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How To Invest $20k: 8 Ways To Increase Your Money’s Value
Modified date: April 6, 2020
You don’t want the money to sit around and get stale. If you’re not investing the money, you’re actually losing money due to inflation.
Here are 8 ways you can invest that money, including suggested allocations and other tips.
1. Invest with a robo-advisor
Recommended allocation: Up to 100 percent
Investing your $20k with a robo-advisor is a great option, as you’ll immediately be invested in the stock market in a broadly diversified way. If you’re unsure of exactly what a robo-advisor is, be sure to read our detailed article on what they are if they’re right for you.
In a nutshell, a robo-advisor is like a financial advisor, but instead of a person picking out expensive investments for you, a company like Betterment creates a series of algorithms to choose, diversify, and adjust your investments over time, all based on your financial resources, tolerance for risk, and investment timeline.
You can choose a regular, taxable investment account or set up an IRA. My advice would first be to set up and max out either a Roth or Traditional IRA, then use the rest for a taxable investment account.
Currently you can contribute up to $5,500 per year to an IRA, unless you’re older and meet catch-up qualifications.
If you want to invest your money with a robo-advisor, I suggest checking out Betterment. They have an easy-to-use platform and a very low fee structure. Plus they have no minimum starting balance, meaning if you’re not willing to invest the full $20,000, you can start with a much lower amount and scale up from there.
Another one I really like is M1 Finance. Most robo-advisors won’t let you select individual stocks to add to your portfolio, but with M1 you can.
That means you can rely on their expertise to create the bulk of your portfolio, but you can also add in your own preferred stocks on top of that. Plus, they charge no commissions and have no minimum starting balance.
Wealthfront automatically invests your money into low-cost index funds, which reduces your risk while bringing maximum earnings. You’ll pay only an 0.25% annual advisory fee for the service, and Wealthfront uses a strategy called Tax-Loss Harvesting to lower your tax burden. Once you’re set up, you’ll also get the benefit of Wealthfront’s insights, which shows you how much you can expect to make in the years to come.
2. Invest with a broker
While many folks prefer hands-off investing with robo-advisors, there are plenty who like to invest on their own. Brokers can help you do that. Before online brokerages come onto the scene, folks used to pay hefty fees to a broker who would make trades on their behalf. That’s quickly becoming a thing of the past.
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For a fraction of the cost of traditional brokers, online brokers like E*TRADE and TD Ameritrade can help you educate yourself about the stock market and invest your money quickly and easily.
You Invest by J. P. Morgan
You Invest by J.P. Morgan has two options for investing. You can use their self-guided option for free, with no investment minimums. There’s also You Invest Portfolios, which gives you access to experts who will help build and manage your investments. You’ll pay a small annual fee of 0.35% for that option. The easy-to-use app means you can monitor performance on an ongoing basis.
E*TRADE, one option for an online brokerage, now offers trades for free. That’s right, what used to cost $6.95 now costs nothing — you can make online US-listed stocks, options, and, ETFs for a $0 commission (see full pricing here ). But it’s not just the low-cost trading that won us over. E*TRADE offers many educational resources that actually explain complicated investing well.
When you sign up for Webull, you get more than a platform for managing your investments. The Webull dashboard gives you a real-time overview of how the market is performing.
You can also add stocks to a watchlist and keep an eye on them. Once you’ve built your portfolio, you can monitor it through the website or the mobile app. But what I like best about Webull is that it’s completely free.
3. Do a 401(k) swap
Recommended allocation: Up to 100 percent
If you’re employed and have $20,000 to invest, one option is to effectively “swap” the money into your 401(k).
Since that money typically comes from your paycheck or bonus, you can increase the contribution amount significantly (usually up to 75 percent of your salary) until you have contributed $20,000—using the cash you have on hand to replace the lost income.
How a 401(k) swap works
Say you make $40,000 per year and you’re putting 5 percent into your 401(k) right now. Not including any employer match, that’s about $2,000 per year. Now let’s say you come into $20,000 that you want to invest.
You could stash that $20,000 in a liquid, high-yield savings account and then increase your 401(k) contribution, so it wouldn’t feel like you were living off of any less. (Though I’d still challenge you to do so!)
So instead of a five percent contribution, change it to 50 percent—yes 50 percent. After a year, you’ll not only have invested $20,000 in a 401(k), but there’s another huge benefit:
You’ve just reduced your taxable income by 50 percent. A 401(k) is pre-tax money, so anything that you get in your paycheck after your 401(k) contributions is considered your taxable income.
