Time is a limited commodity for everyone. In order to not work until you drop dead, you need to automate certain amount of your resources so they are working for you. If you starts a company, you would have a bunch of people working for you. If you created a website, the website would be working for you once you have it up and running with the right content. It can also be money, you should put your money to work.
Typical inflation in a given year (not the last year or so), has been around 3%. In another word, if your money/assets isn’t growing at at least 3%, you’re losing money!
What are some ways you can best put your money to work?
1. High Yield Savings Account
This one is low risk and low reward option. There was a time many many years ago when these accounts would yield between 4-5% interest return every year. Those days are long gone for the time being. With the recent federal reserve rate hike, you can now get between 1-2% interest with online savings account.
If you’re not investing your money elsewhere, most of your money should at least be in this type of account. Most banks are federal insured (FDIC) up to $250,000 per account, so double check with your bank that they are part of the FDIC pool.
Comment: Low risk and low reward option
2. Certificate of Deposit (CDs)
Certificate of Deposit or CD is also FDIC insured that offers a fixed interest for a fixed amount of time. For example, you can earn 2% interest for a deposit of $10,000 at bank X at the end of the 12 month of the deposit, or the maturity time.
Good thing about CD is that you will usually get a slightly higher interest rate than regular online savings account. The downside with this is, the money cant be used for anything during the fixed amount of per the agreement with the bank or there will be penalty for taking the money out early. The penalty is usually a big part of the interest that you have earned up to that point.
Comment: Low risk and low reward option
3. Mutual Funds
Mutual fund is a pool of assets that investors can buy to invest their money. It usually consists a mix of stocks from different companies and possibly bonds or other type of investment. It’s an inexpensive way to diversify since you can often time invest with as little as $100 and guard against risking your investment in a single loss.
Many people like this option as their initial investment because the risk is still relatively low as an investor and offers to flexibility to invest in all kinds of funds and type of investments while potentially yielding much higher returns than the savings account options. Mutual funds are not backed by government.
Comment: Low to medium risk and medium to medium high returns
4. Government Bonds
Government bonds are essentially government writing an IOU to you for borrowing you money from you while promising to pay you a certain amount of interest. The interests are usually just a tad bit higher than the savings account options while the risk is about the same.
Government bonds are backed by US government credits and treasury, so you can have a peace of mind when investing in it. The typical yield is in the 2-3% range, so around the typical inflation level.
Comment: Low risk and not very high reward
5. Corporate Bonds
Corporate bonds work in a similar fashion as government bonds except it’s not backed by the government. The higher the yield, the riskier the investments. The higher yield bonds are sometimes referred to as junk bonds. You will want to assess what your risk tolerance is for this type of investments.
Comment: Medium to high risk and return
6. Dividend Stocks
Dividend stocks can be a very attractive option for investors since they give regular dividend payout (usually once per quarter) in the range of 1-5%, depending on the company. They are often time seemed as inflation insulated type of stock since the investor get dividend payout whether the company is doing well or not, though the payout is usually adjusted based the company stock price.
Dividend stocks are also good for people who’s looking for fixed income options since you get regular payouts. But some people don’t like dividend stocks for the same reason because you have to pay some taxes on the dividends. For most stocks, you only pay taxes when it gets sold.
Comments: Medium risk with medium to medium high returns
7. Individual Stocks
Owning individual stock is like owning a smart part of a company, so when the company is doing well, your potential return increases as well. Stocks offer the highest level of potential returns but also potentially the highest volatility.
If you are investing on your own, you want to invest with caution. I have tried to invest on my own and that did not turn out well, so I work with investment firms who manage my portfolio now for a set amount of fees. I find this less stressful and we’ve been getting solid returns for the last three years.
So you will want to assess your risk tolerant level as well as your stress tolerant level. Trading stocks on your own can be quite very stressful since you are trading with your financial well being.
Comment: Medium to high risk and medium to high returns
In Conclusion
So where should you put your money? The answer, it depends on where you are in the cycle of life. If you are in your twenties, thirties, or even forties, your risk tolerant is most likely much higher than if you’re in your fifties and sixties since you are much closer to retirement.
Many financial advisor recommend 70% bonds and 30% stocks, or 60% bonds and 40% stocks when you hit retirement, I am not a fan of bonds because the returns are too low for my taste. But it’s a good option if you don’t want to see your portfolios fluctuate too much (some times by 30-40%).
I am currently in my early forties and I always tell my financial advisor to focus on growth for our portfolios and I think it will be the same even when I’m in my sixties. Why? You will just have to find out in another article that I will be writing later on!
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Time is a limited commodity…
