Different Ways of Investing Money

What are the different ways of investing money?

Really this is three questions wrapped in one: What do you invest in? How do you invest? Who do you invest with?

The first and most important question about the different ways of investing money is what do you invest in?

There are three main categories of investments -- stocks, bonds, and cash. You can choose to distribute your money in any way between these three categories. You don't have to pick just one. In fact, having an appropriate balance for your investing goals, age, and psychological temperament is the biggest determining factor in your long-term returns. I didn't just make this up. Finance professors have come to this same conclusion.

The first, and most often associated with investing, category of what to invest in is stocks. If you are young or start investing young, then most of your gains will likely come from stocks. It is also the portion of your investments that will fluctuate the most -- as investors have seen over the last few years. Because of these ups and downs you must make sure that you have the right temperament to invest in stocks. If you panicked and sold all your stocks after they fell a lot, then you should not be investing in stocks. If you salivated over the low prices or just continued investing as normal, then stocks may be for you. Also, if you are young, you have more time to ride out the lows of stocks.

The second category is cash. I prefer the money market account as the form of investing in cash. I explain my preferences in the link. However you decide to invest in cash, it should still be an important piece of your financial plan. It prevents you from having to dip into your investments at a loss in case of emergency or job loss. It gives you more peace of mind about the rest of your investments to know that you have a stockpile of cash sitting readily available. It can also allow you to take advantage of good investment opportunities. And there are many more options with cash. It is the most flexible of all the types of investments, so you can do pretty much whatever you want with it. However, you also get the lowest returns on it.

The final category is bonds. You're probably the least familiar with bonds. Basically, they are loans from either the government or a corporation. There are different forms of bonds, but the most common one is one we get paid in interest rate every month based upon the face value of the bonds you own. Bonds are more risky than cash, but yield a higher return. They are less risky than stocks, but yield a lower return.

It is important to make all three of these categories a major part of your investment portfolio. If you have all of one, then you are exposed. Also, don't try to move to whichever category is the hottest at the time. That can get you into serious trouble by underperforming significantly. Choose what proportion of stocks, bonds, and cash are best for you and stick with it. Or go the simple and easy route and invest in a target retirement fund. It doesn't have to be within retirement account.

The second question about the different ways of investing money is how do you invest money?

How do you get your money into the stock(s), cash, and/or bonds that you want? There are three different main ways.

The first way is to go directly to the source. You can do this with stocks by getting a brokerage account and buying stocks directly. This is what most people think of when they think of investing. However, this tends to be more speculating than investing. You can also put your money in cash directly through a money market account. This is how I put my money in cash. You could also buy bonds directly from a corporation or the government. It is generally not practical for an individual investor to buy bonds directly from a company, but with the U.S. Treasury direct is actually quite practical to buy government issued bonds.

The second, and best way in my opinion, is through mutual funds -- specifically index funds. This is definitely the easiest, most prudent, and most time efficient way to invest your money in stocks or bonds. However, I don't believe the same is true for money market funds. You can easily create an account through a mutual fund company with plenty of index funds. I would recommend Vanguard. After you create an account, just buy the most general stock and bond funds that you can find and you will do better than over 80% of the investors out there.

The third way, investing in ETF's, is kind of like a combination of the first two ways. You buy them from a brokerage like you would buy a single stock, but they are basically index funds. The expense ratio is lower than an index fund through a mutual fund company, but you have to pay your brokerage commission fee with the ETF and not when you buy index fund.

The third main major question about the different ways of investing money who do invest money through?

The answer to this question depends on how you answer the first two questions.

If you were going to buy index funds, I highly recommend Vanguard. But they are not the only player -- just the oldest and generally lowest-cost player. Fidelity has a few lower-cost funds, but they are minimum investment is much higher ($10,000 compared to $3000).

If you're going to buy individual stocks, I would recommend Zecco as a very low cost way to buy stocks. They used to have free trades, but now their trades are just very cheap relative to other brokers. I used them for while, but don't anymore because I just invest in index funds now. Some people had problems with them, but I never did. Their website and help aren't as good as others, but you are still able to buy stocks for a low commission. I have a few friends that use Scottrade and are happy with it. However, your commissions will be a higher.

Of all the options listed, what do I think is the best combination of them? Go to my best way to invest money page to see.

return from different ways of investing money to investment basicsreturn to beginner investing made easy home