1. Growth stocks
Overview: Growth stocks are the Ferraris of stock investing. They promise rapid growth as well as high investment returns. Growth stocks are frequently technology companies, but they do not have to be.
They generally reinvest all of their profits, so they rarely pay out dividends, at least not until their growth slows.
Who are they good for? If you’re going to buy individual growth stocks, you’ll want to thoroughly research the company, which can take a long time.
Because growth stocks are volatile, you’ll need to have a high risk tolerance or commit to holding the stocks for at least three to five years.
Risks: Growth stocks can be risky because investors frequently pay a high price for the stock in relation to the company’s earnings.
As a result, when a bear market or recession hits, these stocks can lose a lot of value quickly. It’s as if their sudden popularity vanished in an instant. Growth stocks, on the other hand, have historically been among the best performers.
Rewards: Because the world’s largest companies – the Alphabets and Amazons – have been high-growth companies, the potential rewards are potentially limitless if you can find the right company.
2. Stock funds
Overview: A stock fund is a collection of stocks that are often united by a common theme or categorization, such as American stocks or large stocks. This product has a fee charged by the fund company, but it can be very low.
Who are they useful for? If you don’t want to spend the time and effort analyzing individual stocks, a stock fund – either an ETF or a mutual fund – can be a good alternative.
A stock fund is an excellent option for an investor who wants to be more aggressive with stocks but lacks the time or desire to make investing a full-time hobby.
Risks: Investing in a stock fund is less risky than buying individual stocks and requires less work.
However, it can still move quite a bit in any given year, possibly losing as much as 30% or even gaining 30% in some of its more extreme years.
If you buy a fund that is not broadly diversified, such as one based on a single industry, you should be aware that your fund will be less diversified than one based on a broad index, such as the S&P 500. So, if you bought a fund based on the chemicals industry, it might be very sensitive to oil prices. If oil prices rise, it is likely that many of the stocks in the fund will suffer.
Rewards: A stock fund is less work to own and manage than individual stocks, but because you own more companies – and not all of them will excel in any given year – your returns should be more consistent. A stock fund will also provide you with a lot of potential upside. The following are some of the best index funds.
If you buy a broadly diversified fund, such as an S&P 500 index fund or a Nasdaq-100 index fund, you’ll get a mix of high-growth stocks and others. However, you will have a more diverse and secure portfolio than if you only owned a few individual stocks.
3. Bond funds
Overview: A bond fund, whether a mutual fund or an exchange-traded fund (ETF), is a collection of bonds from various issuers. Bond funds are typically classified according to the type of bond in the fund, as well as the duration, riskiness, issuer (corporate, municipality, or federal government), and other factors.
When a company or government issues a bond, it agrees to pay a set amount of interest to the bond’s owner on an annual basis. The bond is redeemed when the issuer repays the bond’s principal amount at the end of its term.
Bond funds are useful for investors who want a diversified portfolio of bonds without having to analyze and purchase individual bonds.
They’re also useful for individual investors who don’t have enough money to purchase a single bond, which typically costs around $1,000, as bond ETFs can frequently be purchased for less than $100.
Risks: While bonds can fluctuate, a bond fund will remain relatively stable, though it may move in response to changes in interest rates.
Bonds are considered safer than stocks, but not all issuers are created equal.
Government issuers, particularly the federal government, are regarded as relatively safe, whereas the riskiness of corporate issuers can range from slightly less to significantly higher.
Bonds are one of the safer investments, and they become even safer when part of a fund. Because a fund may own hundreds of different bond types from many different issuers, it diversifies its holdings and lessens the impact of any one bond defaulting on the portfolio.
The return on a bond or bond fund is typically much lower than the return on a stock fund, perhaps 4 to 5 percent per year on government bonds but less on corporate bonds. It’s also far less dangerous.
If you’re looking for a bond fund, there are several options available to meet your needs.
4. Dividend stocks
Overview: If growth stocks are the sports cars of the stock market, dividend stocks are the sedans – they can deliver solid returns but not as quickly as growth stocks.
