We’re riding the modern wave of wealth management where investing commands more attention than it used to. The good news is that technology has made access to investment products economical for all, not just the ultra-wealthy. The bad news is that technology has also brought a 24-hour news cycle right into our pockets and magnified our behavioral biases.
Here at Zoe Financial, we believe that the value of a great fee-only advisor is not their ability to “beat” the market but to help you stay on track with what you are trying to accomplish with your investments. A great advisor will want to understand what you value, what keeps you up at night, your goals and aspirations and then work backwards from there in deciding what investments are necessary for your specific situation.
Regardless of whether you work with an advisor or not, there are a handful of investment ingredients that will help you create a financial plan and accomplish your goals. Let’s have a look at those here:
Investing in Stocks
When you purchase stock, you exchange cash for shares (equity) in a company. You can invest in small-capitalization companies or big guys like Apple and Microsoft, invest in an individual stock or take advantage of investing vehicles like mutual funds or ETFs. Stocks offer returns in the form of dividend payouts or price increases that you can sell for a profit. While there’s definitely risk, the returns are generally higher than what you might expect with bonds. Over the last 10 years, US stocks provided almost double the returns of bonds, despite high market volatility. Stocks are among the most popular financial assets when it comes to liquidity, tax benefits, and diversification.
Investing in Bonds
Bonds are another top dog in a financial plan. When you buy a bond, you play the role of lender, offering a company your money in exchange for regular interest payments. For example, if you invest $1,000 in a bond that matures over a 10-year period with 5% interest, you will receive $50 back each year. After 10 years, you’ll receive your original investment back. You can also sell at any time to earn capital gains. For instance, interest rates may fall after five years and your bond may be priced at $1,100, so you may sell to lock in the $100 gained. No bond is without risk, but their prices are considered more stable than daily fluctuating stocks. Most people invest in bonds through a well-diversified, low-cost mutual fund or ETF.
Investing in CDs
A CD is a low-risk investment like a high-yield savings account or short-term bond. This type of investment offers an appealing blend of safety and yield. Banks offer anywhere from one-month to 20-year CDs. By purchasing one, you agree to leave your money tied up in the account for the specified period. In return, the bank pays you interest, backed by FDIC insurance. If you were to invest $100,000 into a 3-month CD with a yield of 1.9%, you might earn $475. If you reinvested your principal three more times over the course of the year, it could return up to $1,900, assuming interest rates stay the same. The longer you invest in CDs, the higher the reward, but you may need to pay a penalty if you want to cash out early. Some investors create a CD ladder with staggered maturity dates to create the ideal balance of liquidity and yield.
Investing in Crypto Currencies
A quick caveat here. Cryptocurrencies, like any new type of investment, are yet to be proven as a core ingredient to a well-diversified portfolio. We at Zoe view them as a commodity (think gold, silver, etc.) which in the future could serve as a potential small sleeve in a portfolio that can help further diversify risk. Bitcoin is one of the most popular forms of digital money (cryptocurrency). Unlike standard money issued by a central bank, digital currency is created by open source software (blockchain). Companies can release their own cryptocurrencies with an Initial Coin Offering to raise funds for business. You can then buy crypto-tokens with your cryptocurrency. Cryptocurrencies are hailed as a revolutionary way of transferring borderless money securely and without fees, but it still very much in its early stages of development. Although we do not recommend cryptocurrencies as a core part of a portfolio, for those that are curious and want to experiment a bit, you can buy cryptocurrency through companies like Coinbase or Gemini, track prices on sites like Coinmarketcap and Investing.com, and keep up to date with the news at CoinDesk or Crypto Insider.