Investment OptionsWhat are my investment options 1) Retirement accounts: You need to figure out if you can and should put money into a retirement account. Just because you can, does not mean you should. However, in most cases, your options in a retirement account are the same except you don't pay taxes on the money coming in (401k and traditional IRA) or the money when it eventually comes out (Roth IRA). The exception to this are employer retirement plans like the 401k plan. In this case, your options are typically limited to a handful of index funds. If your employer matches your 401k contributions, then that is probably your first best investment option. You are essentially doubling your money without having any taxes taken! Granted, you have to wait until you're 591/2 to take the money out without fees and penalties. Even considering the fees and penalties its a great deal. Outside of a 401k plan, the IRA investment options are great choices. You can invest this money with just about any stock or mutual fund broker who provides an IRA plan. There are two types of IRA plans -- Roth IRA and Traditional IRA. With the Traditional IRA you put the money in before it is taxed, but when you eventually pull it out you will be taxed. With the Roth IRA you put the money in after it is taxed but then never pay taxes on the original money you put in or any earnings. I prefer the Roth IRA because it a bit more flexible and I already get pre-tax retirement savings with my 401k. 2) Safe Investment Options -- also known as short term investment options: The safest investment option is the money market account -- which is different from a money market fund. However, with this supreme safety comes tiny returns. You may not beat out inflation. You should choose the money market account over the fund because the account is FDIC insured and funds are not. You don't even get a better rate with the fund, so there's really no reason to not choose a money market account. Despite the low returns, a money market account is critical to any investing plan. You need it to fall back on if some large, unexpected expense falls on you. More importantly, it helps you feel at ease with the rest of your investments because you know you can leave the longer term investments untouched in the case of an emergency. If your stocks fall a lot (like in 2008/2009) then you don't need to worry because you weren't planning on pulling that money out any time soon anyway. Not only that, but if you have enough of a cash cushion, you could have invested when the stock market was really low in early 2009. Investing in CDs is a very safe investment option. A CD ladder is a great way to setup a CD investing plan. Like money market accounts, CDs are FDIC insured, so your money is not going to disappear if the bank you got it from fails. Again, you pay a price in returns for this security. The returns on CDs are generally only a little more than with money markets. Investing in Bonds is also a relatively safe way to invest money. They are not FDIC insured and can lose value. However, you generally get much better returns on them than with the money markets or CDs in exchange for more uncertainty. Investing in individual company bonds is not for the beginning investor -- it is somewhat risky and usually requires a huge investment. I would consider bonds to be safe to invest in if bought in a broad bond fund. The best and easiest way to do this is through Vanguard's Total Bond Market Index Fund. 3) Mutual Funds: The next major investment option is mutual funds. Mutual funds are professionally managed groups of assets. The assets can be anything from stocks, bonds, money market, or gold to whatever can be bought and sold. An investor gives money to the mutual fund and the fund manager invests it as he or she sees fit. I'm really not a big believer in actively managed mutual funds because their expense ratio is high because you have to pay the "professionals" managing the fund and they incur a high amount of trading costs. There is also good evidence out there that about 80% of the mutual funds are beaten by... 4) Index Funds: Index funds are a sub set of mutual funds, but really deserve their own category. They should be the bread and butter of your investment portfolio. Studies have shown that people who invest exclusively in broad index funds beat out active investors (mutual fund managers and individual stock investors) a whopping 80% of the time. This a fact that is not disputed. Warren Buffett's simple investment recommendation for laypeople is to invest all your money in a broad US stock index fund. Not only will Warren's suggestion beat most of your friends, but it will save you a tremendous amount of time. Vanguard's Total Stock Market Index Fund is a great place to go if you want to do this option. The primary reason why index funds are such a great deal is because of their low expense ratio. You are not paying some fat cat a large percentage of your money and index funds tend to incur much less trading costs because there is almost no turnover. If you already own a piece of everything, you don't really need to move things around. Index funds don't need to have 100% stocks either. They can have a mix of stocks and bonds or no stocks at all. They can cover more narrow area of the stock or bond areas. For example, you can get index funds for companies involved in Gold, Oil or Semiconductor. However, I don't recommend going that way because then you are entering into the world of speculation. More importantly, you can get International index funds. Vanguard has a fund for that too. I recommend putting some money into international and bond funds when you can to round out your portfolio. 