This means that, in the government’s eyes, you’ve only made $20,000 in one year, not $40,000. You’ll pay fewer taxes in most cases, so it’s a win-win.
If don’t have a 401k and you want to start saving for your future, I’m gonna recommend blooom, a robo-advisor that specializes in managing your 401k. Choose a risk tolerance, and blooom will make recommendations for you based on your age, income, and other factors.
Get started with Blooom and get $15 off your first year of Blooom with code BLMSMART. Or check out our Blooom Review for more information.
4. Invest in real estate
Sure, you could take the chance of buying a rental property and becoming a landlord. But even if it works out, it’s a complete time-suck. Plus, you’re missing out on the potential rewards from investing in large-scale commercial projects.
Until recently, you had to be an accredited investor to invest in these types of projects (or have a ton of money to put in). But now there’s a real estate crowdfunding investment site called Fundrise that creates loans for people or groups who are buying commercial real estate.
Think BIG projects, like apartment buildings and office buildings. They then bundle these loans together and make it an investment, called an eREIT. They then sell shares of the eREIT to you as an investor, directly through their site.
In other words, they make it incredibly simple for you to invest in big real estate projects. What’s even better is that you can start investing with as little as $500. Now those of you that have read my thoughts on investing over the years know I hate correlating past performance to future returns, but it’s worth noting that Fundrise has historical annual returns between 8.7 and 12.4 percent.
That’s hard to ignore.
So with $20,000 to invest, adding at least some diversification in real estate is a wise investment decision. And Fundrise can help you accomplish that quickly and securely.
Plus, with such a low barrier to entry, Fundrise makes it easy for you to start investing in real estate without sinking all of your money into property or expensive REITs. I think this is a great way to dip your toe in the real estate waters. Check out our full review.
5. Put the money in a savings account
Some high-yield savings accounts will give you one percent annual percentage yield (or higher), which is awesome… for a savings account. You’re better off, however, putting your money in the stock market, taking on a little more risk for a higher potential reward.
The other thing to consider is that you can invest your money with a robo-advisor in a super-conservative way. For example, we’re saving for a new home right now and I chose to take my money out of my high-yield savings account and put it into a Betterment account with only 10 percent stocks and 90 percent bonds.
This is by no means going to give me the 6 percent-plus return I’m expecting from my stocks, but I’m hoping it’ll do better than a typical savings account, while also keeping my money liquid, meaning I can take it out of the account whenever I need.
6. Try out peer-to-peer lending
Recommended allocation: Less than 10 percent
Peer-to-peer lending is a way of loaning money to someone else who needs it. This could be for anything: a business idea, student loans, or just paying down credit card debt.
The benefit to peer-to-peer lending (or P2P lending) is that your returns can be much higher than if you were to invest in stocks or bonds. The risk, however, is much greater, as many people won’t pay the loan back on time or won’t pay it back at all.
If you’re going to look into peer-to-peer lending as an option for investing part of your $20,000, be sure to do as much research as you can.
Here you can read the review of two of our favorite peer to peer lenders, Lending Club and Prosper. Before diving into P2P lending, make sure to do your research, because the risk is considerable. Also, check out this article comparing LendingClub and Prosper to find out which is right for you. If you do want to get started, click here to invest with Lending Club and here to invest with Prosper.
7. Start your own business
Recommended allocation: Up to 100 percent (be aware of the extremely high level of risk)
I want to emphasize that starting a business is extremely risky. If you put 100 percent of your $20,000 into starting a business, there’s a strong chance it’ll fail and you’ll lose everything.
Now that I’ve gotten that disclosure out of the way, starting a business can be incredibly lucrative (and fun). You just really have to know what you’re doing.
This all starts with a solid business plan. If you don’t have a comprehensive business plan, don’t even bother thinking of starting a business.
You also have to dedicate a lot of time and energy to that business. Expect to work far more hours than you would as a regular employee.
The payoff can be great. If you find something that there’s a market for, and you know how to operate a business the right way, you could end up doing exactly what you love and making great money from it.
8. Pay for an education
Recommended allocation: Up to 100 percent
My dad once told me that the only thing someone can never take away from you is your education. It has stuck with me to this day because it’s true.
