companies or high-dividend stocks.

- Index funds: A type of mutual fund that aims to provide investment returns equal to the performance of a particular market index, such as the S&P 500. They are more cost-effective and less volatile than actively managed funds.

- Exchange-traded funds (ETFs): ETFs are similar to mutual funds but trade on stock exchanges, making them more flexible. They are ideal for investors who want to diversify their portfolio but don't have enough money to meet the minimum investment requirements for mutual funds.

- Stocks: Stocks generally offer higher potential returns than lower-risk investments but come with higher levels of volatility. It's important to diversify your portfolio and limit individual stock holdings to a small portion of your overall portfolio.

- Dividend stocks: These stocks provide regular cash payments and are often associated with stable, profitable companies. They can be attractive to investors due to the fixed income they provide, but dividends are usually taxable.

High-yield savings accounts

When choosing a high-yield savings account, consider the APY, fees, minimum opening deposit and balance requirements, and ease of access to your money. Some accounts may require a minimum balance to earn the advertised APY, and some banks restrict withdrawals or transfers to six per month. It's also important to note that high-yield savings account rates are variable and could fall.

• BrioDirect: 4.55% APY, $5,000 minimum opening deposit
• LendingClub Bank: 4.50% APY, no minimum opening deposit
• Bask Bank: 4.50% APY, no minimum opening deposit
• Bread Savings: 4.50% APY, $100 minimum opening deposit
• Popular Direct: 4.50% APY, $100 minimum opening deposit
• CIT Bank: 4.35% APY, $100 minimum opening deposit
• EverBank: 4.30% APY, no minimum opening deposit
• CIBC Bank USA: 4.28% APY, $1,000 minimum opening deposit
• TAB Bank: 4.26% APY, no minimum opening deposit
• MySavingsDirect: 4.10% APY, $1 minimum opening deposit

Exchange-traded funds (ETFs)

ETFs are like mutual funds but trade throughout the day on a stock exchange. So, you can trade them just like shares of a company. This also means that their value rises and falls as the trading day goes on.

ETFs can mirror an underlying index such as the Dow Jones Industrial Average or any other basket of stocks chosen by the ETF manager. The index might cover anything from emerging markets to commodities, individual business sectors such as biotechnology or agriculture, and more. The most popular ETFs for both mammoth institutional investors and those putting a bit into a fund each paycheck remain those that track indexes.

ETFs offer exposure to many stocks across various industries, low expense ratios and commissions, and risk management through diversification. They are also a great option for investors with any level of experience as they offer high liquidity and diversification.

• Open a brokerage account: The majority of online brokers now offer commission-free stock and ETF trades. Compare each broker's features and platform. If you're a new investor, it might be a good idea to choose a broker that offers an extensive range of educational features.
• Choose your first ETFs: For beginners, passive index funds are generally the best way to go. Index funds are cheaper than their actively managed counterparts, and most actively managed funds don't beat their benchmark index over time.
• Let your ETFs do the hard work for you: ETFs are generally designed to be maintenance-free investments. Newer investors tend to have a bad habit of checking their portfolios too often and making emotional, knee-jerk reactions to major market moves. The best advice is to leave them alone and let them do what they're intended to do: produce excellent investment growth over long periods of time.

• SPDR S&P 500 (SPY): The oldest and most widely known ETF that tracks the S&P 500.
• IShares Russell 2000 (IWM): An ETF that tracks the Russell 2000 small-cap index.
• Invesco QQQ (QQQ): Known as "cubes", it tracks the tech-heavy Nasdaq 100 Index.
• SPDR Dow Jones Industrial Average (DIA): Known as "diamonds", it tracks the 30 stocks of the Dow Jones Industrial Average.
• Sector ETFs: ETFs that track individual industries and sectors such as oil (OIH), energy (XLE), financial services (XLF), real estate investment trusts (IYR), and biotechnology (BBH).
• Commodity ETFs: These ETFs track commodities, including gold (GLD), silver (SLV), crude oil (USO), and natural gas (UNG).
• Country ETFs: Funds that track the primary stock indexes in foreign countries but are traded in the U.S. in dollars. Examples include China (MCHI), Brazil (EWZ), Japan (EWJ), and Israel (EIS).

ETFs are a smart investment option as they provide diversification, low costs, and the ability to trade shares live during the trading day. They are also very accessible, with a minimum investment of just $1.

