This guide to investing your money in 2021 is going to help you figure out where to put any additional money you have.
There are many ways and many places to invest your money. What is the best option for you? Is it worth the time and effort to put all of your money into single stocks, or should you go with index funds or mutual funds, which give you exposure to lots of different sectors, while reducing your risks of having all of your eggs in just one single basket?
Take inventory of your own personal situation, your goals, and what you want your money to accomplish, and then make a decision that is best fits what YOU are trying to accomplish.
In this blog post, I'm going to examine 10 places you can invest your money in 2021, and give you the risks involved with each. I will also talk about the liquidity of each.
Of course you want to get the maximum return on investment (ROI) while being exposed to the minimum risks, but there are many ways to go about that. Remember, personal finance is personal, so what you ultimately decide to do depends on what you ultimately want to achieve. It's always a good idea to start with the end in mind and work backwards to see how you should be investing now, to reach the future you want.
As the year 2020 has shown us, with the COVID-19 pandemic, there are always surprises around every corner that are unavoidable and sometimes unexplainable, and the markets can become volatile in a hurry with no warning. In 2020 the stock market took some of its biggest swings, along with some of its biggest daily declines and strongest rises in its history.
Diversification is best, but there are other factors to consider, such as how much time you have to dedicate to watching the stock market, the length of time throughout your life that you have to invest, your goals for your money, your risk tolerance level and the percentage of return you are interested in getting over time.
Certificates of deposit (CD's)
Money Market accounts
1. Savings Account:
Savings accounts are the most basic of all savings vehicles. They are best if you need to get to your cash immediately, and represent a place to hold money for short periods of time.
They offer very little risks, but at the same time, they offer very little return as well. Typically, savings account are going to provide you with less than a percentage of interest. Don't expect your money to grow in a savings account because the annual rate of inflation is much greater then the interest you gain from a savings account.
Risks: There is virtually no risks with savings accounts because the money is federally insured by the FDIC. However, you are losing money due to the inflation rate, which represents a risk based on the lower purchasing power of your money.
Liquidity: Savings accounts provide you with access to money quickly, via online banking or in person banking. You have virtually 24 hour access to your money at any time.
2. Certificates of deposit (CDs):
CD's are issued by banking institutions, and they are generally, a low risk, and relatively safe, savings vehicle. CDs will provide you with a higher interest rate than a savings account, however your interest rate will depend on the term (time of maturity) of the CD. CD's are time deposits that have maturity dates. You cannot withdraw the money for a specified time.
The longer the time, the higher the interest rate, and the shorter the time, the smaller the interest rate.
The bank will pay you interest at regular intervals and when the CD matures, you will receive your entire principal plus any accrued interest. Always shop around because different banks offer different rates, which you will typically see advertised on the banks website. Banks and credit unions love to sell CD's.
Keep in mind that there are penalties for early withdrawals. Typically CD's are going to provide you with less than a percentage of interest, however, if interest rates from the Federal Reserve were to increase significantly, that would positively affect the rates offered by CD's.
Risks: CD's offered by banks are backed by the FDIC, so there is a lot of safety and security with CDs. CDs offered by credit unions are insured by the National Credit Union Administration (NCUA). The biggest risks with CDs is that if you lock your money away in a CD, then your money is not as liquid it needs to be to react quickly to a rise in rates, or as quick as you may want too.
There is also, because of the very low rates of return with CDs, the real possibility of inflation eroding away the spending power of your money, by the time maturity date is reached.
Liquidity: Again, CDs aren’t as liquid as savings accounts or money market accounts (see below) 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 Account:
A money market account is a deposit account that pays interest based on current interest rates in the money markets. They usually require a higher start up cost because of minimum balances, but they also will earn slightly more interest then savings accounts and CDs.
If you have an emergency fund, money markets may be a better alternative than just a normal savings account, because you will get a higher interest rate.
With a money market account there is usually a limitation to the number of transactions per month, and once you exceed that number, then penalties are assessed. They do offer greater access to your money than a regular savings account because typically they come with checks and debit cards, so they are relatively liquid. However, the rates are still pretty low and usually don't outpace regular annual inflation rates.
