If you’re new to investing, you’re probably aware that there are literally dozens of asset classes you can invest your money in.
To make it easier for you, we’ve selected 10 classes, and broken them down between traditional and nontraditional, with five assets in each category.
5 Traditional Ways to Invest Your Money
If you’re a first time investor, you should concentrate your money in traditional asset classes. The classes below should be at the top of your list.
This is a debt security issued by a company, government, or government agency. They are typically available in denominations of $1,000 and pay interest to the holder on a periodic basis. There are three major categories of bonds:
Municipal bonds are sold by states and local governments, and pay interest that is free from federal income taxes, as well as taxes in the issuing jurisdiction.
Treasury bonds are issued by the United States government and are considered the safest type of bonds since they’re backed by the full faith, credit, and taxing power of the federal government.
Corporate bonds are issued by companies and can come with a variety of different features, including convertibility to the company’s stock, and early call provisions (the corporation has the ability to pay the bonds early).
2. Mutual Funds and Exchange Traded Funds (ETFs)
These are portfolios of stocks, bonds, and other securities, that are offered for sale to the general public. They typically include money from thousands of investors, and can have anywhere from a few securities to several hundred in the fund.
They are an excellent way to invest in a ready-made portfolio of diversified securities, and are typically less risky than investing in individual stocks. The funds typically pay dividends and capital gains distributions based on the performance of the securities in the portfolio.
3. Certificates of Deposit (CDs)
These are contracts between a bank and a depositor in which the bank borrows money from the depositor at a fixed rate of interest. They typically have minimums of $500 or $1,000, and terms can range anywhere from 90 days to several years.
The principal invested in CDs is completely safe, as are the interest payments, as long as the security is held until maturity. Normally, there are prepayment penalties should you liquidate the CD prior to its maturity date and that will reduce the amount of interest you will receive. CDs are an excellent place to park cash or invest your emergency fund.
4. Money Markets
These are essentially mutual funds comprised entirely of interest-bearing cash type investments, typically US treasury bills. Unlike a CD, interest rates tend to fluctuate based on prevailing rates in the financial markets. Principal invested, while theoretically not guaranteed by the issuer, is nonetheless highly stable.
Money markets can be issued by banks and investment brokers. When provided by investment brokers, they are an outstanding place to park cash in between risk investments, like stocks and bonds.
Stocks trade in shares since they represent a form of ownership in a business entity. Holding stock in a company not only entitles you to a share of the entity’s revenues (paid through dividends), but also the ability to participate in the growth of the stock price if the company is successful. While stocks represent an ownership share in the business, the price is not stable, being completely dependent upon market fluctuations.
Stock held in a strong company can provide steady price appreciation over many years, while stock held in a weak company could drop to nearly zero. Stocks trade on exchanges, the largest of which are the New York Stock Exchange and NASDAQ in the US.
5 Non-Traditional Ways to Invest Your Money
Once you become more familiar with investing – and you have a few of the traditional investment classes already – you should start investigating nontraditional ways to invest your money. You can go crazy with the number of possible investments, but these are the most common nontraditional investments.
1. Self-Directed IRA
These are retirement accounts that you invest in apart from your employer. You can choose whatever investments that you like to hold in your IRA, and buy and sell when you deem necessary. Under current law, you can contribute up to $5,500 per year (or $6,500 if you’re age 50 or above), and deduct the amount of the contribution from your income for tax purposes.
The investment earnings within the account accumulate on a tax deferred basis, which means there is no income tax liability until you begin withdrawing the funds when you retire. This generally works to your advantage since income is typically lower by the time you retire, meaning that the funds withdrawn will be subject to lower tax rates than during the years when you were working for a living.
2. Lending Club
In recent years, peer-to-peer (P2P) lending organizations have been springing up, enabling both lenders and borrowers to bypass banks as loan intermediaries. Lending Club is perhaps the best known P2P site, and it has funded more than $4 billion in loans since its inception.
If you are looking to invest money in debt type vehicles – that pay a predictable rate of interest – you can become a lender with Lending Club. Returns are much better than anything you can get at a bank or even with bonds. You can choose which loans you want to participate in, but there is a risk of default by borrowers. Should that happen, you will lose at least some of your principal. There is no FDIC insurance to cover losses on Lending Club investments.
3. Treasury Inflation Protected Securities (TIPS)
If you’re looking for the safety of US government securities and a measure of protection from inflation, then TIPS may be the investment of choice for your bond holdings.
They are sold in terms of 5, 10 and 30 years, and in denominations as low as $100. They pay interest twice each year, and the principal is adjusted at maturity or redemption based on the Consumer Price Index (CPI). TIPS will actually lower the principal value of the bonds in the event that deflation – not inflation – takes place. However, the value of the bonds upon maturity will never be lower than your initial investment.
You can buy TIPS through banks and brokerage firms, but perhaps the easiest way is to buy them through the US Treasury’s website Treasury Direct. There are no fees for this service, and you can hold your securities in the site.
If you want something tangible to invest your money in, collectibles could be the way to go. These can include antiques, precious metals, numismatic coins or any other tangible asset likely to rise in value over time. The key with all collectibles is rarity – the less available something is, the higher the price it will command.
Collectibles are a diverse group and you will need to thoroughly investigate a category before stepping into it. Make sure you’re investing with money you can afford to lose since collectible prices can vary substantially in short spaces of time. That said, certain collectibles – notably precious metals and numismatic coins – can be ideal contrary investments, rising in price at times when most conventional assets are falling.
5. Real Estate
In a real way, real estate is the ultimate tangible asset. But unlike other tangible assets, its price tends to perform more consistently over long periods of time. There are three basic ways you can invest in real estate:
Owning your own home. By far the simplest way to invest in real estate because you also live in the investment. Home ownership offers the opportunity to increase your ownership equity in the property through a combination of amortizing the mortgage, and gradual appreciation of the property’s value.
Investing in rental property. This is the most complicated of the three real estate investment methods because you will need to buy a property for less than the going market value, then keep it rented out to tenants for as long as you own it. Once again, you’re looking for the combination of mortgage amortization and price appreciation to make your investment pay off. But you’re also hoping to create a positive cash flow from rents exceeding the monthly house payment.
Rental real estate is a hands on activity, and also requires a larger down payment than what will be required for an owner occupied home. The returns on rental real estate can be spectacular over the long run, but diversifying over several properties requires a very large bankroll.
Real estate investment trusts (REITs). You can think of REITs as mutual funds for real estate. They are trusts that sell on major exchanges and can invest in either property or in mortgages. They can also be segmented by multi-unit (apartments), and commercial/retail, as well as by geography. They have special tax advantages and provide high yields. Unlike direct ownership of real estate, you can buy and sell REITs just as easily as mutual funds and ETFs.
It’s important to remember that you don’t have to jump into the various asset classes all at once. Start with one or two traditional investments and then work your way up to the nontraditional ones. Slow and steady wins the race, and nowhere is that more true than when it comes to investing.
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