You can lose all of your money in the stock market. Your business can fail. But if you have a strong education and a degree, that’ll never go away.
If you don’t have a college degree, consider getting one in something you really enjoy, but is also marketable. If you already have a college degree, consider an even higher one, say a master’s or a PhD.
If that’s still not for you, there’s always the option of paying for some of your child’s education. If you have children and haven’t started a college savings account for them, now might be the time.
A 529 Savings account is an excellent choice for college savings, and there are a ton of benefits to having one. In fact, I just opened one up for my son who was born earlier this year.
While $20,000 isn’t going to cover the full cost of a degree in most cases, it’ll at least get you started.
Remember that diversification is key, especially with this kind of money. I’d suggest you don’t put all your eggs in one basket unless you really know what you’re doing.
The exception to this is investing with a robo-advisor. I would feel completely comfortable investing $20k with a robo-advisor, knowing that my money is going to be well-diversified. Just make sure you mix up the type of accounts you have (i.e. retirement vs. regular investment accounts).
Don’t forget about the value of an education or the thrill of starting your own business. But be sure to know the risks involved.
Whatever you do – do something. Indecision is a losing game in the financial world.
Recommended Investing Partners
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No Minimum Low-fee robo-advisor with no minimum investment. Creates fully-automated portfolios based upon your desired allocation. Visit Site
$500 Minimum Wealthfront requires a $500 minimum investment and charges a very competitive fee of 0.25% per year on portfolios over $10,000. Visit Site
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A great investment I have, that I wish I could throw $20,000 in, is the company I work for, American Homeowner Preservation. They do the “equity crowdfunding” thing so it’s an individual investment online and you don’t have to be accredited. It makes it super easy. I threw $100 in just to see how it works out and I get little distributions every month (1% a month for 12% annually, which is the cap) like clockwork.
I’ve never had anything anywhere even close to 20 grand to invest…in AHP that’d be $200 a month in distributions. That’s kick-ass passive income, but it feels more personal than using a robo-adviser (I used Acorns before but stopped after a few months).
Your next post should be, “How to get $20,000 for investing” рџ›
How can someone put $20K in to a pre-tax account like a 401K or 403B, like your second recommendation, when the limit for a single person is $18,000?
You are right and Chis is wrong. $18k is the 2020 401k limit set forth by the IRS.
I see this all the time in financial blogs, but really what is the percentage of companies that match 401(K)s these days?
I am in my late 30’s and have asked my friends if their companies offer a 401(K) match and they laugh at me.
Agreed unfortunately. It’s not as common as it perhaps once was. I had one company that matched (investment bank) but you only kept it after being “vested” after 2 years of employment.
What if I’m saving for a home upgrade in the next year? For example, if I have $100k sitting a savings account, does it make sense to transfer to a conservative robo advisor if I’ll just be removing the funds in 12-15 months?
You can trust the integrity of our balanced, independent financial advice. We may, however, receive compensation from the issuers of some products mentioned in this article. Opinions are the author’s alone, and this content has not been provided by, reviewed, approved or endorsed by any advertiser.
10 Best Investments Sites To Invest Like a Pro
Updated March 24, 2020 By Josh Patoka
Some of the links included in this article are from our advertisers. Read our Advertiser Disclosure.
Reviewed by Deacon Hayes
Investing in individual stocks is a dream for many investors, but they don’t because it can be too risky for their level of investing experience. The best investments sites let the average investor buy individual stocks while minimizing risk.
With these sites, you can receive expert-researched stock recommendations to invest in and earn long-term profits that potentially outperform the market.
I’ve personally been investing in individual stocks for the last decade. The first individual stock I purchased was company stock in my 401k plan. To diversify my portfolio, I began buying individual stocks in my personal brokerage accounts because of the recommendations from investment sites and newsletters like these.
At A Glance: Our Top Picks for Investment Sites
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Table of Contents
The Best Investments Sites for Any Investor
While you can make a fortune trading options, shorting stocks, or investing in penny stocks, you should leave these investing strategies to the pros.
When you are just beginning to diversify your portfolio or want to own stocks that provide steady dividends, you only need to buy individual stocks that should outperform the market for the next three to five years.
The best thing you can do is visit a few of these sites and decides which ones offer the most valuable information to you. It’s always good to get your information from at least two different sources so you can cross-check opinions to gain a complete understanding of the market and your potential investment.
