Stocks, mutual funds, exchange traded funds, bonds, and bank certificates can all help you preserve and grow your wealth. The critical thing is to choose investments that you are knowledgeable about and that fit your goals, your time horizon, and your constraints.
Where Should I Invest?
If you have the time and interest to do the research yourself, you can weigh the pros and cons of the various options in light of your personal situation and then determine the right investment mix and specific investments that are a good fit for your situation.
If not, it might be prudent to seek out professional assistance from an experienced advisor who can help you take stock of your personal situation and recommend the best ways to put your money to work in sound investments that can help you grow their value for you.
Whether you do it yourself or with the help of a good financial advisor, here is an overview of the major categories of investment options and a little about each approach. With the right work ethic, an open mind, and a sound approach, or alternatively, with the benefit of professional advice, you can put yourself on the path to generating good returns that will help you reach your goals faster and with less risk of mistakes that could set you back years or even decades from reaching your goals.
The stock market
You can see significant returns when investing in the ever-evolving and changing stock market. The stock market works by democratizing the opportunity of ownership of the many firms that drive the overall economy. In the United States alone, there are more than 12,000 public traded companies. Out of this number, the largest and most established 500 companies are part of an index called the S&P500, which many investors and journalists use to measure the health of the overall stock market.
You invest in a company by buying their stock which generally trades during market hours on one of the several main stock exchanges which have been established to facilitate these trades between investors. In the United States, the main stock exchanges are the New York Stock Exchange (NYSE), the NASDAQ, and the OTC exchange.
While some people think of stocks as little pieces of paper that wiggle around arbitrarily or investing in stocks as gambling, the reality is that investing money into stocks is actually partial ownership of the business that it represents. Stock market investors can do well when the company’s earnings grow over time. When the company makes a profit, they often also pay its investors a portion of those profits in the form of dividends.
This is an excellent option if you are looking for solid returns and have enough of a time horizon for your investment to be able to withstand the ups and downs that go along with stock market investing. To be successful, you have to be able to research and identify good companies with good management leaders that you invest in. You also need the patience and stomach to stick to your long-term investments even when the market gets volatile – which happens in normal functioning stock markets.
Of course, for those who can use some assistance, the help of a financial professional can be invaluable in selecting the best place to invest money. Financial professionals can mitigate or avoid substantial mistakes and losses such as those caused by a drop in a company’s value.
Mutual funds allow you to buy a bundle of stocks in one purchase. A professional manager typically manages the fund and makes investment decisions for the entire portfolio, so keep in mind that you will pay a percentage-based fee for this service, which is also called an expense ratio.Of course, reaching and choosing the right funds for your circumstances can also be challenging. In the US along, there are over 9000 mutual funds to select from. Just as with stocks, you have to select your fund investments thoughtfully and the overwhelming number of options to choose from can make this almost as challenging as picking the right stocks as investments.
When you invest in stocks, you are an owner of the company whose stock you own. When you invest in bonds, however, you are loaning your money to someone.
Bonds come in various flavors, such as government bonds, corporate bonds, or mortgage-backed bonds – just to name a few. While stocks give you a share of the profits of a company, including in the form of dividends, bonds only give you the interest paid on the bond over its life plus a return of your principle.
Bonds are sometimes considered less risky than stocks. While bonds may be lower risk compared with stocks, the returns are also relatively moderate – especially in a low-interest rate world. Bonds are also less volatile because they “mature” at a certain time.
If you believe that slow and steady wins the race, you may want to consider what mix of bonds and stocks is a better investment option for you.
Certificates of deposit (CDs)
This investment method offers you an alternative to savings accounts. It yields a higher return than savings accounts but locks you into a set saving period, during which you cannot withdraw the money. A saving period can range from several months to several years. With this option, you are also getting insurance just in case the bank holding your deposits experiences an issue.