Where to Invest Money in 2021
Types of Investments to Consider
- Individual stock shares
- Stock mutual funds
- Stock ETFs
- S&P 500 index funds
- Dividend stock funds
- Nasdaq 100 index funds
- Treasury securities
- Government bond funds
- Short-term corporate bond funds
- Municipal bond funds
- High-yield savings accounts
- Certificates of deposit (CDs)
- Money market accounts
- Rental housing
- Commercial real estate
With numerous different investments available, you should get a better idea of what you’re most likely to invest in. Each of them has different ways to generate returns and different levels of risk involved.
Stocks represent share ownership in a particular company.
Generally, if the company’s share price rises, your stock value will increase. In the same manner, a drop in the stock price means your investment will decrease in value.
A bond is a debt obligation issued by companies or governments that pay a fixed interest rate.
Because of their low risk, bonds are typically considered safe investments that generate low, but predictable, returns.
Mutual funds are a basket of investments that may focus on a particular asset class or investing strategy (e.g., index-tracking, large-cap growth, precious metals, sustainable investments, etc.).
Mutual funds can be made up of any mixture of stocks, bonds, other securities, and even multiple mutual funds.
Index funds: mutual funds that aim to mimic the performance of a particular index
Target-date funds: usually made up of multiple mutual funds that will automatically lower the risk of the fund (often by reducing holdings in stocks and increasing holdings in bonds) as you approach your target retirement year
Exchange-traded funds (ETFs) are a basket of investments that serve a similar purpose as mutual funds.
However, ETFs can be traded at any time during open market hours.
Mutual fund orders, on the other hand, are only executed when the market closes for the day.
Cash equivalent investments are designed to help investors minimize the risk of dropping in asset value. Typically, they offer very low returns but are easy to access in case you need the money in the event of a financial emergency.
Here are common examples of cash equivalent investments:
Certificates of deposit (CDs): Investors deposit funds for a set amount of time (usually 1 to 5 years) and earn a higher interest rate than savings accounts
High-yield savings accounts: Highly liquid bank accounts that hold your cash with opportunities to earn interest, especially with online banks
Money market accounts (MMAs): Money market accounts are similar to savings accounts with some checking-account features and they tend to offer higher interest rates but require higher deposit minimums
Real assets are physical assets that you may consider to be investments due to their potential increase in value, ability to generate income, or both.
Common examples include:
Real assets as investments may have their own risk profile and factors to consider.
For example, with real estate, you may have to deal with maintenance costs and other expenses such as utilities, insurance, repairs, and property taxes.
Annuities are a form of guaranteed income designed to provide stable income to minimize the likelihood of outliving your assets in retirement.
You often buy an annuity in large premium payments or a lump-sum payment.
Annuities can come in various types and they can become quite complex.
What is Your Risk Tolerance?
Your risk tolerance is your comfort with the amount of uncertainty or potential loss associated with your investments.
It will play a major role in the types of investments that you choose for your portfolio.
If you have a high-risk tolerance, you may favor more volatile investments that have the potential to generate higher returns but also with the potential for bigger losses.
If you have a low-risk tolerance, you may favor less volatile investments with lower, but predictable, returns while there’s less risk that you’ll lose your money.
The general advice is that younger investors have more time to recover from large investment losses. Therefore, they can build a portfolio with an asset allocation that consists of a higher percentage of stocks..
When investors get older, they may transition slowly from stocks to low-risk investments, such as bonds, CDs and cash-equivalent accounts.
As investors reach retirement age, they have less time to recover from significant losses from stock price declines. So, it is recommended to maintain an investment portfolio with an asset allocation that contains a much lower percentage of stocks.
Popular Investment Strategies
Here are some of the popular investment strategies to help you build a portfolio that fits your risk tolerance and your financial goals:
A growth investing approach is focused on the expected higher growth potential of stocks compared to the market or industry. Usually, this strategy looks at young or small companies.
A value investing strategy focuses on companies that investors believe are undervalued. Essentially, the stock price of the company is believed to be valued less than it should be.