To maintain a diversified portfolio, don’t forget that you can also use these resource below to research ETF investments too.
1. Motley Fool Stock Advisor
When you’re ready to buy individual stocks, you should consider Stock Advisor from The Motley Fool. Each month, brothers David and Tom Gardner release two new recommendations for stocks they believe will outperform the market long-term.
Since Stock Advisor launched in 2002, brothers David and Tom Gardner release two new picks each month. David’s picks alone have outperformed the S&P 500 by 513.8%! Tom’s picks have outperformed the same benchmark by 88%. While your S&P 500 index funds held during the same time period would have grown 93% by tracking the market performance, picking the right individual stocks can help you actually beat the market.
I personally subscribe to three different investment newsletters, including Stock Advisor, to make informed investing decisions. While I’ve had a few losers along the way (like any investor), I’ve been pleased with Motley Fool’s advice so far.
To help you understand David and Tom’s investment philosophy clearly, here’s how Motley Fool sums up the brothers’ investment philosophy:
It’s a generalization to be sure, but David swings for the fences. He’s willing to take the occasional stumble, so long as his total portfolio is up. Tom, on the other hand, never wants to see one of his stocks down 20% or 30%. He prefers to score runs consistently through constant base hits; David’s more about home runs. You may be somewhere in between. That’s why it’s important that you pick your investments on a stock-by-stock basis, just like we do.
Although you don’t have to buy every recommendation, you need to buy several of them to be a successful investor. Stock Advisor only recommends you to sell a stock when it appears the company won’t outperform the market for the next three to five years.
How to Be a Successful Investor with Stock Advisor
Besides two monthly picks with a detailed analysis, I probably enjoy the straightforward investing model Stock Advisor follows. Each recommendation explains the current company fundamentals, why the stock is a good pick for at least the next three years, and the potential investment risks that might cause you to sell the stock sooner than anticipated.
David and Tom’s goal is for you to eventually own at least 15 stocks. To make your decision easy, they categorize their recommendations into the following categories:
- Starter Stocks (10 proven winners that can benefit any portfolio)
- Best Buys (The best recommendations selling at a relative to discount to future earning potential)
Stock Advisor recommends investing in at least three starter stock recommendations first. After that, you can expand to their best buy recommendations to invest in stocks that have more growth potential but might also have more volatility.
Besides these stock recommendations, you can also create a personal watchlist to track potential future investments, read investing articles, and interact with other Motley Fool members in the community forum to bounce investing ideas around.
An annual subscription to Stock Advisor costs $99 or you can pay $19 monthly. With either option, you get a 30-day free trial.
Personally, I never spend more than $199 per year for a single investment site. Following this rule, Stock Advisor is a bargain for the caliber of investment advice you receive as similar newsletters easily cost double the price.
One of the most widely respected investment rating sites is Morningstar. Even the free investing apps use an ETF’s Morningstar rating to help you easily reach prospective investments.
Like other investments sites, you can access a trove of free articles to help you understand the markets and investing ideas. You will need to purchase a premium subscription ($199 annually) to access the Morningstar rating and detailed analysis for investments.
Sign up for their 14 day free trial and get up to $100 off an annual membership with this link.
Many beginners and experienced investors like Investopedia because of their educational database, market news articles, and their investing simulator.
For free, you can make simulated investments with a $100,000 starting balance to test investing ideas! Before you invest your own money with some of the investment ideas, you can see how the play out with paper trades first.
Investopedia has also rolled out an online academy where you can take video courses to learn more about how to invest. All of the best investments sites include how-to articles, but maybe you enjoy a more interactive learning method.
Want a FREE daily email about investing? Check out Morning Brew so that you can stay up to date with the stock market!
Zacks provides some free investing commentary but their premium service also provides a list of “Top Stocks to Buy” and report cards for over 5,000 individual companies. Each company is assigned a grade and the potential upside and risks for present and future perfomance. They also rate the best companies by industry if you want to gain exposure to the healthcare or technology sectors for instance.
While any investor can benefit from Zacks Premium Research, it’s probably a better option if you are following a particular investment strategy and can use their stock screener so you can filter stock recommendations by some the following traits:
- Earning Surprises
- Best Industries
At $249 a year (after the 30-day free trial), you do get valuable research but you also have to invest more money so your investment returns can “pay” the annual subscription fee. If you still need to buy your first stock or you already have access to similar analyst reports in your brokerage, Zacks might not be the best option at this time.
