Building wealth is everyone’s dream, whether it’s having a secured retirement, paying for children’s education, or obtaining financial independence. Whatever you invest in plays a significant role in your success. It’s not just about choosing the winning stocks or bonds. The fact is, it is about making the right investment decisions according to your goals. In other words, when you are just simply waiting for the proceeds from your investments.
Here, we are going to explore some of the most prominent investment vehicles available to you. While they might not be suitable for your situation right now, as time goes by, the best investments that are suitable for your needs could change.
Why Stocks Are Good Investments
Most people consider stocks as good investments. This is because it has been proven that stocks are the best way to build wealth for any average person on a long-term basis. Over the past four decades, U.S. stocks have provided better returns than earnings from savings, bonds, and gold. Stocks have beaten most investment types over the past century.
Why are U.S. stocks considered great investments? This is because as a stockholder, you are considered as an owner of a business. Consequently, as the global economy progresses, your business also grows bigger and becomes more profitable. Hence, you are an owner of a business that is very valuable. In most cases, as a shareholder, you will also obtain a dividend.
Let us use the previous years as an example. Despite experiencing two of the toughest recessions in history, we have seen how the SPDR S&P 500 ETF was able to deliver better returns than bonds or gold. This is why stocks should be the foundation of your investment. When it comes to deciding how much stock makes sense, it will likely differ from one person to another.
For instance, people in their 30s who are saving for their retirement could likely experience several years of market volatility, hence, they should own a lot of stocks. On the other hand, people in their 70s could choose to own some stocks for growth. People who are in their 70s should protect the assets that they will need in the succeeding years of their life by holding some cash and investing in bonds.
What Are the Risks of Investing in Stocks?
Volatility
The prices of stocks have a tendency to change more often over a short period of time. This means that it can be risky if you decide to sell your stocks within a brief period of time.
Permanent Losses
As a stockholder, you can also consider yourself as a business owner, which can have some serious reprecussions. Let’s face it, some businesses fail. In case the company declares bankruptcy, then they will have to pay their suppliers, contractors, vendors, and bond owners first. This means that the stockholders will get whatever is left, in case there’s any. Fortunately, you can prevent these risks by identifying what your financial goals are.
How to Manage Volatility
If you are about to retire in a few years or you have a child who will be going to college in a year or two, then your goals should not be about maximizing growth anymore. Rather, it should be about securing your capital. This means that you should transfer the money that you will be needing in the next few years out of stocks and into cash and invest in bonds.
On the other hand, if your goal is many years in the future, then you can simply dodge volatility. Despite having two of the most disastrous market crashes in history, stocks have managed to provide incredible returns to stockholders who managed to hold on to their investments.
How to Avoid Permanent Losses
If you want to avoid permanent losses, then the best thing that you can do is to have a diverse portfolio. As much as possible, try to avoid putting too much of your wealth on a particular industry, company, or end market. With this diversification, you can reduce your losses to a few bad stock decisions and your ultimate winners will be the ones that will make up for these losses.
You can consider it this way if you have invested in 20 stocks with the same amount. This way, if one of them goes bankrupt, then you will likely only lose up to 5% of your capital. But what if one of those stocks increased by 2,000% in value? In this situation, it does not only make up for any losses, but your entire portfolio has doubled in value. Having diversity in your investment can protect you against permanent losses and exposes you to several wealth-building stocks.
Why You Should Invest in Bonds
Growing wealth is your primary goal. However, once you have built that wealth and are getting closer to your financial goal, then investing in bonds can help you in keeping it. Basically, there are three major types of bonds: corporate bonds, municipal bonds, and treasury notes. Corporate bonds are released by companies, while municipal bonds are released by state and local governments. And finally, treasury notes, bonds, and bills are released by the U.S. government.
While the stocks can crash hard and fast, bonds hold up much better. This is because the worth of bonds is easier to calculate, so they are less volatile. As you are getting closer to your financial goals, it is advisable that you should own bonds that match your timeline so you will be able to protect your assets.
Why Should You Invest in Real Estate?
Investing in real estate might seem impossible for most people. Obviously, some people can’t afford to buy an entire commercial property. However, there are some ways that people at any financial level can invest and earn money from real estate. Furthermore, similar to owning successful companies, owning profitable real estate can be a great way of building wealth. Additionally, in most recessionary periods throughout history, investing in commercial real estate is considered a more stable, safer investment than stocks.
Eventually, it is much simpler to invest in commercial real estate development projects right now. Recently, real estate developers are now allowed to crowdfund capital for real estate projects based on the latest legislation. This leads to billions of dollars of capital being raised from investors who want to join the real estate development. It is important to know that investing in crowdfunded real estate requires more capital.
After you made your investment, you may not be allowed to touch your capital until the whole project is done. Furthermore, there is a great risk involved, in case the developer fails to execute. This means that you will lose all your money. However, the potential earnings and returns from real estate are quite compelling, and it is only during these recent times that people can access this investment. This development is made possible through crowdfunding.
Investing in Brokerage Accounts That Minimize Your Tax
It is advisable that you invest in brokerage accounts that can minimize taxes. Owning the right investments that can help you in reaching your financial goals is important. However, knowing where to make your investment is just as important as well. The fact is, most people are not aware of the tax consequences of their investments. As a result, you will probably fell short of your financial goals. Hence, it is best to have a little bit of tax planning. There are different types of accounts that you may want to use on your investments. These accounts can likely make your investments grow tax-free.
When choosing the appropriate account, it should be based on the purpose of your investment. For example, for self-employed retirement savings choose SEP IRA/Solo 401(k), for employed retirement savings, choose 401(k), for retirement savers choose either Roth IRA or Traditional IRA, for college savings, choose either 529 College Savings or Coverdell ESA and finally, for savings with extra cash to invest, choose taxable brokerage.
Other Types of Investments
Savings Accounts
Credit unions and banks can offer you savings accounts. Additionally, the money that you put in your savings account is safe since it is insured by the Federal Deposit Insurance Corporation (FDIC) up to a specific amount. Keep in mind that there are some restrictions that will be applied to your savings accounts.
For instance, you will be charged a service fee if you go beyond the number of monthly transactions permitted. Most often, you are not allowed to withdraw your money through check-writing, and sometimes at ATMs. Unfortunately, the interest rates for savings accounts are relatively low, however, online banks do higher-yielding savings accounts.
High-Yield Savings Accounts
This type of savings account is completely safe since it is protected by FDIC. High-yield savings accounts have higher interest rates than a standard savings account. This is because it requires a larger amount of money for its initial deposit. Also, access to the account is restricted. Most banks offer this kind of account to their most valued customers who have existing accounts with the bank.
Money Mgt Inc. can help you in building your wealth and help you achieve your financial goals. For more information, you can contact us at 601-990-2102 or send us an email at jmckennon@virtuecm.com.
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