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Investing

 

By Joel Anderson

When you invest, you're handing over your money to someone else who will use it to generate income through business activities and then pay you back with some additional profit. Investing your money is a critical part of saving money that puts your money to work earning more money, often without your active participation. Investment options are available to everyone whether you want to invest $100 or tens of thousands of dollars. Most have easily accessible online options.



What Is Investing?

Investing is essentially offering up money to people who have an immediate use for it in exchange for a share of the money they will earn using it. There are many different ways to invest, but they're all variations on that basic form of letting other people or companies use your money and paying you for
the privilege.

All investments involve some degree of risk, and your returns are essentially a fee you're being paid by the market for putting your hard earned cash on the line. Generally speaking, the more risk you take on, the greater the potential returns from your investment.


Ways to Invest

The American financial system is very good at helping people from all walks of life put their money to work helping the economy grow, and there are plenty of options that offer broad, low risk investing geared towards novices and people unfamiliar with the financial system.


Brokerage

A brokerage is a firm that exists to help people make investments. In many cases, making a direct purchase of an investment product can be difficult and complicated. Brokerage houses will make those purchases for you in exchange for a fee, usually on a per transaction basis.

There are many options for brokerage services available online, including many that are meant to make investing easy. Some offer investment advisors in addition to their brokerage services.


CDs and Money Market Accounts

Certificates of deposit (CDs) and money market accounts (MMAs) are both products offered by banks that offer interest payments for letting them make loans with your money when you aren't using it. Because CDs and MMAs are FDIC insured, they are mostly risk free. However, they come with limitations on how and when you can access your money without paying a fee.


CDs

CDs offer a higher interest rate than savings accounts and a fixed rate of return, so you'll know ahead of time how much the investment will earn. However, when you buy a CD, your money is essentially locked up until the CD matures in anywhere from six months to 10 years. You'll need to pay a steep fee to access it before then.


Money Market Accounts

MMAs also can earn a higher interest rate than traditional savings accounts, but you can expect a higher minimum balance requirement ranging between $500 and $50,000. Unlike CDs, you can add or withdrawal funds to your MMA; however, there is a federal limit of six transactions per month, including writing checks or charging with a debit card. Interest is compounded and paid out either monthly or quarterly.


Stocks, Bonds, Mutual Funds, and ETFs

Stocks, bonds, mutual funds and ETFs carry much more risk than CDs and MMAs. They do, however, offer much higher returns on your money.


Stocks

Shares of stock represent ownership of a tiny piece of a company like Apple or Google. Stocks are risky as stock markets tend to move up and down unpredictably. A major downturn can result in a significant loss in the short term. However, in the long run, those big swings up and down tend to average out to better returns than most other options.


Bonds

When you purchase a bond, you are basically giving a loan to a company, government or municipality. It comes with repayment terms that include an interest rate or "yield" and a date of "maturity," the date when the loan will be fully repaid.

Bonds are less risky than stocks as governments and large corporations rarely default on their debt, but the returns are lower in the long term. Bonds, however, are much more stable than stocks, making them a more attractive investment the closer you get to retirement.


Mutual Funds

Mutual funds are made up of a combination of stocks, bonds and other securities bundled together into an investment "portfolio." That portfolio is then subdivided into individual shares that can be sold to investors, with each representing the entire basket of investments.

One important part of investing is to spread out your risk by "diversifying," owning a wide variety of types of assets. Mutual funds are among the best ways to do this as each share represents hundreds, if not thousands, of different stocks
and bonds.

Many mutual funds are "actively managed," meaning a fund manager is carefully selecting what goes into it.
That can be a positive for some investors, but it usually involves a management fee that can greatly reduce your returns over time.


ETFs

Exchange traded funds (ETFs) are very similar to mutual funds in that they're made up of a large basket of stocks and bonds grouped together. Their major difference is that ETFs are usually built to match the movement of a specific index like the S&P 500.

Not having people research and handpick stocks means that ETFs usually have much lower fees. If your mutual fund isn't regularly beating the market, you may want to consider an ETF where you can get market returns without paying higher fees for a managed product.


401ks and IRAs

Individual retirement accounts (IRAs) and 401ks are investment accounts designed to help people save for retirement. In both cases, they're usually made up largely of stocks, bonds, mutual funds and ETFs and offer significant tax benefits to investors that use them.


401ks

A 401k is an investment account offered through your work, but you have control over how the contributions are invested. A 401k allows you to make investments with pre-tax income, so you don't owe taxes on any money you put into your 401k until you begin drawing on that account in retirement.

Not only are contributions to a 401k untaxed, but many employers match 401k contributions up to a certain level, meaning that there are significant benefits to enrolling in automatic 401k contributions.


IRAs

An individual retirement account (IRA) is like a 401k, but it's not associated with an employer. You can set up an IRA on your own and make contributions directly. It's a good option for people whose jobs don't offer a 401k plan.

