Exploring Investment Types

Investing can be an intimidating term. Although investing is a very broad term, it is probably the term most often associated with financial planning and financial advisors, as, traditionally, financial advisors were mainly focused on managing their clients’ investments. Nowadays, however, investing in stocks, bonds, and other investment vehicles, is much more accessible to non-financial professionals. As a result, financial advisors have broadened their product offerings substantially.

The Basics of Investing

Investment management is just one piece of your financial plan. While saving typically involves setting aside money in low-risk accounts (like a savings account), investing means putting your money to work with the goal of growing it over time. Saving is focused on preservation while investing aims for growth—though it comes with more risk.

Your approach to investing depends on your financial goals, timeline, risk tolerance, and current financial situation. With these basics in mind, let’s explore some common types of investments that can help you build wealth.

Types of Investments

1. Investing in Stocks:

When you purchase stock, you’re buying a small share (equity) in a company. You can invest in small-capitalization companies or big guys like Apple and Microsoft.s. Stocks offer returns in the form of dividend payouts or price increases that you can sell for a profit. While stocks tend to have higher returns compared to bonds, they also come with higher risks. Stocks are among the most liquid investment assets, offering advantages such as potential tax benefits and diversification opportunities.

Rather than taking a gamble on the latest and greatest recommendation of “stocks to buy now” that you might hear from a colleague,  it’s important to consider how your stock investments align with your long-term financial goals. Whether you’re planning for significant lifestyle changes like retirement or career shifts, having a clear strategy helps you weather the inevitable ups and downs of the stock market.

2. Investing in Bonds:

Bonds are a common component of a diversified 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 with a 10-year term and 5% interest, you’ll receive $50 annually, and after 10 years, your $1,000 will be returned. 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. 

3. Investing in Mutual Funds

Mutual funds pool money from multiple investors to buy a diversified range of securities, such as stocks and bonds. They are a great investment choice when diversifying your portfolio and building out your long-term financial plan, as they tend to have a lower risk profile than singular stocks. 

Mutual funds can also be actively managed and updated by portfolio specialists who adjust allocations within the fund regularly. However, actively managed mutual funds come with management fees, which can reduce your returns compared to passive funds.

4. Investing in Exchange-Traded Funds (ETFs)

ETFs are similar to mutual funds but are traded via the stock exchange. ETFs often track specific indexes, such as the S&P 500, Dow Jones, or NASDAQ, providing a cost-effective way to invest in broad market segments. ETF stock “baskets” can be comprised of stocks focusing on business sectors, commodities, and emerging markets, making them a versatile tool in a long-term financial strategy.ETFs are also ideal for those nearing retirement, offering lower risks than individual stocks while still providing growth potential.

5. Investing in Cryptocurrencies

Cryptocurrencies are a newer, highly speculative investment that can add a layer of diversification to a portfolio, similar to commodities like gold or silver. Bitcoin is one of the most popular forms of digital money (cryptocurrency). Unlike traditional currency issued by a central bank, digital currency is created by open-source software (blockchain technology). Companies can release their cryptocurrencies with an initial coin offering to raise business funds. 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 still remain volatile and are still in the early stages of mainstream adoption.

6. Investing in CDs

Certificates of Deposit (CDs) are 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 CDs with fixed terms, ranging from a few months to several years. 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.

Do You Need a Financial Advisor to Invest?

Technology has made investing more accessible, but it also brings constant news that can trigger emotional decision-making. A great advisor helps you stay focused on your goals rather than just trying to beat the market. Whether you use an advisor or not, it’s essential to find the right mix of investments for your financial plan.