5. Seeking Alpha
Seeking Alpha is arguably one of the best free investments sites for free advice. I personally subscribe to the daily Wall Street Breakfast email that includes a quick summary of the market’s top headlines. It let me quickly track any recent moves for the positions I hold or planning to acquire.
You can also read articles to get investing ideas and read market commentary from Seeking Alpha contributors. Personally, I use these article during the research phase so I better understand an investment recommendation.
Maybe you’ve received an envelope in the mail from American Association of Individual Investors (AAII). Many people regard AAII as a respected source for learning how to invest in stocks, ETFs, and mutual funds. You can also use their model investment portfolios as an example to build your own investment portfolio.
An annual subscription only costs $49 a year which makes AAII one of the most affordable paid investment research sites.
Barron’s is a highly-respected investing publication that offers daily market insights and weekly stock recommendations. You can subscribe to the digital version or also receive their weekly print newspaper if you still prefer reading investment advice on paper instead of a computer screen.
Each week, Barron’s gives readers five new investing ideas from a team of individual stock pickers. Many subscribers usually follow the recommendations of the portfolio that best represents their investing strategy. These ideas focus on company fundamentals, much like the Motley Fool Stock Advisor so you don’t have to worry about short-term trades that require you to closely watch the markets.
If you’ve ever read a copy of The Wall Street Journal, then you will be very familiar with Barron’s content format.
INO is another investments site that offers free market analysis and a weekly stock pick. Of course, you can also opt for one of their premium MarketClub which offers top investment recommendations for stocks and ETFs plus advanced research tools. For casual investors that only want basic commentary and the free weekly stock pick, you will find all the information you need without becoming a paid subscriber.
Kiplinger’s is best known for their monthly personal finance magazine that offers investment recommendations and money management advice for every age. An annual subscription to the magazine costs $19.95.
Several columnists provide monthly investing ideas, plus each month features a special report of other stocks, bonds, ETFs, and mutual funds you might want to buy too. You can act on one of the new recommendations or follow one of their investing lists:
- Kip Dividend 15 (Best Dividend-Paying Stocks)
- Kip 25 Mutual Funds (Best 25 Mutual Funds to Own)
You won’t find the same level of deep analysis as some of the other recommendations on this list, but Kiplinger’s ranks as one of the most trusted magazine brands. If you follow the buy and hold investing approach and act on several of their recommendations, you should have no problem earning consistent investment income.
CNBC is the most watched investing news channel. To save time (and the cost of a cable tv subscription), you can visit their website to read the numerous articles for free.
You’re going to find bullish and bearish sentiment so you should use this as a research tool and to keep up with the latest market news. If investing news is being made, it’ll probably land on CNBC first so it’s worth a regular visit if you’re curious what’s happening in the financial world.
Because CNBC is mostly news articles, make sure you read the bull and bear-side opinions for your potential investments. You can also use the content to gauge market sentiment in addition to tracking current financial events.
The Wrong Way to Buy Individual Stocks
Once your investment portfolio has a solid allocation of ETFs and index funds to minimize market volatility, you’re ready to begin investing in stocks. As a general rule of thumb, each stock you buy should only be a maximum of 5% of your total portfolio to minimize your downside risk. If you have $10,000 in your brokerage account, each stock position might only be $500 if you follow this rule.
Using investment sites to purchase stocks can help you avoid these common mistakes:
- Investing in company stock just because you work there (i.e. Enron or General Electric)
- Only buying stock for brands you use (the product might be good, but their business model isn’t)
- Trading stocks on headlines (momentum trading) instead of long-term fundamentals
- Investing in stocks without understanding the company’s business model
- Having a single position take more than 5% of your total portfolio allocation
- Not performing your own due diligence (always conduct additional research for any recommendation)
Stock investing isn’t a “get rich quick” scheme. Although there are successful day traders and momentum traders, most successful investors follow the “buy and hold” approach and ignore the periodic share price dips.
This is why it’s so important to get investment advice from a third-party resource. Investing in stocks and ETFs can be easy and successful if you use the proper resources.
Professional investors rely on many of the same resources mentioned above to research potential investments. You can access to the same information without paying hefty advisory fees or subscribing to a $1,000+ investing newsletter.
When you’re ready to start investing in stocks and ETFs as a DIY investor, you can succeed when you use these investments sites.
