“Ok, I want to invest but what should I invest in?” That’s a question I hear all the time. People are ready to invest but don’t have any idea what investment opportunities exist for them. I’ve created this list of ten types of investments to help give some direction!This list of ten types of investments is made for them.
Here are ten types of investments for building wealth:
- Traditional Savings Accounts (I know it’s boring but we’ll go a little more into when this makes sense).
- Fixed-Income Securities
- Mutual Funds
- Hedge Funds
- Exchange-Traded Funds (ETFs for short)
- Derivatives (Options and Futures)
- Real Estate
- Tangible Investments
- Your Own Business
Traditional Savings Accounts – Safe and Highly Accessable
So, it’s not easy for me to call a Savings Account an investment but it does have a place in the short-term investing space. Let’s start off by saying that short-term investments for the purpose of savings accounts is < 1 year.
If you have money that you want to remain highly liquid so that you can use it whenever you need it or have plans for it less than a year from now, one of the best places for it is a standard boring old savings account.
Savings accounts offer little to no risk. Savings accounts are FDIC insured up to $250,000. They are highly liquid meaning you can access them whenever you want. Lastly, they offer a very small interest rate which hovers around 1%. Now, that doesn’t keep up with annual inflation but it’s better than stuffing your money in a coffee can or your kid’s piggy bank.
You can even find savings accounts at online banks that offer even more attractive interest rates. Varo offers 1.21% and if you meet certain criteria it jumps to 2.8%. It’s still FDIC insured too!
Stocks – Invest in Companies You Believe In
If you follow this site at all, you know I love talking about stocks more than a Wookie loves playing holographic chess (actually the game’s called Dejarik).
Stocks have an average return of 7% annually since the 1930s. Even when you account for recessions, depressions and corrections, on average the stock market goes up. Now, this assumes that money you invest in the stock market has a long-term time horizon.
When I invest in stocks, I do so with the mindset that I will not need that money for at least 5 years and usually I have an even longer time-horizon.
Stocks can earn you money in a couple of ways. The way most people are familiar with is Capital Gains. You buy a stock at one price and sell it for a higher price. The difference is called Capital Gains.
You only pay taxes on capital gains when you actually sell the stock so if it has risen in value over the last five years and you haven’t sold it, you won’t get taxed. This is because taxes are applied to realized gains (once sold).
I could write an entire article about this. In fact, I did! You can check out Realized vs Unrealized Income for more info.
The other way you benefit from stocks is in dividend income. Dividends are basically small payouts of the profits that the company pays it’s investors (usually quarterly). For example if Apple pays an annual dividend of $4 per share, that would be about $1 per share each quarter.
The cool thing about dividends is that you receive that income as long as you own the stock. Some people become rich off investing in dividend stocks and living off the interest payments. This obviously requires A LOT of money. Our article on how to choose dividend stocks for beginners goes into a lot more detail.
If you want to start investing in stocks, it’s as easy as opening a free account in a brokerage, funding that account, and choosing your stocks. You could be investing in stocks in as little as 15-20 minutes. In fact, I’ll show you with this simple roadmap to investing in stocks for the first time.
This sounds more complicated than it is. Imagine loan companies. They loan you money and you make payments back to them over a set period of time with interest. They make money based on the amount of interest you pay back. That interest is adjusted based on the risk of you possibly defaulting and not paying them back.
Bonds are fixed-income securities. When you invest in bonds, you are investing in debt. You pay for the bond and then receive that money with interest at a later date. When you invest in government bonds, you have low risk because generally the government always makes good on their debt payments. As a result, you get a low interest.
There are a couple of ways to invest, depending on the type of bond. In the case of Treasury Bills (T-Bills), you purchase the bond at a discount. So if a T-Bill is $1000, you may pay a lower value (such as $925) and then at maturity, you receive the entire value which is $1000. In this case, you make $75. These are often less than a year for maturity.
Treasury Bonds work a little different. Their maturity ranges from 10-30 years. You can purchase a full value bond (such as $1000) and receive interest payments depending on the prime rate until maturity. So, if the rate was 3%, You’d receive $30 per year (in semi-annual payments) until it matures. Once it matures, you receive the $1000 back. The minimum value is $1000 for this type of bond.
