Whether you’ve recently celebrated a major career move or have reached a stage in life where retirement doesn’t seem as far away, you’ve probably come to this article searching for information that will help you make progress towards your investment goals.
To help you get the ball rolling more quickly, we’ve put together the following list of investment concepts and considerations.
Retirement Savings Accounts (401(k)s / 403(b)s / IRAs)
Matching – This may sound too good to be true but it bears mentioning, if your employer offers a matching option for an employer sponsored plan, this is essentially free money going towards your investment account. While there are limitations regarding when and how you can access these types of accounts (something we’ve discussed in a previous post), free money is free money. Take advantage of this offering.
Risk – Many employer sponsored plans allow you to tune your risk exposure to your personal preference and stage of life. It is important to remember that your risk tolerance is unique to you and your investment accounts should mirror your risk tolerance, and not someone else’s.
Account Type – employer sponsored plans can vary in type. It is important to know what type is offered and what the advantages are to you. For example, if you have a Roth 401(k) and traditional 401(k) option, know the difference and what the benefits are to you. This account type shouldn’t prohibit matching but please note it could alter your current tax picture.
If you have a 403(b), 457 Plan or other option available, the same applies, know the difference and why each benefits you.
Mutual Funds
In essence, a mutual fund allows you to invest in an extensive portfolio of stocks and/or bonds designed around a specific investment strategy. The great thing about this approach to investing is the opportunity to seek a wider array of investment opportunities in one investment compared to the use of several different individual stocks or bonds. Plus, mutual funds also have the added benefit of having the portfolio managed by a team of investment experts.
When seeking which mutual fund or funds best suits your investment style, look for star ratings, manager experience, internal operating expenses, fees and historical performance before making any decisions. Also remember that growth and loss in these investment options is possible. Lastly, remember what we just discussed regarding risk tolerance. Your risk tolerance is not someone else’s risk tolerance. Each mutual fund should provide a risk profile that will help you determine if it aligns with your desired risk. Do not just look at a percentage return when determining a risk tolerance.
Check out this article to see more on mutual fund returns and considerations, The average 15-year return of a mutual fund.
Index Funds
Index Funds function similarly to Mutual Funds however instead of your money going towards a curated portfolio of stocks and bonds, you’re investing in a “clone” of a major financial index, such as the S&P 500. In other words, when the financial index grows, so should your investment. The same applies when it goes down.
Much like your risk tolerance is unique to you, expenses in mutual funds are unique to them. That said, Index Funds are sometimes referred to as passively managed because they are mirroring an index. Therefore the internal operating expenses of this type of investment are historically less than an actively managed mutual fund.
Although the past is no guarantee of the future, check out this article to read more on how the S&P 500 performed over the past several years, S&P 500 returns.
Exchange-Traded Funds (ETFs)
ETFs are a newer investment option in relation to market investments. In essence, they look similar to mutual funds and or index funds yet they are bought and sold like stocks and are traded on an exchange during trading hours. Mutual funds trade at market close or opening.
Much like stocks, mutual funds and index funds, ETFs are also subject to volatility and your risk tolerance should mirror your choice in investment.
Real Estate
If you’re into the idea of an investment you can touch with your own hands, real estate is a timeless option. Whether it’s putting money into remodels, additions that add to the equity of your own home, land, buying a fixer-upper with the intent to flip it or operate it as a rental property, this investment option can help diversify your investment portfolio. To learn more about real estate and it’s earning potential, check out this article, the average real estate investment in the US tends to return between an 8 and 10 percent yield year over year.
We’ve included real estate on this list because, assuming you’re not overextending your budget, it is an investment option that offers a different approach to investing. It is very important however to understand the risks associated with this investment option as they can differ from other investment choices.
It’s also important to know that real estate often requires a sizable amount of cash on hand to get started, maintain and grow the investment.
Every Investment Includes Risk
Knowing that risk exists in every investment helps to create a foundation from which to learn. The key is to determine what type of investments are best for you. Here are a few examples of risk. Cash provides liquidity but most often loses ground to inflation. CD’s and high-yield savings accounts provide a stable environment for cash however there is an opportunity cost associated with this stability. Rental property is often said to be inflation proof however mother nature doesn’t care about inflation. Bonds tend to be a place investors run when volatility nears yet one wrong move in interest rates and look out. And the stock market ebbs and flows daily.
All this to say, diversification is your friend. After you understand that risk exists and you identify the risk you’re willing to take, then learn how to diversify your investment portfolio within these identified risks. Following this path will help avoid two common behavioral investing mistakes known as passivity and knee jerk reactions. Doing nothing rather than something a little at a time is hard to recover from and making emotion based decisions in reaction to fluctuations doesn’t bode well for the long term.
Remember to set clear goals and a timeline for your investment plan, and be aware that even the best investors experience poor performing investments. If you’d rather not have that pressure squarely on your shoulders, give our team at Awaken Wealth Partners a call.
