To enjoy a comfortable future, investing is absolutely essential for most people.
Investing can provide you with another source of income, help fund your retirement or even get you out of a financial mess in the future. Above all, investing helps you grow your wealth- allowing your financial goals to be met and increasing your purchasing power over time.
Or maybe you’ve recently experienced a raise in your income, then it’s a wise decision to let that money work for you and grow over time.
While investing can build wealth, you’ll also want to balance potential gains with the risk involved.
As the start of 2020 showed with the coronavirus crisis, markets can become volatile very quickly. An investment might be good for the long term, but its price can bounce around significantly during some periods. Recessions can hurt investment prices for even longer, meaning you might not have the cash that you put into the investment soon, or ever.
There are various investment plans and you can find investments that offer a variety of returns and fit your risk profile. It also means that you can combine investments to create a well-rounded and diverse safer portfolio.
What to consider
Risk tolerance and time horizon each play a big role in deciding how to allocate your investments. The value of each can become more obvious during periods of volatility.
Conservative investors or those nearing retirement may be more comfortable allocating a larger percentage of their portfolios to less-risky investments. These are also great for people saving for both short- and intermediate-term goals.
A longer time horizon allows you to ride out the volatility and take advantage of the potentially higher return of stocks, for example. Be prepared to do your homework and shop around for the types of accounts and investments that fit both your short- and long-term goals.
Here are best investment plans in 2020:
1. High-yield savings accounts
Just like a savings account earning pennies at your brick-and-mortar bank, high-yield online savings accounts are accessible vehicles for your cash.
With fewer overhead costs, you can earn much higher interest rates at online banks. As of May 2020, you can find accounts paying above 1.5 percent.
A savings account is a good vehicle for those who need to access cash in the near future.
Risk: The banks that offer these accounts are FDIC-insured, so you don’t have to worry about losing your deposit. While high-yield savings accounts are considered safe investments, you do run the risk of earning less upon reinvestment due to inflation.
Liquidity: Savings accounts are about as liquid as your money gets. You can add or remove the funds at any time.
2. Certificates of deposit
Certificates of deposit, or CDs, are issued by banks and generally offer a higher interest rate than savings accounts.
These federally insured time deposits have specific maturity dates that can range from several weeks to several years. Because these are “time deposits,” you cannot withdraw the money for a specified period of time without penalty.
With a CD, the financial institution pays you interest at regular intervals. Once it matures, you get your original principal back plus any accrued interest. You may be able to earn up to around 1.8 percent on these types of investments, as of May 2020.
Because of their safety and higher payouts, CDs can be a good choice for retirees who don’t need immediate income and are able to lock up their money for a little bit. But there are many kinds of CDs to fit your needs, and so you can still take advantage of the higher rates on CDs.
Risk: CDs are considered safe investments. However, they do carry reinvestment risk — the risk that when interest rates fall, investors will earn less when they reinvest principal and interest in new CDs with lower rates. The opposite risk is that rates will rise and investors won’t be able to take advantage because they’ve already locked their money into a CD.
Consider laddering CDs — investing money in CDs of varying terms — so that all your money isn’t tied up in one instrument for a long time. It’s important to note that inflation and taxes could significantly erode the purchasing power of your investment.
Liquidity: CDs aren’t as liquid as savings accounts or money market accounts because you tie up your money until the CD reaches maturity — often for months or years. It’s possible to get at your money sooner, but you’ll often pay a penalty to do so.
3. Money market accounts
A money market account is an FDIC-insured, interest-bearing deposit account.
Money market accounts typically earn higher interest than savings accounts and require higher minimum balances. Because they’re relatively liquid and earn higher yields, money market accounts are a great option for your emergency savings.
In exchange for better interest earnings, consumers usually have to accept more restrictions on withdrawals, such as limits on how often you can access your money.
These are a great option for beginning investors who need to build up a little cash flow and set up an emergency fund.