If you are interested in bonds, check out the official Treasury Direct site.
This is a whole different ball game. It is similar to stock as we described above but there are a couple key differences. The first one is that you receive a fixed dividend rate and you would have priority to that dividend payout ahead of those that hold mere common stock.
That means if the company doesn’t perform as well, they’d be obligated to pay out the dividend to you and possibly reduce or cancel the dividend for common stockholders.
The drawback to preferred stock is that you don’t have voting rights typically but that’s the trade-off for guaranteed fixed-income.
Instead of investing in individual stocks, Mutual Funds allow you to invest in a portfolio of companies. Mutual Funds are a great way to invest if you want to have a portfolio but not necessarily choose every single company that you want to invest in.
Mutual funds usually have a minimum investment requirement but what makes them great is that you can set up auto-contributions so that investing is on autopilot. This is why mutual funds are generally the makeup of most retirement and pension funds.
Mutual funds come in all shapes and sizes. You can choose a mutual fund that is narrowed down to a specific industry or you can choose a broader mutual fund that follows a major index.
There are a lot of Mutual Fund companies out there but two of the most famous are Fidelity and Vanguard. I prefer Vanguard. They have the lowest fees in the business and if there’s one thing I can’t stand, it’s FEES.
If you want to invest in the entire US Stock Market, check out VTSAX (Vanguard Total Stock Market Index Fund). That’s Vanguard’s most popular fund and my personal favorite. If you’d rather invest in Emerging Markets, check out VEMAX (Vanguard’s Emerging Markets Stock Index Fund).
If you have the stomach for risky investing, hedge funds might interest you. They don’t have the same scrutiny under the SEC (Securities Exchange Commission) and are traded privately instead of publicly. That being said, this is another reason they are riskier.
You can’t even invest in a Hedge Fund unless you are considered an accredited investor which is usually defined as having at least $1 million dollars in assets and an income of at least $200 thousand dollars a year ($300 thousand with a spouse).
Personally, I have no interest in this investing vehicle because they usually use very aggressive investing strategies, aren’t regulated enough for my taste, and a lot of funds require you to lock up your money for a certain amount of years. Yikes!
Also, like most people reading this, I don’t quite meet the accredited investor guidelines either.
Someday, I hope to say I don’t want to invest in hedge funds even though I could!
If you are interested in adding hedge funds to your investing portfolio, check out Investopedia’s article on the top hedge fund firms in the world.
Exchange Traded Funds (ETFs)
Similar to mutual funds, ETFs are collections of stocks that can be bought as one unit. There are a few differences between ETFs and Mutual Funds but the biggest is that Exchange Traded Funds can be bought by the individual investor from any brokerage account.
Instead of investing a sum of money in a mutual funds, ETFs are bought through a “per share” purchase and can’t be auto-invested like mutual funds.
ETFs are perfect for people that are more hands on and want to make each investment purchase when they have the money to do so. They have no minimum investment amount other than the price of the individual shares.
I have been invested in VUG (Vanguard Growth ETF) for four years now and have more than 110% unrealized gains so far. I also just invested in VOO (Vanguard 500 Index Fund) on Webull a couple months ago that I will probably hold for the next decade or so.
ETFs offer great diversification and allow you to invest much more passively than holding only individual stocks.
Derivatives (Options and Futures)
Investing in options and futures futures? I’m not talking about a sci-fi novel here! These are two common investment vehicles known as derivatives. These are not for the feint of heart because they get a little more complicated than mutual funds and common stock.
With Options, you are buying or selling contracts that give you the right to buy or sell a stock at a certain price on a certain day. That means rather than buy 100 shares of Apple (APPL) stock, you could buy a single option contract (controlling 100 shares) for a certain price and that price is good up until it’s expiration date.
Still confused? Let’s try another example:
Right now I have an option for Zynga that I purchased about a year ago that expires in 4 months. It cost me $125 dollars and what it does is it allows me to buy 100 shares of Zynga (ZNGA) stock for $5.50 per share. As long as the price of Zynga goes up, my option will be “in the money” meaning profitable.
