There are dozens of different ways to invest your money in order to grow your wealth and save for the future, and knowing which kind of investment to go with at any given time can be daunting if you don’t know where to look.
To help, here are seven major types of investments you should know about, including their pros and cons so you can make the best decision possible when it comes time to make your financial plan official.
Stocks represent shares in a company, so if you buy one share of Apple (AAPL), for example, you are entitled to a small portion of its profits. Although buying stocks can be risky, they’re also an effective way to build wealth over time. Investing $1,000 today and forgetting about it is a pretty good bet compared with other options.
A bond is an IOU. It’s a promise to pay, typically in exchange for interest. Bonds can be issued by government entities or private companies, and are used as a way for these entities to raise money.
If you buy bonds, you are essentially lending money (your investment) at a pre-determined rate (the interest rate). When bonds mature, you get your original investment back plus any accrued interest.
3) Mutual Funds
If you want to save for retirement, but you don’t want to handle all that money on your own, mutual funds are a great option. A mutual fund is a collection of many different investments, including stocks and bonds. It offers diversification across a range of assets and increases your chances for long-term growth.
Mutual funds can be actively managed or passively managed, which means they have staff who decide what kinds of assets should be included in the fund or they follow specific rules in selecting their investments.
4) Exchange Traded Funds (ETFs)
An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. An ETF, like any other mutual fund or stock, is bought and sold on a stock exchange at current market prices.
5) Inflation-Protected Securities
By investing in I-bonds, you’re ensuring that your initial investment doesn’t erode over time due to inflation—in fact, it will actually go up. This is important because while most assets lose value due to inflation, I-bonds keep pace with inflation. Learn more about purchasing these bonds here.
6) Physical Assets
These are things you can hold and touch, like real estate, stocks, or collectibles. If you’re considering purchasing a physical asset as an investment (such as land), make sure that it has resale value. An asset is only worth what someone else will pay for it down the road, so if your property doesn’t have resale value, then there’s no need to invest in it at all.
7) Alternative Assets
There are many types of investments available today. But alternative assets are not well-known in most investment plans. Alternative assets include real estate, private equity, venture capital, and hedge funds. These assets allow for a greater level of customization for your financial portfolio.