What Investment Options Are Right for You | Woodbridge Wealth
10 25 2016
When you think of successful investments, it's natural to think of soaring stock prices, and rewarding high yield returns.
To be sure, those outcomes are often a reason to celebrate. However, a better barometer would be how well the investments are performing in accordance with financial planning projections - and how well those projections are tailored to an investor's personal needs and goals.
How Close You Are to Retirement Matters When Considering InvestingFor older investors whose retirement planning is further along, there are low-risk, low-yield investments that sustain a conservative approach. Of course, it wouldn't be strategic to simply not lose money; part of the financial planning battle is keeping up with inflation.
For younger investors who still need to bolster their retirement planning, it's common to embrace some risk in order to generate higher early returns. But it's not just younger investors going aggressive; 71 percent of Americans aren't saving enough for retirement, and 1 in 3 has saved zero - zip - zilch. For many, it's about making up for lost time.
And there are millions of people somewhere in the middle - they've begun their financial planning but they know they need to do more.
No One Can Guarantee High Yield ReturnsThe truth is, there's no magic product that secures your capital and guarantees high returns. That's why the most important aspect of your financial planning is to determine a strategy that makes sense for you. Let's take a look at some of the investment options available for both types of approaches.
Types of Lower Risk InvestmentsBelow are some categories of investments that have historically proven to be lower risk.
Real Estate Investment Trusts (REITs).Like to keep your investments liquid? Look at Real Estate Investment Trusts (REITs). They work like mutual funds, combining the investments of many to purchase property. This includes large commercial projects like housing facilities and shopping centers. REITs allow for diversification across a range of properties and geographies, which mitigates risk. They're sold on the major exchanges, and can be bought and sold like stocks (though they're uncorrelated, so largely insulated from the stock market). And they are legally required to pay out 90 percent of profits in the form of dividends to investors, which puts REITs in the high-yield category.
Certificates of Deposit (CDs)For those looking for a level of stability comparable to a savings account - but with some yield, Certificates of Deposit - or CDs - are a traditional solution. The catch: unlike a savings account, you have to stash your cash for the entire term length. Today's rates of return are often less than 1 percent, but the rate improves with higher initial investment or longer term length. Local banks like credit unions and online banks feature slightly higher-yield promotional offers.
Money Market FundsFor years, money market funds have been a low-risk haven - a way for investors to safely stow their cash without fees or account limits. The idea is similar to a mutual fund, but with short-term government bonds. Investors earn the interest off their cash, based on the Fed funds rate. But since the financial recession, interest rates have plummeted to next to nothing. To offset that, many providers have eliminated fees, so even they aren't making money here. Furthermore, starting October 14, 2016 there are new rules for institutional investors regarding net asset value calculations.
U.S. Treasury SecuritiesU.S. Treasury securities such as bonds are considered a safe investment, but don't expect to earn much. Due to a surge in the popularity of U.S. Treasuries, the rate has fallen dramatically (though longer-term bonds still remain a viable option because the rates offer better yield than in markets of many developed nations).
Types of Higher-risk InvestmentsOftentimes, the higher the risk, the higher the reward. See below for some higher risk investments available in the marketplace, that may lead to higher yields.
StocksIf high yield investments are your priority, you have to be somewhat tolerant of risk. One of the most popular growth-intensive investment options is the stock market. Its chief strength is the sheer variety of opportunities. No matter the market conditions, there are bargains to be had - and a shrewd investor can find them. There's also a lot of flexibility if a change in strategy becomes necessary. When it comes to gains, there is no higher ceiling. Stocks play a large role in aggressive wealth management strategies, including in the portfolios of younger investors just starting out and also wealthier investors who can "afford" the volatility.
Dividend StocksBut staying on top of stock prices is a continuous process. There's a reason some traders study it all day and still get it wrong: we're limited by what we know, and markets are as volatile as the internal operations of the businesses. Even managing dividend stocks - typically offered by stable, prominent companies - requires professional oversight, and it's still speculative. Gains include dividends, capital gains, and tax incentives (depending on your bracket), but there is no security for the initial investment if the stocks underperform. For those reasons, stocks tend to be one part of a balanced approach to investment. This is especially true when it comes to retirement planning, where investors are looking for safe, secure investments that deliver financial peace of mind.
Junk BondsJunk bonds also offer a higher yield with a higher risk of default. Their name derives from their rating - lower than investment grade. But many organizations are bound to invest only in products above a certain rating. This often disqualifies junk bonds, which offer no security for your principal, and depend on active, professional oversight.
Commodities SpeculationAnother high-ceiling, high-risk market is commodities speculation. The most common way to speculate on commodity prices is to hold futures contracts. A staple of mutual funds and hedge funds, futures can be purchased with low transaction costs, low account minimums, and relatively favorable tax treatment for individual investors. But, there is low visibility into outcomes, which is why futures tend to play a supplementary role in conservative portfolios.
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