Deciding how to invest your money is a big decision. And you’ve got a LOT of options.
Not exactly what I wanted to hear.
We’ll ease into it with two “asset classes” (fancy term for types of investments with similar characteristics) you probably already know: stocks and bonds.
Stocks: small slices of a company. Companies sell stocks to raise money. Investors buy them to get a piece of the profits. When a company succeeds, its stock price can go up. And vice versa. Company earnings, the economy, and a lot of other factors can move a stock’s price for better or worse. Making these riskier investments...with the potential to make your wallet very happy.
Bonds: loans you give to a company (aka corporate bonds), a local gov (muni bonds), or the federal gov (US Treasuries). In return, you’ll get paid back, plus interest, anywhere from a few months to 30 years later. That money-back guarantee is why bonds are generally considered safer than stocks. But lower risks also means lower rewards.
What if I can’t choose between the two?
You don’t have to. Splitting your money up across different asset classes is called diversification. Remember that word. Financial experts say it a lot. The idea is that when one type of investment isn’t doing so hot, another may be able to balance it out.
Pro tip: Don’t stop after deciding how much of your portfolio should be in stocks vs. bonds. You should also diversify within asset classes. Meaning you’ll want to own different types of bonds and stocks from a lot of different companies, industries, and even countries.
That sounds like a lot of work.
The DIY version can be. But there’s a shortcut: investing in funds. That’s an easy way to buy a bunch of assets at once. You’ve got some options here, too:
Mutual funds: one way to buy investments in bulk. You pool your money with other investors to buy a collection of assets picked by a fund manager. That fund manager may be actively trading investments within the mutual fund to try and make you money. Most mutual funds have a minimum investment (usually ranging from $500 to $3,000) to get in on the action.
Exchange-traded funds (ETF): a more laid-back way to invest in a lot of stocks, bonds, and other assets at once. While some ETFs have fund managers, many don’t. And track an index instead. (More on that in a minute.) Bonus: there aren’t any minimum investment requirements. Making these a good option for anyone getting started without a lot of money.
Index funds: winner of the ‘best investment’ award...if you ask Warren Buffett. It’s a type of low-cost mutual fund or ETF that tracks an index and tries to match its performance. Quick refresher: an index is a group of investments used to ballpark how the broader market (or a portion of the market) is doing. The S&P 500, which is made up of 500 large US company stocks, is a big one. An index fund that tracks the S&P 500 owns shares from every company in the index — an easy way to get the benefit of broad diversification without having to buy 500 individual stocks.
Is that it?
You can also invest in commodities (aka raw materials like oil and gold) and other alternative assets. Think: cryptocurrencies, real estate, hedge funds. These may help diversify your portfolio, but the risks are real. They’re often very volatile, may have high fees, and can be tough to sell. Which is why experts usually suggest sticking with investments with a steadier track record, like stocks and bonds.
Every investment comes with risk. Some have a lot. Others have less. Investing in different asset classes can help protect your money and maximize its growth. Balance.