If you do a quick search in Google, there is no shortage of information out there trying to get you to into an array of investment vehicles, and if you are careful, you could fall into a trap and make some very crucial mistakes. Today I’ll share with you my opinions on the best ways to invest money, and I’ll cite more reasons and sources along the way.
The first thing you must ask yourself is: why are you investing?
“When you look at investing, time horizon is one of the key things a planning professional will want to know,”
I absolutely love that statement by Dan Yu, managing principal at EisnerAmper Wealth Advisors in New York City. To me, if you don’t know when you’ll need access to the money, you are shooting darts. (When you need the cash is the definition of a time horizon.) Source: US News & World Report.
The reason this is so important is because you have short and long term needs, and you SHOULD have short and long term goals in place as well. The money you sock away for a vacation is much different than money you are saving for that house you want to upgrade to in say, 5-10 years.
Also Read: Investing in your 20’s.
Don’t Invest All Your Money in One Place
This is yet another big mistake that people make with their money, putting all of their eggs in one basket.
Elliot Omanson, of Sage Financial in Kansas City (I always have an affinity for Midwest investment advisors, which I’ll expand on later) cited this as the biggest mistake people make.
Using different investment strategies to fund different growth vehicles is important. For example, you won’t save with the same strategy for retirement as you will for that short term goal you have of getting a new kitchen.
Saving for the Short Term
If you are focusing on saving for short term goals, the onus should be on accruing capital without risk. You shouldn’t have money invested in anything with a hint of volatility if you need to access it within three years. Sorry, Bitcoin.
What is the Best Option for Short term Savings?
You’ll want to open an account that will mature over time and be safe from any market fluctuation. Below are a few examples.
Certificate of Deposit:
If you can put your money away for a year or more, you’ll earn the best yields.
Money Market Accounts:
This will offer a comparable yield in comparison to a CD and you’ll also have less restrictions. On the flip side, you will likely be able to only withdraw a limited number of transactions each month.
Short Term Bond Funds:
Seen as a highly safe investment approach, the bond market is a way to get a decent return without having much risk. While a current annualized return for a ten year period is about 2-4%, which is far from sexy, you’ll see that it’s much better than letting it sit in a checking account.
Fixed Income Funds:
These include bonds and can include securities, and they yield a better return in comparison to savings and money market accounts. They are also a very solid way to invest in a market that may be volatile.
In my past experiences, short term saving was always an afterthought. It took near bankruptcy to get me to realize that a small portion of my income needs to be put away in one or more of the above vehicles in order to grow, with very little risk, in order for me to have a well rounded investment strategy.
Saving Money for the Long Term
When you look at investing for the long term, you need to think about this as money you won’t need for at least three years. A great place to invest money for the long term is stock market equities. The aforementioned Dan Yu was quoted as saying:
“We can live though most bear markets,”
Yu continued to note that most of these markets last from nine to 16 months. To me, the example I lived through, the Great Recession, “only” lasted from December of 2007 to June of 2009.
Didn’t it seem longer? I guess when I look back at 2009 and 2010, I started to pull out of my funk and make a lot of progress towards building solid businesses again.
Of course, a long term savings plan should involve two of the most powerful vehicles known to man: 401(k)s and IRAs.
View information on each below:
These are tax favored accounts and in some cases, a 401(k) can also come with a company match for any contributions made. Retirement accounts such as IRAs give the benefit of an immediate tax deduction OR withdrawals deemed tax free in the future.
The lion’s share of these funds have a plethora of options, and if you are unsure about monitoring and reallocating your portfolio, you may want to look into a target-date fund. These allow you to manage the account in a hands off manner that will look into your future retirement date and set up investments accordingly. While the account ages, it will transfer money to bonds and other investments with less risk.