There are a bunch of different ways to invest your money and it can get pretty confusing. How you choose to invest your money depends on your personal goals and your risk tolerance. In some cases it also depends on your knowledge of the space. The easiest place to start is with a basic understanding of what some of the most common forms of investments even are and investigate the ones that sound interesting to you. Better yet, talk to your digital advisor about them and how they might fit into your strategy.
401(k) Plan A 401(k) is offered through your employer. It is a plan to which qualified employees can contribute a percentage of their salary on a post- and/or pre-tax basis. Many employers will offer contribution matching up to a certain percentage (free money!). Contributing to your 401(k) can also provide certain tax benefits.
Roth IRA A Roth IRA is an individual retirement account which allows you to save after-tax income up to a specified amount. The Roth is similar to a traditional IRA but your contributions are not tax deductible. They do however, grow tax-deferred and then are withdrawn tax-free after age 59.5.
Individual/Joint Taxable Account This is if you want to save additional after tax dollars. You don't get the benefit of pre-tax savings like a 401(k) or a Roth but you don't have limits on how much you can contribute.
Dividend Reinvestment Plan - DRIP This is a plan offered by a corporation that allows you to reinvest your cash dividends by purchasing additional shares on the dividend payment date. Most DRIPs allow you to buy shares commission free. Contribute money on a monthly basis and use your dividends to increase the value of your investment.
Exchange Traded Fund - ETF An ETF is an investment fund that holds assets such as stocks, commodities or bonds. An ETF tracks an index but unlike a mutual fund, it trades like a common stock on a stock exchange. ETFs usually have higher daily liquidity and lower fees than mutual fund shares. In case you're curious, we use ETFs at Wela.
Mutual Fund A mutual fund is an investment vehicle that is made up of a pool of funds collected from several investors for the purpose of investing in securities. Mutual funds are generally operated by money managers who invest the fund's capital and attempt to produce capital gains and income for the fund's investors.
Precious Metals This is a classification of metals that are considered to be rare or have high economic value such as gold, silver, and platinum. You can invest in precious metals by purchasing the physical specimen or by purchasing futures contracts for the particular metal. Metals are a controversial investment as they are highly speculative.
Certificates of Deposit - CDs CDs are typically considered safe because they are generally issued by commercial banks and insured by the FDIC. The savings certificate entitles the bearer to receive interest at a fixed rate for a period of time. CDs bare maturity dates ranging from 1 month to 5 years. Another option is to create a CD ladder where you stagger the maturity dates of your CDs such as 1, 2, 3, 4, and 5 years. Each year you will have the chance to buy CDs at higher rates should interest rates increase.
Bond A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. When companies or other entities need to raise money to finance new projects, maintain ongoing operations, or refinance existing debts, they issue bonds directly to investors instead of obtaining loans from the bank. The longer the bond maturity, or duration, the greater the chances of adverse effects. Longer-dated bonds also tend to have lower liquidity. Because of these attributes, bonds with a longer time to maturity typically command a higher interest rate.
Real Estate There are several ways you can invest in real estate: buy the property direct (for rent income, flip, or capital appreciation), limited partnerships (where you invest in a real estate partnership that typically invests in commercial real estate), and investment trusts (sort of like a real estate mutual fund).
Pay off Debt Yeah, you read that right. This is a guaranteed return. If you pay off credit card debt where you are paying 11.5% interest that's the same thing as earning 11.5% rate of return on the same amount of money invested in another assets. Moreover, this "return" isn't taxed like many other gains. If you're carrying debt you should consider this for your first investment.
What other terms are you curious about? Want more "Basics" posts like this one? Let us know in the comments.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.