Stocks

Understanding the Basics

Advantages of Investing in Stocks

One of the main advantages of investing in stocks is the potential for higher returns compared to other investment options. Historically, stocks have delivered average annual returns of around 9-10%. This means that investing $10,000 in stocks and achieving a 10% return would result in a profit of $1,000 in a year. Additionally, stocks offer liquidity, which means you can easily buy or sell them on the stock market. Stocks also provide the opportunity for dividend income, which is a portion of the company's profits distributed to shareholders.

Types of Stocks

There are different types of stocks to consider:

• Blue-chip stocks: These are stocks of well-established, large companies with a strong track record of performance and stability. Examples include companies like Apple, Microsoft, and Coca-Cola.
• Growth stocks: These are stocks of companies that are expected to grow at a faster rate than the overall market. They often operate in new or expanding industries and have the potential for significant capital appreciation.
• Value stocks: These are stocks that appear to be undervalued by the market and are trading at a lower price than their intrinsic value. Value investors look for these stocks as they believe they have the potential for capital gains when the market recognizes their true value.
• Dividend stocks: These are stocks that pay out regular dividends to shareholders. They are often associated with mature and stable companies that have consistent earnings and cash flow. Dividend stocks can provide a steady income stream in addition to potential capital appreciation.

Factors to Consider

When investing in stocks, there are several factors to consider:

• Risk and volatility: Stocks are generally considered riskier than other investments, such as bonds or savings accounts. The stock market can be volatile, and stock prices can fluctuate significantly in the short term. It's important to assess your risk tolerance and ensure that you are comfortable with the potential for losses as well as gains.
• Diversification: Diversifying your stock portfolio is crucial to managing risk. It's important to invest in a variety of stocks across different industries and sectors to minimize the impact of any single stock or market downturn.
• Research and analysis: Conducting thorough research and analysis before investing in stocks is essential. Look at the company's financial health, competitive advantage, management team, and future prospects. Consider using resources like financial statements, analyst reports, and industry news to make informed investment decisions.
• Long-term perspective: Investing in stocks should typically be done with a long-term perspective. Short-term market fluctuations can be common, but over the long term, stocks have historically provided strong returns. It's important to have a buy-and-hold strategy and avoid making impulsive decisions based on short-term market movements.

Getting Started with Stock Investing

To start investing in stocks, you can follow these steps:

• Open a brokerage account: Choose an online brokerage firm that suits your needs, considering factors such as fees, investment options, and research tools.
• Fund your account: Transfer funds into your brokerage account to begin investing. You can link your bank account or use other payment methods to deposit money.
• Research and select stocks: Conduct thorough research to identify stocks that align with your investment strategy and risk tolerance. Consider factors such as the company's financial health, industry trends, and growth potential.
• Place your orders: Once you've decided on the stocks you want to invest in, place your buy orders through your brokerage account. You can specify the number of shares you want to purchase, and the brokerage will execute the trade on your behalf.
• Monitor and manage your portfolio: Regularly review your stock portfolio's performance and make adjustments as needed. Stay informed about market trends, company news, and economic factors that may impact your investments.

Remember, investing in stocks involves risk, and there is no guarantee of profits. It's important to do your own research, diversify your portfolio, and invest with a long-term perspective to increase your chances of success in the stock market.

Fixed income

Fixed-income investments are those that provide a fixed interest rate or regular payments to investors holding the securities. They are considered to have lower returns and lower risks than stocks. Government and corporate bonds are the most common types of fixed-income products.

Mutual Funds and Exchange-Traded Funds (ETFs)

Mutual funds and ETFs are a practical and cost-efficient way to build a diversified portfolio of bonds or short-term investments. These funds give the investor an income stream and professional portfolio management. ETFs may be more accessible and more cost-effective for individual investors, and they may target specific credit ratings, durations, or other factors.

These are professionally managed bond portfolios built around a specific investment strategy and can be personalized to the investor's preferences.

Individual Bonds

Individual bonds, including corporate, municipal, and government bonds, can provide principal preservation, regular income, and potential tax benefits.

Certificates of Deposit (CDs)

CDs are fixed-income vehicles with maturities of less than five years, typically offered by financial institutions. They offer a higher rate of return than a typical savings account and carry FDIC or National Credit Union Administration (NCUA) protection.

Bond Laddering

Investors can use a laddering strategy when investing in fixed income by investing in a series of short-term bonds with different maturities. This provides steady interest income and allows investors to take advantage of rising market interest rates.

Annuities

Annuities are contracts, often made with insurance companies, that pay a certain level of income over some time in exchange for an upfront payment. Fixed annuities provide a guaranteed income and return and are a good option for those seeking financial security, especially during retirement.