Which investments sites do you plan on using first? Do you plan to trade stocks, ETFs, or both?
Josh is a personal finance writer with his prior professional experience as a transportation operations supervisor for an S&P 500 company.
He paid off $80,000 in consumer debt and uses his experience of getting out of debt and changing careers to write about many personal finance topics including making money, saving money and investing.
He has been featured in the US News and World Report, Student Loan Hero, and more.
I rarely see anyone recommend Investor’s Business Daily. I have subscribed since the 1980’s and it has proven to be invaluable to me. Whether you subscribe to the CANSLIM principle or not, it contains a wealth of information not found elsewhere.
Thank you for sharing your investing story with us!
What about SuperStockScreener.com? I’ve been subscribing for years and their picks have made me a lot of money.
Thanks for the suggestion!
I am a Motley Fool subscriber and have been very happy with that for several years. I though feel the services are very much focused on the US markets, and I would like to diversify my portfolio towards EU and Asia. Anyone having some good recommendations for similar services covering those markets more?
I feel Zack’s basic service is ok, but their higher paying (more expensive service offerings) get information earlier than other clients. By the time I am reading information to buy a stock, stock is already up by 5 to 15% !. That means somebody is ahead in this game! You did not mention Value line service which is one of the best service, little more expensive though.
Thanks for the feedback David. We will take a look at Value Line.
Best and safest way to invest 20k
I just came into about $20,000. I know its not a whole lot of money but for someone my age (22) it seems like a decent amount to get me started on the right road. I am looking for the safest, but most effective, way to invest this money. I am told some mutual funds make 15-20% depending on where its invested. I have also thought about putting it all into ford stock or some safe stock and putting like 2-3k in penny stocks.
Anyway, just looking for some ideas from some of you who may be where I want to be in the next 10 years (multi-millionaires
How soon will you need to spend this money?
If it’s 5+ years index funds/ETFs are fine (avoid individual stocks). If it’s less than that you need to stick to money market, savings, etc. Interest rates suck right now but should improve within a year. Don’t get locked into a sucky interest rate with a CD.
Mark from Plano
Lifestyle change – no homo
QUESTION NUMBER 1
For how long do you plan to invest it?
QUESTION NUMBER 2
How much risk are you willing to take, e.g. how much (if any) of your principal are you willing to lose?
Thanks for the responses.
For the questions above:
I don’t have any set time. I am not in any real financial need of the money just yet. As far as risk the post above kinda scared me lol. 20 to 10k would make me sick haha. but I’ve always been the type of person who believes that in order to make gain you have to take risk. This is where I am torn.
Not one of the investments you listed would be considered “safe” in any reasonable context. Maybe as opposed to dropping it on black at the casino, but that’s about it. You can lose up to 100% of your investment in any of the investments you mentioned. Penny stocks are the worst. Investing 100% of your money in a distressed company in a distressed industry (Ford) is not much better. Mutual funds are the safest of the ones you mentioned (that’s not saying much) but any mutual fund with a history of returning 15-20% will be in a higher risk, more volatile sector that as likely as not will lose that much (or more) in any given year.
You need professional help. Find a fee based financial planner (fee based is key) to help you decide on a plan. If you don’t have a 3-6 month cash reserve, then this money should go into a CD ladder for a rainy day. After that you can start thinking about investing in equities or bonds.
A good financial planner can help you assess your risk tolerance. Think about this: If you got your brokerage statement and this money had gone from $20,000 to $10,000, how would you feel? If you said anything but “calm” then the investments you listed are probably wrong for you. If you said that you’d want to vomit, then you need a much safer investment. Scared money makes bad decisions. Don’t do anything until you have a well-thought out plan.
This. If you don’t have a cash reserve, that’s what you should do with a chunk of the money.
I believe conservatism is race-warfare and culture-warfare, which I find to have horrific outcomes, whereas class warfare is ultimately mostly positive in my opinion (Nameback)
there are no grounds to say that Bieber is a talentless hack. his voice is really nice and he’s a talented musician considering he’s only 17 (kwilkinson)
12 smart investment options in Australia
There’s more to investing than super and property. Take a look at the different investment options available in Australia which you might consider when creating a portfolio.
While property seems to get the lion’s share of attention when it comes to investing money in Australia, a 2020 study by the Australian Securities Exchange (ASX) revealed that shares, along with other investments traded on an exchange, were in fact the most popular investment choices among Aussies 1,2 .
