By Jordan Woods
Saving money is certainly better than spending it frivolously. But being responsible also means spending so that our money works for us even when we’re sleeping. Investing, particularly in the stock market, can be scary or intimidating, especially when you’re just starting. However, it should be an important aspect of your long-term goals (remember, we’re working to build generational wealth). This installment will give you the framework to become a savvy investor by exploring some examples investment vehicles in terms of risk and potential return, and providing you with resources to plan your investment strategy.
1. Low Risk:
- Certificates of Deposit (also known as “CDs”) give your money to the bank for a specific period of time, giving them extra cash on hand. In turn, you receive a more predictable return ( typically 0.5-3%) at a rate that is often higher than that of savings accounts. CDs are also covered by the same FDIC insurance that your bank is, further protecting your investment.
- Treasury Bonds are fixed-interest U.S. Savings Bonds issued by the U.S. Department of the Treasury. They are fully backed by the United States government and are considered to be among the safest investments one can make, but do not reach their maturity date for 10+ years after being bought.
- Medium Risk:
- The most talked about investment vehicle is the stock market. You can buy stakes of ownership yourself, or you can put your money in the hands of an group of finance professionals who focus their time on finding the best mixed of investments for a consistent, positive return (typically around 5-10%).
- A Mutual Fund is a company that pools money together from investors and then invests that money in stocks, bonds, short-term securities, etc. They help to mitigate some of the risk through diversification, but also can include som riskier investments as part of their portfolios, meaning that they can reap some of the rewards of high-risk investments without exclusively relying on those investments.
- An Index Fund (or ETF) is a type of mutual fund that is designed to invest in, and thus replicate, the performance of one particular type of investment. For example, an S&P 500 ETF would invest money across all of the S&P 500 companies, so that the fund’s performance matched that of the S&P 500.
- High Risk:
- Junk Bonds are bonds that promise higher interest payments than regular bonds, primarily because they come with a higher risk of default, because the entity issuing them is in poor financial shape. These bonds are typically issued by companies looking to raise capital quickly.
- Cryptocurrencies (such as Bitcoin) are digital assets that serve as mediums of exchange, using cryptography to ensure more secure financial transactions. Many types of cryptocurrencies experience large swings of positive and negative returns that are unpredictable, but if caught at the right time can potentially increase your positive return tenfold– or more. Many, if not most cryptocurrencies have no official backing, further exposing your investment.
These are just some of the many ways that exist for you to invest your money. No matter how you choose to invest, one essential guideline is to spread out your portfolio across a few different investment vehicles. This practice, known as diversification, is a prudent response to the fact that some investment types, and individual investments within each type, are more volatile than others. ROI is the percentage of your original investment that you have gained or lost since you decided to invest. An acceptable ROI from following sound investment principles is typically around 7-8% over the long term. This is including outlier investment scenarios where people made and kept large sums of money in a short period of time. Keep this in mind when deciding where to invest and when analyzing your portfolio’s performance. Two things we all can and should do are to start small, and then remain patient with our investments. Often lower average positive returns over time also come with less risk, and vice versa. First Independence Bank’s Asset Allocation calculator can help you create a balanced portfolio and their Investment Returns calculator can help you track and meet your long-term investment goals.
Keep an open mind when easing your way into investing. Whether you’re saving for college, looking to start a business, or looking towards retirement, keep in mind the typical timeline for returns for the things you choose to invest in and how that aligns to the timeline for your reason(s) for investing. Working with an investment professional and doing your own research will help you create and stick to a dynamic investment strategy that is based solely on your personal financial goals instead of those of other people.
This article originally appeared in the Michigan Chronicle.