Risks: The biggest risk is the fact that inflation outpaces the return. Also, access to the funds (the liquidity) is often times very tempting and pose a risk of penalizations for exceeding the minimum access. The rates associated with money market accounts is often so small that it's not worth the high minimum entry amounts or all of the restrictions.
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:
Treasury securities are government debt instruments that are issued by the U.S. Department of the Treasury that are issued to finance government spending as an alternative to taxing the American public. Treasury securities are broken down into basically 3 categories based on their lengths of maturity: Treasury Bills (T-bills), Treasury Notes (T-notes) and Treasury Bonds (T-bonds).
Without going into the deep dive of Treasury securities, it's important to note that this is one critical way that the government raises money to pay for both it's projects and it's debts. These are some of the safest investment vehicles out there, based on the fact that they are backed by the full faith and credit of the U.S. government. They always pay as long as they are held to their maturity, which can range from only a few weeks, to 30 years.
There are a couple of ways to purchase Treasury securities. You can buy these from either your traditional brokerage house, such as Fidelity or Vanguard, or you can purchase them through Treasury Direct.
Many people opt to purchase these through their brokerage account through a secondary market or with ETFs, because of some of the restrictions at Treasury Direct.
Treasury money market accounts also offer more convenience and liquidity than Treasury Direct.
These treasury securities are a slightly better option for the more savvy investor.
Risks: Although Treasury securities are considered very low-risk because they are backed by the U.S. federal government, there is still some risk based on inflation and fluctuations in the national interest rates. When rates go up investors flee from Treasury securities to get a higher rate elsewhere, and there are some losses that may occur when you sell prior to the maturity date. As with any of these investments, quicker mature dates offer less risk, but also offer a lower return.
Liquidity: Treasury securities are considered to be fairly liquid, as they redeem at maturity. There are some nuances to the various types of Treasury securities, so I advise you do your research. This can be a good place to store away some of your money if you don't want to focus on the more riskier investments that are below.
5. Government bonds and Corporate bonds:
A Government bond is a debt security issued by a government, or its agencies, to support government spending and obligations. Government bonds can pay periodic interest payments called coupon payment. Government bonds issued by national governments are often considered low-risk investments since the issuing government backs them.
The funds raised by the government bonds invest in debt instruments like T-bills, T-notes, T-bonds, or mortgage-backed securities issued by governments or government businesses such as Freddie Mac and Fannie Mae.
A Corporate bond is a debt security issued by a company and sold to investors. To put it simple, Corporate bonds are a way a large company finances its debt. The company gets the capital it needs and in return the investor is paid a pre-established number of interest payments at either a fixed or variable interest rate. When the bond expires, or "reaches maturity," the payments end and the original investment is returned.
Corporate bonds are a little more risky, as they are typically backed by the ability of the company to repay. Because of this extra risks, these bonds are subject to a rating system that rates the company's credit worthiness. There are three rating agencies; Standard & Poor, Moody's, and Fitch ratings. The low risk bonds are called Triple A and the high risk bonds, sometimes called "high risk", which are from company's with the poorest ratings. These with the poorest ratings are infamously referred to as "junk bonds".
Risks: While Government bonds are among the safest, Corporate bonds offer more risks because of the obvious volatility that a corporation could suffer through the various factors that make it more susceptible to risks then government entities.
Inflation and interest rates have an impact on bonds. Specifically, as interest rates rise, the price of bonds drop, and if interest rates decline, the price of existing bonds rise. So in an environment where interest rates hit historical lows, you will see bond prices go up as investors shift money over to the bond markets.
It's important to note here that bonds are not FDIC insured. Corporations credit ratings are sometimes downgraded, or they run into financial problems, or they can default on the bonds. To reduce your risks with bonds, get highly rated investment grade bonds or invest in a bond index, which spreads your bond investments across hundreds of bonds.
Liquidity: Bond fund shares are highly liquid, but their values fluctuate depending on the interest rate environment, and you can buy and sell bonds every business day. You can reinvest dividends and make investments any time.
A quick word about Municipal Bonds: A municipal bond, often times known as a muni bond, is a bond issued by a local government, or one of their agencies. It is generally used to finance public projects such as roads, schools, hospitals, airports and other infrastructure-related repairs.