An income investing strategy will emphasize steady cash flow with investments that tend to generate income rather than relying solely on the increase in asset value. Such a portfolio may consist of dividend stocks, bonds, cash-equivalent accounts, and real estate.
With diversified portfolios, investors can reduce the risk of a single investment causing the majority of losses. Diversification can be achieved by owning a mixture of assets.
Typically, investors can diversify easily by investing in mutual funds and ETFs.
Dollar-cost averaging is a strategy based on the repeated purchase of a particular asset investment over time -- the cost of investing with “average out.”
It reduces the effect of volatility on the asset’s price and eliminates the allure of timing the market.
How to Pick a Brokerage
When it comes to investing in the stock market, you’ll likely need a brokerage account.
You have many choices when it comes to brokerages that will allow you to build an investment portfolio.
To help you decide on the right brokerage for you and your intended investing style, here are the key factors that you should consider:
Depending on the brokerage and the type of investment, there may be a minimum account asset value or minimum investment.
For many mutual funds, for example, a minimum required investment may range from $1,000 to $3,000. Even if you can open a brokerage account, you may not be able to start investing until you have enough money.
Every brokerage will have its own fee schedule for various services -- from account maintenance to trading fees.
Depending on your preferred type of investment, you should choose the brokerage with account fees that will allow you to trade and own that investment type with the lowest cost.
Account maintenance fees
Every brokerage may have its own fee structure for account maintenance fees -- many don’t have any monthly maintenance fees.
Typically, account fees may be a flat fee or vary based on the amount of total assets managed.
Most brokerages will charge commission fees depending on the type of transaction being made. Commonly, commission fees apply when you buy or sell a security.
If you’re transacting very frequently, you may end up paying heavily for trading costs.
That said, brokerages may waive commission fees when trading certain securities.
Ideally, you choose a brokerage with the lowest commission fees for transactions of your preferred investments.
Expense ratios help investors understand the total annual cost of a mutual fund or ETF. It includes the various fees and costs associated with managing the fund.
It is represented as a percentage that is deducted from the amount you have invested in the fund.
Typically, actively-managed funds will have a higher expense ratio while index funds tend to have lower expense ratios.
As an investor, you have to account for the expense ratio against the performance of the fund to determine the return on your investment.
Accounts types offered
A brokerage account can have special tax advantages but they are also subject to financial regulations and rules.
You’ll want a brokerage that offers the type of account that you want.
Taxable brokerage account
A taxable brokerage account is a standard investment account that may allow you to buy, sell, and hold various securities including stocks, bonds, mutual funds, ETFs, and more (depending on the brokerage).
When you put money into a brokerage account, you’re doing so with post-tax dollars. And, you will have to deal with capital gains taxes on investment profits. Essentially, there are no tax advantages that often come with designated retirement accounts.
Taxable brokerage accounts are often suggested for investors who have already maxed out contributions in their tax-advantaged retirement accounts (such as a 401(k) plan and/or IRA). They are also appropriate for investors who do not want to have their investments held in retirement accounts that may restrict access to those assets without penalties.
A traditional IRA is a retirement account that allows tax-deductible contributions. Basically, you can reduce taxes on your income in the years that you contribute.
Investments held in a traditional IRA will grow tax-deferred until you withdraw from it during retirement. Qualifying withdrawals are taxed at the current income tax rate in retirement.
Traditional IRAs are typically best suited for taxpayers who want to reduce tax liability on their high incomes.
A Roth IRA is a retirement account that doesn’t allow for tax-deductible contributions.
While you don’t get tax advantages when contributing, your withdrawals during retirement are tax-free.
Roth IRAs are usually recommended for taxpayers who have lower income (and a corresponding lower income tax rate) earlier in their careers.
Brokerages and other financial companies may offer robo-advisory services that help automate the management of your investment portfolio.
The robo-advisor will account for your risk tolerance and/or desired investing style and choose a group of investments that align with your goals. Every time you add money to the account, it will be distributed to maintain that portfolio allocation.
