There are many paths you can take when considering how, when and where to invest. Figuring out this process can be quite intimidating considering most all options have significantly different rules and outcomes. It's always a good idea to get advice from a financial advisor when it comes to creating or extending your existing portfolio. Though if you decide to take on the world of investing for yourself, this guide will give you a simple break down of the most common types of investments and what they do for you.
Investing At An Early Age
Investing at an early age can be very difficult. In most cases, the bricks to build an investing mindset end up being pushed aside to deal with the daily grind. Most all people would love to have investments in order to secure their retirement or are playing the long game for the payout. If it is at all possible for you to invest at an early age, take the opportunity. Your future self will most likely thank you for the effort.
Investing In Your 401k
This is the most common and easiest type of investment for your future self. In 2018 alone there were over 58 million Americans that were active 401k participants. A 401k is known as a defined-contribution plan. It's basically a retirement account offered by many employers to their employees. The plan is set up so that employee's contributions are automatically withdrawn from their payroll directly into their 401k. The employer can also choose to match either some or all of the contribution. Your 401k earnings are not taxed until you decide to withdraw from the account, usually in retirement.
There are two types of 401k plans. One being the traditional 401k, the other being a Roth 401k. The main difference between a traditional 401k and a Roth 401k are the way in which they are taxed. In a traditional 401k the employee contributions reduce their income taxes for the year in which they are made, though early withdraws and final withdraw are taxable. This means the money you are contributing has never been taxed. So when you decide to withdraw funds they will be treated as normal, taxable income.
In a Roth 401k employees make contributions with post-tax income, this means the money they are contributing has already been taxed, therefore they are allowed to make withdraws tax free.
If you decide it is best for you and your employer offers both choices, you may be able to split your contributions between both a traditional and Roth 401k plans. In all, a 401k plan is a great way to invest for the future without the maintenance that comes along with stocks or other types of investments.
- A change was made in early 2020 that changed things a bit for the time being when it comes to 401k plans and taxes. The recent $2 trillion dollar stimulus bill signed into law on 3/27/2020 states that those affected by the recent events are allowed what's called a hardship-distribution. This means those that have been affected are allowed up to $100,000 without the usual 10% withdraw penalty those under 59-years-old usually owe. This also allows for up to 3 years to pay the taxes owed on the withdraw, in contrast to the normal time period of paying the taxes the same year as the withdraw. Please note. The changes for 2020 explained here are only temporary. Do not plan for this to be the case for years to come.
Investing In Stocks
In a nutshell, a stock is an investment in a company. Companies will sell their stocks in order to raise funds to expand and invest in themselves. Upon purchasing a stock you are essentially purchasing a piece of that company's assets and earnings, this is called a share and you are now a "shareholder" for that company. Investors can purchase a company's stocks if they think the company's value will increase over time. If the company's value increases, the value of your purchased stocks/shares will increase. This is the same for if the company's value decreases. If the company loses value or goes out of business for any reason your shares will be at risk at losing most, if not all of their value.
Companies that are publicly traded sell their shares via the stock market exchange. You may have heard of the New York Stock Exchange or Nasdaq. These are major exchanges that are part of the stock market exchange. As an investor, you can purchase stocks in public companies through a stock broker. These are professionals who execute buy and sell orders for stocks and securities on your behalf.
It's important to remember that stock prices can fluctuate significantly over time and even throughout the day. This is normal. Investors hope that their stocks will continue to rise in value over time, though not all do. The best approach here is to diversify your stocks with many different companies. This will allow for fluctuation in the market and your portfolio to continue on the right path if there happens to be a downturn in one of your invested companies. Though there isn't a perfect science to trading, investing in stocks can pay off in a big way if done correctly.
Fixed Income Investing
Fixed income investments typically include government and corporate bonds, CDs, and money market funds. All of which have different things to offer you as an investor. These investment options may also come with lower risk than stocks, though can also come with a lower stream of income or payout. The lower risk is due to the fixed income assets are generally less susceptible to economic downturns and/or geopolitical events.
Government & Corporate Bonds
Fixed income investments can come in many forms, though the two largest bond markets open to investors are government bonds and corporate bonds. Essentially, these two bond types are loans to either the government or corporations. So when you purchase the bond you are lending the entity money in which they generally must pay interest on at set intervals, this is where you earn money from your investment. The entity (government/corporation) must also pay the principle once the bond matures.
The main difference between government bonds and corporate bonds is the risk file each posses. Corporate bonds most always offer a higher yield than government bonds due to their credit risk being greater. Of course this is not always the case and can vary depending on the situation.
Fixed income investments are great for those who are looking to avoid a fluctuating stock market while still generating income from their investments. This is also a great option for those who are retiring to make sure their money is more secure. Even though there is still risk in the investments listed above, these are still on the safer side.
Investing in Property
This is probably the most uncertain and expensive investment of them all. There are basically two avenues of thought when it comes to investing in property. Are you investing to fix up and quickly resell? Or are you in it for the long haul? If you're looking for a quick turnaround time with a big payout, property investment probably isn't right for you. That is, unless you have a business and have worked out the logistics of exactly how long you can hold onto the property and not end up under water. There are so many things to consider when looking to purchase property for the sake of profit.
Unlike other forms of investing, property investors are allowed to use leverage to buy a property for just a fraction of what it's actually worth, then pay off the remaining balance over time. This time allows you to fix up the place to resell for profit, though that might not be the best thing.
When thinking property investments you have to consider time as both a good thing and also a major issue. You may be thinking you will turn a profit on the property some day in the future, but you're also paying the bills, the taxes, the maintenance, etc on it in the meantime as well. This can get very expensive for the owner.
Something else to consider here is investing in land itself. This is almost never a bad idea. There's only a finite amount of land and it's value will continue to go up over time, that is, unless something miraculous happens. Investing in property isn't an exact science. Things can happen in a single day that can either make or break it for owners. Make sure to seriously do your homework on all aspects before making the decision.
Diversifying Your Investments
This is the most important thing to consider when investing. Diversification of your investment portfolio can either be your money maker, or more importantly, your safety net. This goes for every topic listed about or really any investment period. If you only have stocks, make sure to diversify with numbers companies in case one has a dramatic downturn. The same goes for bonds, 401k funds, property, etc. The best move here is not only to diversify in whichever you choose to invest in, but to also diversify by investing in different types of investments. Having diverse investments can offer you a much broader and more opportunistic approach to a wealthier future. A financial advisor can help you put together a portfolio that will utilize a number of investments in order to meet your specific goals for your future.