One popular option is a Roth IRA, which differs from a 401k or traditional IRA in the way it offers tax benefits. Contributions to a Roth IRA are made from after-tax income, but you don't owe taxes when you start making withdrawals in retirement, meaning that your investment returns are tax free.


Other Ways to Invest

Less traditional, higher risk investment alternatives include investing in specific commodities or real estate, but there are many, many different options out there. Consult an investment advisor before committing to high risk investments or any investment that you do not fully understand.


Real Estate

Investing in real estate, whether buying a property for its rental income or flipping houses, can offer big returns but often comes with big risks.

If you don't want to buy properties directly, you can invest in real estate investment trusts (REITs). REITs are like mutual funds or ETFs in that they purchase a basket of investment properties, package them together, then divide the entire portfolio up into many individual shares that can be sold to investors.


Commodities

Just like stocks, the value of commodities like oil, coffee or gold will change over time and investors can take advantage of this if they make the right predictions. There are even ETFs designed to track commodity prices, making it easier to invest even if you aren't hooked into commodity markets.


Options/Futures

Options and futures contracts are agreements to buy or sell something (usually a stock or commodity) for a certain price at a date in the future. They have many different uses, including many conservative, low risk ways to make small profits without putting much on the line. They can also be used to make risky bets on future movements in the market, so take care before considering this "option."


Annuities

An annuity is a financial product that allows you to exchange a lump sum in the present for a regular income stream in the future. These can be attractive to retirees who would prefer the relative security of a steady, recurring payment to managing their retirement account. That said, annuities will often offer a lower total return on your money in exchange for that peace of mind, so be sure to do thorough research on what they're offering before buying in.


Cryptocurrencies

Cryptocurrencies are digital assets created and enshrined in their underlying code. These are very new and involve enormous risks that most other investment opportunities won't involve, so any investment should be approached with extreme trepidation. That said, the extreme volatility can make for big returns for the lucky few who can take advantage of them.

 


Real Estate Investing

 

By Joel Anderson

 

Real estate investing is investing in property or land with the intent of eventually being able to sell your holdings for a profit. Real estate investing can be as simple as buying your own home, but it can also include riskier bets with much less certain returns.


What Is Real Estate Investing?

Investing in real estate means purchasing property or buildings that you expect to increase in value over time providing a return on your money. Real estate investing can vary widely in its nature, from extremely safe, long-term investments to very risky speculation with no guarantee of a return.

While most people don't engage directly in real estate as an investment, the range of opportunities make it an important piece of your portfolio to remember and a great way to diversify your investments beyond just stocks and bonds.


Types of Real Estate Investing

There are a variety of different ways that you can put your money to work in buying and selling property, including many that don't require you to actively or directly participate in the selection and management of those buildings or spaces.




Buying a House

Most Americans are investing in real estate when they purchase a house. You may take out a mortgage and buy a house for the express purpose of securing a place to live for you and your family. If home prices in the area increase over time (as they typically do), the value of the house you purchase can appreciate to a level well beyond what you initially paid for it. Your home purchase becomes a valuable investment in addition to a home for your family.


Buying Investment Property

Beyond simply purchasing a home, you may also secure property with the intent of providing yourself with an income stream. That can be as simple as purchasing a vacation home with the plan to rent it out for most of the year. Or, as complex as buying up a strip mall with the intent of leasing space out to small business owners and everything in between.

By owning property you can collect rent on you would be creating an excellent investment. You can both collect a steady stream of income and see the overall value of the property increase over time. However, there are a lot of variables that go with renting out your beach house, let alone becoming a landlord. It's important to do your research before purchasing any sort of investment property.


REITs

Real estate investment trusts (REITs) are securities that are made up of real estate holdings. They will essentially trade like a stock, usually offering large dividends, but their value is in the portfolio of investment properties underlying them.

Many REITs will focus on a certain type of asset or region (like strip malls in Southern California, for instance) and then pay dividends to investors from the income generated through rent. Owning a REIT is like owning rental property, but it comes without having to take care of the duties involved with managing rental property.

The variation within REITs is considerable, so it's very important to research them carefully before making an investment. While some are stable, relatively safe investments that would make a solid piece of a 401k, plenty of others are very risky and don't make sense unless you're ready to take some big chances with your money.


Flipping Houses/Properties

Some real estate investing involves owning for the short term only, buying properties with the intent to “flip” them within the next few months. If you have identified what appears to be an undervalued property, buying it and fixing it up can net you a major windfall when you sell it later.

Flipping properties can be extremely risky and involve a lot of work, but it can also be a lucrative way to turn your knowledge of a specific real estate market into a quick return on your money. If you have the funds and a very strong sense of how price trends are progressing for a certain area or region, you might be able to generate significant returns from flipping property.

 

 


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