What different assets can you invest in?
If you’re interested in seeing what your investment options are outside investing in property and super, here’s a list of some of the common investment options in Australia you could consider when building your own investment portfolio.
If you put your money into cash investments (such as savings accounts and term deposits), the returns will often be lower in comparison to other investment products. However, these types of investment options typically provide stable, low-risk income in the form of a regular interest payment, so they may be a good option if you’re risk averse or working to a short timeframe.
Fixed interest or fixed income investments
Fixed interest investments (also known as fixed income or bonds) usually have a set investment period (eg five years), and provide predictable income in the form of regular interest payments. They tend to be less risky when compared to other types of investments, so can be used to provide balance and diversity in an investment portfolio. Fixed interest investments are issued by governments and companies in Australia and internationally.
A government bond is one example of a fixed interest investment. It provides the holder with regular interest payments, and once matured, the amount originally invested (known as the principal) can be returned to you. However, the value of the investment doesn’t increase with inflation.
There are also different types of fixed interest investments with different investment timeframes and different risks – for example, a fixed interest investment issued by a company can be risker than one issued by the Australian government.
If you purchase shares (also known as equities or stocks) in Australian or international companies, you’re essentially buying a piece of that company, making you a shareholder. If the shares of the company grow in value, the value of your investment will also increase, and you may receive a portion of the company’s profits in the form of dividends. However, if the share price falls, the value of your investment will also fall. If you manage the shares yourself, you’ll have to decide when to buy shares, and when to sell them. It’s also worth keeping in mind that you may not receive any dividends at all.
If you’re looking for how to invest in shares, get in touch with an AMP financial adviser who can guide you through the process.
In a managed fund (also known as a managed portfolio), your money is pooled with other investors on your behalf by a fund manager. A managed fund can focus on one asset class, for example, an Australian shares managed fund will only hold shares in Australian companies. Or, it can be a diversified managed fund and include a mix of cash, shares and property. One of the benefits of pooling your assets in this way is that it can also give you the ability to gain access to investments and a level of diversification that isn’t usually obtainable by an individual.
The amount of money you invest is equal to a set number of units, and any growth or earnings are then divided among all investors depending on how many units each investor owns. Any income generated on these earnings will also be subject to tax based on the individual income tax rate of the owner.
Because investment returns are tied to movements in investment markets, it’s important to keep in mind that putting your money into a managed fund won’t necessarily guarantee you a positive investment return.
Exchange traded funds (ETFs)
An ETF is a type of managed fund that can be bought and sold on an exchange, such as the Australian Stock Exchange (ASX), and which tracks a particular asset or market index. ETFs are usually ‘passive’ investment options as the majority of these investment products aim to track an index, and generally don’t try to outperform it. This means the value of your investment in an ETF will go up and down in line with the index it is tracking.
ETFs tend to be easy to buy and sell and have lower fees than some other types of investment products. They form part of a larger class of investment products called exchange traded products, or ETPs, which can be bought and sold on an exchange.
Like a managed fund, if you decide to put money into an investment or growth bond (also known as an insurance bond), your money will generally be pooled with money from other investors, with an investment manager overseeing the funds and making the day-to-day investment decisions. This makes for a hands-off approach for the investor, which can be helpful if you’re too busy to oversee your investments, or prefer to have a knowledgeable manager making the decisions.
The main point of difference with investment bonds is the way earnings are taxed. If you hold onto an investment bond for at least 10 years, you won’t have to pay additional tax on any profits that you’ve made when you eventually sell (or redeem) your investment. That’s because such investment bonds are seen as ‘tax-paid’ investments, where earnings are taxed within the bond along the way at 30%. If you’re paying more than 30% in income tax, an investment bond may be a tax-effective structure to help you invest.
A popular option for retirement, annuities provide a guaranteed income regardless of what’s happening in financial markets 3 . These can be in the form of a series of regular payments either over a set number of years (fixed-term), or for the remainder of your life (lifetime annuity). The payments you receive will depend on things like the amount you put in and actuarial calculations, which estimate future outcomes by looking at economic and demographic trends.
You can purchase an annuity through your super or with ordinary savings. It’s important to note though, that if you’re using your super money for the purchase, you won’t be able to access the funds until you reach your preservation age and retire.