And, over time, as the values of the investments change, the robo-advisor will buy and sell investments to maintain the proper allocation.
Basically, robo-advisors are brokerages that offer a more hand-off approach to diversified investing.
What You’ll Need to Open a Brokerage Account
Generally, opening a brokerage account can be completed in 10 minutes if you have all the information ready.
After that, it may take a couple of business days for the brokerage to confirm that your account is open and the funds are ready for investing.
Documents and information needed usually include:
- Full name
- Date of birth
- Social Security number
- Bank routing and account number
- Current employer’s name and address (brokerage is required to ask for it)
As with most financial accounts, you have the option to designate beneficiaries for your brokerage account. Essentially, you’re telling the brokerage who gets your assets in the event that you pass away.
Note: Beneficiaries do not have any ownership rights to your brokerage account when you’re alive.
If you do not list beneficiaries upon account opening, you can add them later.
How to Pick Cash Equivalent Accounts
Choosing a cash equivalent account is significantly easier than picking a stock or mutual fund to add to your investment portfolio.
Due to the low-risk nature of cash equivalent accounts, there are fewer variables to consider. They include:
- Interest rate
- Ease of access
The interest rate on a savings account, money market account (MMA), or certificate of deposit (CD) is likely the biggest factor in your decision of the account.
It’s safe to say that you’ll prefer an interest rate that is as high as possible at the time that you open the account.
With savings accounts and MMAs, the interest rate is variable and can change without notice.
With CDs, the interest rate is usually fixed for the life of the CD’s term. Exceptions to this rule include flexible CDs that allow you to bump up the interest rate (usually only one time) before the CD reaches maturity.
Cash equivalent accounts may come with various fees that would reduce the effective returns on your cash investments.
Commonly, savings accounts and MMAs have monthly fees -- fee waivers may include a minimum balance, direct deposit, or other types of recurring activity. Transaction fees may also apply, such as transfer fees and excess withdrawal fees.
CDs don’t typically have monthly fees, but they may have early withdrawal fees for taking your money out before the CD term has lapsed.
There may be minimum deposit amounts or balances that you have to maintain in order to open an account or to keep the account.
For example, you may need to commit at least $1,000 to open a CD. Or, an MMA may have a higher interest rate apply only when your total account balance is $10,000 or more.
Be aware of the minimums so that you maximize the interest earnings in your account.
Ease of access
The big benefit of cash-equivalent accounts is that they are usually very easy to access in the event of a financial emergency.
Savings accounts usually require just a funds transfer or ATM withdrawal to move or access your money.
MMAs may offer the added features of a debit card or a checkbook for check-writing capabilities.
CDs are the least accessible of the cash-equivalent accounts because they are designed to be left untouched. The only hurdle to withdrawing the money on a CD is the early withdrawal penalty.
If you’re comfortable with not using the money for a long period of time, CDs are typically a better investment because they tend to provide higher interest rates.
Tax implications should be of concern to all investors because they can have a drastic effect on the bottom line. (New investors are advised to consult a tax professional or financial advisor for help with their specific tax situations.)
Capital gains tax
Capital gains tax is imposed on profits that result from the sale of an asset and the tax rates are determined by how long you’ve held the asset
- Short-term capital gains tax applies to assets held for one year or less.
- Long-term capital gains tax applies to assets held for more than one year.
Different rules may apply collectibles, home sales, and certain tax-advantaged accounts such IRAs and 401(k)s.
Investors often harvest tax losses near the end of the year as a strategy to offset capital gains and reduce taxes on profits.
If losses are large enough, investors may be able to eliminate capital gains taxes for the year.
With certain types of investments, such as cash-equivalent accounts, you will likely be responsible for paying taxes on interest income.
Generally, at the end of the year, the financial institution will send an IRS Form 1099-INT with details needed to file tax returns.
Exceptions may include tax-advantaged accounts and some tax-exempt bonds.