When you buy a municipal bond you are essentially loaning money to a city or state for some type of public works. Nowadays there are Municipal bonds being issued to simply pay the interest on previous bonds, which is another topic for another blog post. Municipal bonds have a fair amount of risks associated with them because they are based on the debt of the local, city, or state governments.
Check out the video below for more information on Municipal Bonds and their tax benefits
6. Individual Stocks:
Stocks are shares or pieces of a company. When you buy a single share of a stock, you essentially become a partial owner of the company's profits. You can buy single stocks from individual companies or you can purchase groups of stocks such as mutual funds, index funds, and exchange traded funds (ETFs), which are discussed below.
Stocks offer you better interest rate returns than the previously mentioned products because of the lack of management fees going to the brokerage company, but with those better rates come additional risks. Factors such as how much time you have to invest, your experience investing, and your tax planning needs, all come into play when deciding if investing in individual stocks are the right choice for you.
Click HERE to check out how to value individual stocks
Risks - There is some inherent risks when investing in single stocks. Stocks are individual companies, so it's always wise to invest in many individual stocks over broad sectors in order to get the diversification you need. With single stocks, diversification is the biggest key to keep in mind. Yes, single stocks allow you to avoid some fees, but diversification is the biggest key.
Keep in mind that if a company files for bankruptcy or is hurt negatively by any number of internal and external issues, it will likely impact the value of your stock(s). Individual stocks can also add to the emotional side of investing, which can pose even greater risks.
There are also dividend paying stocks that can be bought and sold as individual stocks. These dividends stocks could provide a sort of offset, or buffer, to some of the risks inherent with individual stocks. There is also the potential to invest in the S&P 500, which is made up of the market’s top companies, which could sort of hedge some of the risks.
Liquidity - Stocks are considered a liquid asset, however, they are a little less liquid than some of the other options mentioned in this blog post. Stocks can be sold immediately by electronic means and can be converted to cash in a relatively quick manner.
7. Mutual Funds:
A mutual fund is a professionally managed investment portfolio of funds that pools money from many investors to purchase/invest in something. Imagine a group of
This is by far the most simple way to explain a mutual fund:
Imagine 10 people standing around a bowl. All 10 people take a $100 bill out of their pocket and put it in the bowl. The 10 people have just "mutually funded" the bowl. So the bowl now represents a mutually funded investment because it was mutually funded. Hope that makes sense.
Put another way, mutual funds are a group of changing stocks that are actively managed by stock pickers, and thus you pay fees to those stock pickers (fund managers, stock analyst, etc.). This increases of the expense ratios (cost to manage the mutual fund) and these fees, over the course of many years, can really add up.
A "mutual fund" refers to a funds structure. When you invest in a mutual fund, it's not trading shares of specific companies held by the mutual fund; it is trading shares of the mutual fund company itself. It's also important to note that Investors buy and sell their stakes in mutual funds at a price set at the end of a trading session; their value does not fluctuate throughout the trading session (day).
Risks - There is always the risk of not getting the higher return you are paying the fees for, and the risk of inflation, market fluctuations, and negative externalities. Another risk is the fees associated with the management of the funds. These fees can have a significant impact through lowering your overall rate of return. Also keep in mind, as with any stock related investment, returns are not insured nor guaranteed.
Liquidity - Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.
8. Index Funds:
An index fund is a type of mutual fund, or a type of exchange-traded fund, that is designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. While mutual funds are actively managed in an attempt to outperform the market, index funds primary goal is to seek the market-average returns.
In other words, an index fund simply tries to match the investment return of a benchmark stock market index, such as the S&P 500. And while the returns on mutual fund are a bit more volatile, the returns on index funds are slightly more predictable over long periods of time.
Keep in mind that whereas a "mutual fund" referred to the funds structure, an "index fund" refers to how the funds are actually invested or the funds investment strategy.
Index funds are passively managed. There is no fund manager or group of analyst picking funds to go inside of it. The investment mix is automated to match the exact holdings of the benchmark index. This means less management fees (lower expense ratios) and therefore index funds offer a slightly more attractive investment vehicle for investors that want to be more passive in their approach. Index funds have known to be called the "set it and forget it" type of investment.
History has shown that it’s extremely difficult to beat passive market returns (a.k.a. indexes) year in and year out. I am a fan of index funds because they are sort of the sleep-easy investment. They are highly regulated, they cost very little to buy and own, and they provide massive diversification that's easy to understand and control.