Risk: Inflation is the main threat. If inflation rates exceed the interest rate earned on the account, your purchasing power could be diminished. In addition, you could lose some or all of your principal if your account is not FDIC-insured (though the vast majority are) or if you have more than the $250,000 FDIC-insured maximum in any one account.
Liquidity: Money market accounts are considered liquid, especially because they come with the option to write checks from the account. However, federal regulations limit withdrawals to six per month (or statement cycle), of which no more than three can be check transactions.
4. Treasury securities
The U.S. government issues various types of securities to raise money to pay for projects and pay its debts. These are some of the safest investments to guarantee against loss of your principal.
Treasury bills (T-bills) have a maturity of one year or less and are not technically interest-bearing. They are sold at a discount from their face value, but when they mature, the government pays you full face value. For example, if you buy a $1,000 T-bill for $980, you would earn $20 on your investment.
Treasury notes (T-notes) are issued in terms of two, three, five, seven and 10 years. Holders earn fixed interest every six months and then face value upon maturity. The price of a T-note may be greater than, less than or equal to the face value of the note, depending on demand. If demand by investors is high, the notes will trade at a premium, which reduces investor return.
Treasury bonds (T-bonds) are issued with 20-year and 30-year maturities, pay interest every six months and face value upon maturity. They are sold at auction throughout the year. The price and yield are determined at auction.
All three types of Treasury securities are offered in increments of $100. Treasury securities are a better option for more advanced investors looking to reduce their risk.
Risk: Treasury securities are considered virtually risk-free because they are backed by the full faith and credit of the U.S. government. You can count on getting interest and your principal back at maturity. However, the value of the securities fluctuates, depending on whether interest rates are up or down. In a rising rate environment, existing bonds lose their allure because investors can get a higher return from newly issued bonds. If you try to sell your bond before maturity, you may experience a capital loss.
Treasuries are also subject to inflation pressures. If the interest rate of the security is not as high as inflation, investors lose purchasing power.
Because they mature quickly, T-bills may be the safest treasury security investment, as the risk of holding them is not as great as with longer-term T-notes or T-bonds. Just remember, the shorter your investment, the less your securities will generally return.
Liquidity: All Treasury securities are very liquid, but if you sell prior to maturity you may experience gains or losses, depending on the interest rate environment. A T-bill is automatically redeemed at maturity, as is a T-note. When a bond matures, you can redeem it directly with the U.S. Treasury (if the bond is held there) or with a financial institution, such as a bank or broker.
5. Dividend stock funds
Even your stock market investments can become a little safer with stocks that pay dividends.
Dividends are portions of a company’s profit that can be paid out to shareholders, usually on a quarterly basis. With a dividend stock, not only can you earn on your investment through long-term market appreciation, you’ll also earn cash in the short term.
Buying individual stocks, whether they pay dividends or not, is better-suited for intermediate and advanced investors.
Risk: As with any stock investments, dividend stocks come with risk. They’re generally considered safer than growth stocks or other non-dividend stocks, but you should choose your portfolio carefully. Make sure you invest in companies with a solid history of dividend increases rather than selecting those with the highest current yield. That could be a sign of upcoming trouble. However, even well-regarded companies can be hit by a crisis, so a good reputation is finally not a protection against the company slashing its dividend or eliminating it entirely.
Liquidity: You can buy and sell your fund on any day the market is open, and quarterly payouts, especially if the dividends are paid in cash, are liquid. Still, in order to see the highest performance on your dividend stock investment, a long-term investment is key. You should look to reinvest your dividends for the best possible returns.
Investing can be a great way to build your wealth over time, and investors have a range of investment options – from safe lower-return assets to riskier, higher-return ones. So that range means you’ll need to understand the pros and cons of each investment option to make an informed decision. While it seems daunting at first, many investors manage their own assets.
Investing can be surprisingly affordable even if you don’t have a lot of money.
Which of these plans would you consider in order to build your financial stability?