Listed investment companies (LICs)
LICs are a type of investment vehicle which are incorporated as companies and listed on a stock exchange. Most LICs operate in a similar way to a managed fund with an internal or external manager responsible for selecting and managing the company’s investments on your behalf to provide diversity. LICs commonly invest in shares in other companies.
It’s important to note that LICs are ‘closed-ended’ investments, which means there’s a set amount of shares available that does not change. Shareholders can come and go, but the amount of capital in the LIC doesn’t change as investors change. This means the investment manager can focus on managing the investment, rather than trying to raise funds if a shareholder exits the investment or making additional investments if more investors come on board.
Real estate investment trusts (REITs)
A REIT is a type of property fund listed on a public market, such as the ASX, in which investors can purchase units. Similar to a managed fund, your money in the fund is then pooled and invested in a range of property assets, which may include commercial, retail, industrial, or other property sectors.
REITs can provide investors with exposure to the property market in a way that is more diversified – commercial and industrial property and potentially more cost-effective – than buying a single property.
As a precious metal, gold is a commodity that can be bought or sold based on set market value. Some people like to invest in gold as a way to hedge against inflation. However, investing in physical gold bars can be cumbersome. Other ways to invest in gold include buying derivatives, gold receipts, gold ETFs and gold mining stocks.
Australia’s alternative finance market has grown by 53% in the 12 months to September 2020 as investors continue to tap into emerging trends and explore new ways to grow their wealth 4 .
In addition to the investment options listed above, there are a number of emerging trends you might consider when building your wealth.
Peer-to-peer lending (P2P)
P2P lending is a way you can borrow money without going through a traditional lender (such as a bank). It operates by connecting investors with companies or people looking for a loan.
Most P2P lending is run via an online platform that acts as an intermediary between investors and borrowers and charges a fee-for-service. Through the platform, the lender will be able to see what loan they would like to fund, and, the borrower must pay the loan back over time with interest.
Some platforms also allow investors to diversify their investment across other assets (such as a managed fund). The details, including the amount of control a lender has, length of the loan and at what interest rate, varies between P2P providers.
Unlike regular currency like coins and notes, cryptocurrency is a virtual currency that exists as a digital token5. The most well-known type of cryptocurrency is Bitcoin, but there are hundreds of others including Ethereum, Litecoin and Ripple.
Cryptocurrencies are kept in a digital wallet and can be used to pay for real goods and services. Transactions are recorded using a vast digital ledger called a blockchain. It’s most commonly used for online payments but can in some cases can be used in stores. However, because cryptocurrency is not legal tender, it’s not accepted everywhere and is not backed by any government.
Factors to consider when making investment decisions
Before putting your money into any investment option it’s important to make sure you understand, and are comfortable with, the level of risk involved, the investment timeframe, any potential costs involved, and how the product could help you reach your financial goals.
It’s also important to look into any potential legal and tax implications, as these can vary depending on the type of investment you make.
Risks involved with investing
Different types of investments carry different levels of risk which can influence the returns you may receive. People tend to have different appetites for risk, so it’s important to understand yours before investing. The AMP Investment Style calculator can help you to understand your risk appetite..
Generally, investments that carry more risk are better suited to long-term timeframes, as these often come with greater short-term volatility, which means they can change rapidly and unpredictably. However, being too conservative with your investments may make it harder to reach your goals.
A good way to manage risk can be to spread your investments across different asset classes. This is known as diversification, and is one of the first things you will learn about when looking into how to invest for beginners.
Diversification reduces your overall investment risk and leaves you less exposed to a single economic event. So if one sector or asset performs badly, the other areas of your investment may not be as badly affected.
It can also be a good idea to diversify within asset classes. For example, a share portfolio may hold shares across different sectors such as banking, resources, healthcare and technology, and across both domestic and international markets.
How to start investing
If you’re interested in building your investment portfolio, you can use these tips to help you get started:
- Do your research – think about how much you can afford to invest, what your options are, and what types of investment products you could use to help you reach your goals.
- Know your risk profile – work out how much risk you’re willing to take and what types of investment products might fit within this. Different investment products carry with them different levels of risk, so it’s important to understand the risk involved in each investment product or strategy you’re considering.
- Speak to an adviser – if you have any questions or want more help or information, speak with your financial adviser. If you don’t have an adviser but would like more information, you can call us on 131 267 to find an adviser near you.
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