Risks - Index funds can leave you a little vulnerable when markets downsize because it doesn't necessarily make room for an investor to react to downturns of specific markets being tracked by the index. Index funds are exposed to the same risks as the index they are tracking. There are also possibilities of tracking errors or under performance.
Liquidity - They're very liquid and require little emotional involvement. Similar to mutual funds, investors can easily redeem their shares at any time.
A quick word about Exchange Traded Funds (ETFs):
An exchange-traded fund is a type of investment fund, and it's an exchange-traded product (they are traded on stock exchanges). ETFs are similar to mutual funds, except ETFs are bought and sold throughout the day on stock exchanges like ordinary stocks, whereas mutual funds are bought and sold based on their price at day's end.
ETFs have a specific price attached to them, which makes them able to be bought and sold easily. ETFs can contain all types of investments including stocks, commodities, or bonds, and they offer low expense ratios and lower fees, which make them an attractive option.
Click HERE for a great article on the difference between Mutual Funds and ETFs
Click BELOW for a great video on the differences between Index funds, Mutual funds, and ETFs
9. Real Estate:
Real estate is always an option, and an attractive possibility for anyone looking to invest. Rental housing, buy and flips, single family homes, or multi-unit homes can all be great investments. If you are looking to go this route, be sure to pay close attention to the location of the property, trends in the local area, your finance options, and interest rates.
The buy and hold strategy is one that can offer some of the best long term gains, but wholesaling and flipping have always been great cash generators. Do your research, learn as much as you can about this investment strategy. If you are looking to own rental homes, there are a ton of resources available to learn. There is considerably more work to this investment strategy then meets the eye.
Click Below for tips to manage your rental investments.
If you hold your assets over time, gradually pay down debt, and grow your rents, you’ll have a powerful cash flow when it comes time to retire. How you buy the property is key. Again, begin with the end in mind when purchasing investment real estate.
Risks: The biggest risk when purchase rental property, or real estate in general, is the possibility of overpaying. While fluctuations in the housing market is a little slower and methodical, those of us that invested in real estate in the mid-2000s are well aware of the type of downturns real estate market can go through.
There is also risks associated with repairs, finding good tenants that pay in full and on time, and managing the property for as long as you own it. There are cost associated with all of this. Be prepared to consider, plan for, and manage all of these risks.
Liquidity: Housing is one of the least liquid investments. If you need your money, in cash, quickly, real estate may not be a good investment for you. Even to sell quickly takes several months, in many cases. There are also brokerage fees, insurance, taxes, and other costs to consider.
10. Cryptocurrency - I've saved the most volatile investment for last. Cryptocurrency has been the proverbial "talk of the town" for the last few years. It is a digital or virtual currency, that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.
Many cryptocurrencies are decentralized networks based on what is referred to as blockchain technology. Cryptocurrencies are not issued by a central authority, and are therefore unregulated by a central authority. So they are not subject to government interference or manipulation. This is good on one hand, but it significantly adds to their very high risks on the other hand.
The most widely known cryptocurrency is Bitcoin, which was created in 2009 by an unknown person using the alias Satoshi Nakamoto. Bitcoin transactions are made with no middle men, or in other words, without banks. Bitcoin is fast becoming an accepted medium of exchange.
Right now, bitcoin can be used to book hotels on Expedia, shop for furniture on Overstock and buy Xbox games. There is a lot of hype about it being traded and some of the quick gains it can offer. Be careful with this one.
Risks: Cryptocurrencies are very volatile. Although Bitcoin is becoming more widely accepted, cryptos are not generally accepted by most retailers and businesses worldwide. The fluctuations are not for the faint at heart. Millionaires have been made investing in cryptos, but many more folks have gone completely broke investing in cryptos.
Liquidity: Many cryptocurrencies can be traded on an open market and so their conversion to cash makes them a liquid asset, in general. But the lack of regulations, and the volatility, add to uncertainties that can sometimes affect the liquidity of cryptos.
Click HERE to learn more about cryptocurrencies
How you decide to invest, is completely up to you. Begin to develop an investment plan as soon as possible, and make the right decisions based on your goals. Good luck and Happy Investing!
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