Currently it is worth $473 because the share price is now $10.27. If I were to execute my option, I would buy 100 shares for $550 and they would instantly be worth $1027. Alternatively, I could just sell the option contract and pocket the equity of the contract without even touching the shares.
Futures are similar but instead of controlling shares of stock, you are buying and selling contracts for commodities like oil, soybeans, or rice. Future contracts guarantee that a seller will deliver the commodity being sold on a certain day and the buyer will receive that commodity on the specified day.
If you buy a contract and it goes up in value, you can sell the contract to someone else that wants to buy the commodities for the agreed price. If not, you could wind up with a garage full of soy beans.
Futures are a lot riskier than Options because they control a larger amount of capital. A future contract for oil could represent 1000 barrels of oil which can be quite pricey.
In either case, derivatives are riskier types of investing and demand a disciplined approach to protect yourself from downside risk. I personally only invest in options when I feel very speculative and I never buy options that make up a large portion of my portfolio.
Currently options make up only 3% of my portfolio. I do not trade futures at all.
Most of the investments we talked about so far are related to the stock market. Real Estate gives you the chance to invest in tangible assets that you physically see.
When you buy a home to live in, this really isn’t an investment because you need it for the basic needs of shelter. You can’t really sell it to make money because you still need a place to live. Real estate becomes an investment when you can make money from it or sell it relatively easily and it doesn’t affect the livelihood of you or your family.
If you were to rent a house out to someone so that it generates income, now it’s more of an investment. There are a couple ways to invest in real estate. You could buy houses or apartments and rent them out so that you collect rent and generate cashflow. This involves really analyzing property to ensure that the rental income makes up for the cost of the mortgage, management service and cost of repairs while still leaving some left over as cash flow.
There are many companies that run their entire business by selling “turnkey property” to would be investors for a fee. These properties usually already have tenants and generate cashflow. One company that does this is called Rootstock.
If I purchase a home with Rootstock, I will instantly be in possession of a cash flow property without the headaches of finding a place, remodeling and cleaning it, finding tenants, and hiring a management team. That’s all taken care of with Rootstock.
If owning a bunch of individual real estate properties stresses you out, you could simply invest in a REIT (Real Estate Investment Trust) which pools your money with other investors in a portfolio of property. Generally a REIT is managed by a company that collects money from investors and employs it into purchasing a portfolio of properties.
The money is generally tied up for a set amount of years and you collect quarterly dividend payments (similar to rent) as your investment grows in value (similar to a house going up in value).
Fundraise offers low fees for the opportunity to invest in their eREITS so if investing in a portfolio that takes a lot less capital get started (as little as $1,000 dollars), then this may be the approach for you!
Other Tangible Investments
Want to invest in precious metals, antiques, art, baseball cards, or classic cars? There are tons of tangible items you can invest in. These are less traditional investment options but they still offer opportunity for those of you that prefer something that you can hold.
One of my co-workers buys silver bars every chance he can get and keeps adding them to his safe at home. He loves the idea of having something physical that is in limited quantity.
My dad, had three classic cars that he fixed up and ended up selling for a profit. Tangible investments are usually more hobby based than the other types of investments we described. Sometimes, they are a great way to diversify a portfolio.
Investing in Your Own Business
Do you have the spark of entrepreneurship? If so, maybe you want to invest in a business.
The beauty of investing in a business is that it can really grow into something that replaces your current job and if you manage it well, can lead to passive income.
You can take an online bootcamp class and learn how to code websites or sell services online through graphic design or freelance writing.
If you want to own a website that makes money with ads or sells products, you can purchase a site on marketplaces like Flippa. If you want a more traditional business, you can check out BizBuySell for businesses for sale.
There are tons of way to invest in yourself! The sky really is the limit.
I think that the most important thing with investing is to just invest in something that makes you comfortable.
Are some investments safer than other? Sure! That’s where you need to do your own independent research and determine where your risk tolerance is and what your time-horizon is.
What’s right for some investors may not be right for you. Hopefully something from the list above speaks to you and gives you the spark you need to get started. Whether you want to invest in real estate, stocks, gold, or a personal business the most important thing to do is get started!
So, what do you say? Are you ready to start? Choose an investment to learn more about and let’s start investing!