5) ETFs -- Exchange Traded Funds An offshoot of mutual funds and index funds are exchange traded funds. These are almost identical to mutual/index funds. In fact, they mirror actual mutual/index funds. The difference is that they are traded on the stock market like stocks through a stock broker. So, instead of buying Vanguard Total Stock Market Fund through Vanguard, you can buy VTI (Vanguard Total Stock Market ETF) directly through a stock broker. Your long-term results should be almost exactly the same. The differences are that VTI will have a little bit lower expense ratio than the fund, but, unlike the fund, you have to pay commissions to acquire it. Personally, I prefer going to Vanguard so that I can invest slowly over time and not worry about commissions piling up. However, ETF investing can be cheaper in the long run if you buy large quantities or can get free stock trades. 6) Individual Stocks: Despite being one of many investment options, stocks of individual companies are what most people associate with investing. This is unfortunate because most people should not be investing directly in stocks. Let me repeat and rephrase that for emphasis. Unless you have a lot of time on your hands, a lot of money to invest, a hardy stomach for large drops in prices, and the ability to not get overly enthusiastic with huge price increases, you should not be investing directly in individual stocks. This is a hard rule to follow because it can be really exciting. Just imagine telling all your friends that you invested in Google 8 years ago. At least, that is what your brain is thinking. What about that friend you had who tripled his money in 1 year? I doubt he will tell you if he loses 50% of his portfolio value on a single stock. What are the main things I need to consider when looking at my investment options? How old you are and the time frame for when you will need the money are big considerations. These tend to go hand in hand. If you are older, you obviously have less time to let the money mature and ride out the dips and spikes of the more aggressive investments (stocks). Therefore, a more conservative mix of investment options are called for. If you are younger, you can hold on to the money for 30+ years. Therefore, you can absorb the highs and lows of stocks knowing that in the end, you'll come out ahead. If you are in a situation to be able to go for the more aggressive stocks, you must understand whether or not you can stomach significant losses. If you are going to sell all your stocks when they dropped heavily over a short period, then you should not invest in stocks. How did you respond to the stock market dive in 2008/2009? If you sold off significant amounts of your stock portfolio or thought stocks would never bounce back, then stocks are not for you. On the flip side, you must be able to control optimism when things are doing well. Did you buy tech, oil, or real estate stocks/investments when they were hot? Did you think oil in 2009 would just keep going up and up? Just like large, prolonged falls in stock prices make most people want to sell everything, big jumps up tend to make us want to buy more. You must be able to stick to your plane when there are significant gains to invest in stocks. Expenses are a huge factor in long-term investing success. As stated in my expense ratio page, a difference of 1% in expenses per year over a 40 year period can make you about 50% more money! This is one of the primary reasons why frequent traders have such a hard time beating index funds. Watch your expenses closely and profit from your prudence. Inflation is always a consideration. Money markets might seem incredibly safe, but they always carry the risk that they will not even beat inflation (and they often don't). If you're not beating inflation, then you are effectively losing money even if your account balance is growing. Inflation tends to average around 3% and money markets are frequently below that number. This does not mean to not use money markets at all. They still have an important purpose even when they are effectively losing you money. What are the best investment options? Generally, for the long-term broad stock index funds are best (through Vanguard), mid-term broad bond index funds are best (again, through Vanguard), and short-term money market accounts are best (ING or Emigrant Direct are great, reliable sources with decent enough rates). If you want more details on the best investment options, check out my page on the best way to invest money. return from Investment Options to Index Funds Like this page?Click the +1 to tell Google you like this page: You can also support the site by using my link to buy from Amazon. Once you click it, bookmark it. Then every time you use Amazon I get a few cents and it doesn't cost you anything. Check out Amazon Prime. It will change how you shop online. Thanks! |