Real estate

REITs are similar to investing in stocks and bonds, but instead of investing in companies, you are investing in properties such as office buildings, apartment buildings, and shopping malls. Your money is dispersed among properties worldwide, and management handles the logistics. REITs are highly liquid, and you can buy and sell shares via a brokerage account. You can also buy shares of exchange-traded funds (ETFs) that own many REITs, or buy fractional shares of REITs to get started with a smaller investment. REITs pay out substantial dividends, making them attractive for income-focused investors.

Buying Your Own Home

The simplest type of real estate investment is buying your own home. Homeowners tend to make a significant profit when they sell, and they can increase their profitability with home improvements. Homes also provide equity that can be used to qualify for loans. Home values tend to increase every year, and homeowners can sell their homes at any time. However, there are also expenses to consider, such as insurance, property tax, interest, and repairs.

Rental Properties

Rental properties offer several investment options, such as single-family homes, vacation homes, short-term rentals like Airbnb, or multi-family homes. A rental can generate significant profits, but it is also labor-intensive, as you must take care of maintenance, rent collection, and ensuring the property is occupied. Owners often hire property management companies, but the fees will detract from profits. It is essential to ensure the property generates enough income to make the investment worthwhile.

House Flipping

House flipping involves buying homes priced below market value, fixing them up, and selling them for a profit. It can be lucrative but is also risky. You must find a property that you can fix up without exceeding your budget. Your best bet is to find homes that don't need a lot of work in up-and-coming areas, as you will make a profit off rising home prices alone.

House Wholesaling

Wholesaling is a quick and easy way to earn a profit without spending a lot of money. It involves putting a seller's home under contract, finding an investor to buy it, and keeping the difference between the contracted price and the selling price. The process usually involves distressed properties, and the wholesaler does not make any renovations or money investments. Wholesalers typically make 5% to 10% of the sale price, and it generates money quickly with little effort. However, if you cannot find a buyer within the contract's timeline, you can lose the earnest money.

Raw Land

Buying raw land is a risky investment strategy, especially if you plan to develop it yourself. Investors typically run into issues with permits, zoning, timeline delays, and lack of planning. It is recommended to simply buy the land and allow it to increase in value, then sell it to the next investor. Land can be purchased relatively cheaply, and it tends to gain value over time.

Fractional Ownership

Fractional ownership allows you to invest in rental or commercial properties without investing a lot of capital. You can buy shares in a property for as little as $20, and you will get rental income and capital gains when the property sells. However, these deals offer no liquidity, and there are usually minimum investment requirements.

Private Equity Real Estate

Private equity real estate is a professionally managed fund that invests in various properties. It requires substantial capital and may only be available to high-net-worth and accredited investors. It is riskier than other types of investments but can generate returns of 8 to 10%. Money can be locked up for years, and fund managers may charge investors 2% of invested assets plus 20% of profits.

Crowdfunded Real Estate Loans

Crowdfunded real estate loans involve investors lending money to other investors looking to flip a home or renovate. You will earn a weekly fixed dividend of around 5%, and some platforms allow you to pull your money at any time. These loans are short-term, typically 6-12 months, and the minimal commitment lowers your risk.

Tax Breaks

As a real estate investor, you can take advantage of tax breaks such as the 1031 exchange. Work with an accountant who knows the real estate investment business to save the most money.

Work with a Real Estate Agent

When starting out in real estate investing, it is essential to have a good team, including a seasoned real estate agent with investment experience. They can provide valuable insights such as rental price insight, legally appropriate lease language, up-to-date MLS statistics, and neighborhood information.

Detaching Yourself from the Property

One of the mistakes new real estate investors make is buying a house as if they were going to live in it. It is important to remember that you are buying it as an income source, not for yourself.

Starting with One Property

If you are new to real estate investing, it is recommended to start with one property to flip or multiple properties to rent. For flipping, having just one property will help you learn the ropes without feeling overwhelmed. For rentals, having several properties is better, as you will still have income if one becomes vacant.

Insurance

It is crucial to buy the right insurance for your property. Vacant homes are especially vulnerable, so consider specialty insurance that covers them.

Know the Market

Understanding the real estate market in your area is essential. Keep an eye on how long it takes for properties to sell—if homes are selling in about 90 days, the market is normal. If it takes longer, home values won't increase, but if it takes less, you can predict that prices will go up.

Budgeting

When budgeting for a property, be sure to include repairs, vacancies, and upgrades. Budget off a conservative sales price to avoid losing money if the market shifts.

Location Research

Get to know the market you are buying and selling in by driving around the area, both during the week and on the weekend, and at night. This will help you mitigate risk by learning about development in the area, nearby neighborhoods, and other factors.

Frequently asked questions