10 Types of Investments to Incorporate Into Your Portfolio
While you've probably heard of stocks and bonds, there's a wide variety of investments you can use to put your money to work for you. Some offer high potential rates of return but also experience high volatility, while others project slow and steady growth.
In this article, we'll review 10 types of investments you may want to consider as you put together your strategy. Please note that this list is provided for educational purposes only and should not be relied on or interpreted as accounting, financial, legal or tax advice. It's best to consult with a professional for your specific situation. Additionally, the first eight types of investments on this list pertain to investments in non-deposit products, so they're not insured by the Federal Insurance Deposit Corporation, or FDIC, or any other federal government agency and may lose value.
Stock is another word for buying into the ownership of a company, which lets you participate in and potentially benefit from their earnings. These investments are generally considered higher risk, but they also typically have greater potential for rewards. There's no theoretical limit to how much money you can make, but there's also no inherent security built in. Stockholders can make money through dividend distributions and by selling stock for a higher price than it was bought.
Often considered a safer investment, bonds are a common way to create a return for your money. These are essentially a loan you make to local, state or federal governments, or to a corporation. In exchange, you're paid a fixed rate of return after a specific amount of time. One great feature of bonds is that they can offer a steady revenue stream through annual or semi-annual interest payments. For this reason, bonds are generally seen as a less risky investment. However, something to keep in mind is that inflation can reduce the value of your bonds and your overall rate of return.
If you don't want to choose your individual stocks and bonds yourself, a mutual fund may be the perfect solution. Mutual funds are what we might think of as a basket of securities containing bonds, stocks and commodities, or a combination of these. Investment managers work toward a certain rate of return for the mutual fund's investors and pick all the investments based on their research and expertise. The manager earns commission on the fund, so you'll share a percentage of your return to pay them. Because the investment management and details are decided by someone else, mutual funds can be a great choice when you don't want to have to be hands-on with buying and selling. Mutual funds are a great way to diversify your investments and often require only a minimal deposit. Plus, they spread out your dollars across several companies, reducing the overall risk of your holdings.
Also known as passive funds, index funds are made up of companies that are on a stock market index like the S&P 500 or NASDAQ. Many investing experts identify index funds as a way to safely buy into all the S&P companies and follow the stock market trajectory, but at the low cost an index fund can provide. By participating in the financial returns of those companies in the index, your investment risk is shared across the performance of all of them. Because there's typically not a lot of turnover in that listing, transaction costs are lower for the fund as well.
An exchange-traded fund, or ETF, is similar to an index fund in that most ETFs follow a specific market index. ETFs trade—like a stock—and can be bought throughout the day, but they have the diversification benefit of a mutual fund. ETFs also tend to have lower expense rates than regular funds.
If you want an approach that's hands-off for you but gets a lot of attention from an expert, an active mutual fund can be a great choice. Going a step beyond standard mutual funds, active funds are managed every day by the fund manager who specializes in this area. This practice is commonly known as asset management or portfolio management. They set a goal for the fund, do all the research and visit the companies. The fund manager then decides where, how and how much to invest in each company. This hands-off approach is appealing to many investors who would prefer to dedicate their time to other focus areas, like work, family and hobbies.
Options are a type of contract that gives the buyer the right to buy or sell the underlying asset, like a stock, for a nominal fee. You aren't obligated to buy the stock, but you have the right to if you want. An option has an expiration date for when you can take action on your right to buy the stock for a specified price, so you have to exercise that option in time to make sure it has value to you. Depending on how the underlying asset price changes, it's possible the option could expire as worthless before there's an opportunity to make any money. And in many cases, options that expire with value will automatically be exercised by the account holder's firm, purchasing or selling the stock at the exercise price.
8Real estate investment trusts
Offering an approachable entry point to investing in property, a real estate investment trust, or REIT, is a company that either owns or finances real estate. You can buy stock in the REIT, and this stock generates income as a dividend to you. REITs must pay out at least 90% of their taxable income to their shareholders. However, you're taxed at a regular rate instead of capital gains. The advantage to buying into a REIT versus actual real estate is that you avoid the sizeable monetary investment up front, as well as the often-complex tax filings that accompany owning the properties in various locations.
9Certificates of deposit
One of the least risky ways for your money to be invested is with certificates of deposit, or CDs. These are a product offered by banks and credit unions in which you deposit a lump sum for a pre-determined amount of time—typically anywhere from 6 months to 5 years. In return, you're rewarded with a higher interest rate than a typical savings account. Because the risks are relatively low, the returns tend to be low, too.
10Money market accounts
If you're looking for a savings account alternative that has a goal of paying a higher rate of interest than a regular savings account, check out a money market account. It's still a low return in exchange for a high degree of safety, but it often offers a higher rate than a typical savings account while delivering liquidity and safety of principal.
Finding the right mix
As a general rule, a complete portfolio will contain a mix of high- and low-risk investments that are tied to your long-term financial goals. A financial advisor can help ensure you're choosing the mix of investment types that make sense for you.
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