What Should You Invest in?
Most stocks are examples of growth investments that you buy in hopes of selling for a higher price later. But there are other types of investments, including real estate (your home, commercial property), precious metals (such as gold) and energy (such as oil and gas). Some investments, such as rental property and fixed-income securities (such as government bonds), are not meant to be sold, necessarily, but are meant to be maintained as a consistent source of income.
Explore Growth Investments
“The real key to making money in stocks is not to get scared out of them.” — Peter Lynch, retired, Fidelity Management & Research Co.
The primary goal of growth investments is to sell the assets at a higher price than you paid for them. Some investments qualify as both growth and income investments. Compared to income investments, growth investments typically offer more potential for bigger gains … and losses.
Some common growth investments include:
Stock Mutual Funds
- Stock mutual funds let you invest in a variety of stocks. As an individual investor, you own shares in the fund that is managed by a professional manager. The earnings from the fund then can be reinvested for you. Mutual fund shares can be purchased through a broker, by mail or online.
- Minimum buy-ins often are low, but fees and commissions can vary widely.
- Risk is reduced through fund portfolio diversification.
Exchange-Traded Funds (ETFs)
- Exchange-traded funds are similar to mutual funds that pool money from many investors to buy securities. But while most mutual funds only can be bought or sold once a day at market closings, ETFs can be bought and sold any time the markets are open, just like individual stocks or bonds. Most ETFs track an index like the Standard & Poor’s stock market index. ETFs are bought and sold through brokers.
- Lower operating costs than mutual funds.
- More tax efficient (meaning less tax liability than other investments).
- Subject to market volatility.
- May have high broker fees.
- When you purchase stock in a company, you provide money for the company to operate its business. The goal is to sell your stock at a time in the future for a higher price than you paid for it. Stocks can be bought through a registered broker or by using online discount brokerage firms.
- An increasing stock price is not guaranteed.
- Could lose money if shares are sold during a market downturn for less than the purchase price.
Explore Income-Producing Investments
Income investments provide regular earnings such as monthly interest, quarterly dividends or even rent payments. Steady, predictable income is the goal for income investments. Choose wisely to create a balanced portfolio.
Some common income-producing investments include:
- You lend money to a government entity or corporation with a promise that you will be repaid on a certain maturity date.
- Interest is paid on the money you lend.
- The interest rate generally does not change.
- Corporate bondholders are less likely to lose money than stockholders in the case of a company bankruptcy.
- Bonds can be bought from banks, brokers and dealers (usually with a fee) and, for U.S. Treasury bonds, directly from the U.S. Treasury.
- General Risk Factors
- U.S. Treasuries: Little risk because they are guaranteed by the U.S. government. Higher amount of inflation risk.
- U.S. Government Agency Securities: Mortgage-backed bonds may have higher interest rate risk than Treasury securities.
- Municipal Bonds: Tax-free. Can vary in risk.
- Corporate Bonds: Risks range from low to high, depending on the corporation issuing the bond. The risk of the bond being called (redeemed by the issuer before it is mature) makes it riskier than government-issued bonds. If a company goes bankrupt, bondholders are considered creditors who must be repaid first.
- Monthly rent payments provide regular income with the potential to sell the property later for more than you paid (growth). The best way to purchase real estate is through a qualified real estate agent.
- General Risk Factors
- Closing costs and realtor fees can make real estate investments costly.
- Maintenance, repairs, homeowners insurance and other house-related costs can add up.
- No guarantee that the real estate market will remain strong if your plan is to sell.
- Regular dividends (payments) usually are paid to stockholders four times each year (quarterly), either in cash or shares of stock. Depending on the performance of the stock, you may be able to sell it later for more than you paid (growth). Registered brokers or online discount brokers can be used to facilitate stock purchases.
- General Risk Factors
- If the company fails, you may not get your dividend and the stock price could go down.
- Market volatility can devalue your investment.
- Dividends paid to shareholders take away from profits reinvested in the company (less growth).
- Starting your own business can generate regular income payments. You get to keep all the profits after taxes and business expenses. The Small Business Association (SBA) and SCORE can help you plan and get loans for starting your own business.
- About 50 percent of new businesses fail in the first five years. The SBA identifies the following risks:
- Market risk: the risk posed by current market trends and conditions.
- Financial risk: the risk associated with the financial outlays facing a new business.
- Management risk: the risk of ineffective management of sales, operations, cash flow and customer service.