A dividend stock is simply one that pays a dividend — a regular cash payout — on a regular basis. Many stocks pay dividends, but they’re more common in older, more mature companies with less of a need for cash.
Dividend stocks are popular among older investors because they provide a consistent income, and the best stocks grow their dividends over time, allowing you to earn more than you would with a bond’s fixed payout. REITs are a common type of dividend stock.
Who are dividend stocks good for? Dividend stocks are good for long-term buy-and-hold investors, particularly those who prefer or require a cash payout and want less volatility than the average.
Risks: While dividend stocks are less volatile than growth stocks, don’t expect them to rise and fall dramatically, especially if the stock market enters a slump.
Reward: The payout is the main attraction of a dividend stock, and some of the top companies pay 3 or 4 percent annually, sometimes more. But, more importantly, they can raise their payouts by 8 or 10% per year for long periods of time, so you’ll get a raise every year.
5. Value stocks
Overview: When the market rises sharply, many stocks’ valuations become stretched. When this occurs, many investors turn to value stocks to be more defensive while potentially earning attractive returns.
Value stocks have lower valuation metrics, such as a price-earnings ratio, which measures how much investors pay for every dollar of earnings.
Value stocks are contrasted with growth stocks, which tend to grow faster and have higher valuations.
Who are they good for? : Value stocks may be an appealing option because they perform well when interest rates rise. And the Federal Reserve has recently been raising interest rates at a breakneck pace.
Rewards: If the market favors value stocks again, their valuations may rise faster than those of other non-value stocks. The appeal of value stocks is that they can provide above-average returns while posing less risk.
6. Target-date funds
Overview: If you don’t want to manage your own portfolio, target-date funds are a great option. As you get older, these funds become more conservative, making your portfolio safer as you approach retirement, when you’ll need the money. As your target date approaches, these funds gradually shift your investments from more aggressive stocks to more conservative bonds.
Where to find them: Target-date funds are a popular option in many workplace 401(k) plans, but they can also be purchased outside of those plans. You choose your retirement year, and the fund takes care of the rest.
Risks: Because target-date funds are essentially a combination of stock and bond funds, they will have many of the same risks as either. If your target date is decades away, your fund will be more volatile at first because it will own a higher proportion of stocks. As your target date approaches, the fund will shift toward bonds, causing it to fluctuate less but earn less.
7. Real estate
Overview: Real estate is the prototypical long-term investment in many ways. It costs money to get started, commissions are high, and returns are often obtained by holding an asset for a long period of time, rather than a few years.
Investing in real estate can be an appealing strategy, in part because you can borrow money from the bank and pay it back over time.
Who are they good for? Those who want to be their own boss can do so by owning property, and there are numerous tax laws that benefit property owners in particular.
Risks: When you borrow large sums of money, you put additional pressure on an investment to perform well. Even if you buy real estate with all cash, you’ll have a lot of money tied up in one asset, which can cause problems if something happens to the asset.
8. Small-cap stocks
Risks: Small-cap stocks, like high-growth stocks, are riskier. Small businesses are more risky in general because they have fewer financial resources, less access to capital markets, and less market power.
Reward: The rewards for discovering a successful small-cap stock are enormous, and you could easily find 20 percent annual returns or more for decades if you’re able to buy a true hidden gem like Amazon before anyone can see how successful it might eventually become.
9. Robo-advisor portfolio
Overview: When you use a robo-advisor, you simply deposit money into the robo account, and it invests it automatically based on your goals, time horizon, and risk tolerance. When you first start, you’ll fill out some questionnaires so the robo-advisor understands what you need from the service, and it will then manage the entire process. The robo-advisor will choose funds, typically low-cost ETFs, and create a portfolio for you.
How much does the service cost you? The robo-advisor’s management fee, which is typically around 0.25 percent per year, plus the cost of any funds in the account. Investment funds charge based on the amount invested, but funds in robo accounts typically charge between 0.06 percent and 0.15 percent, or $6 to $15 per $10,000 invested.
Risks: The risks of a robo-advisor are heavily dependent on your investments. If you invest in a lot of stock funds because you have a high risk tolerance, you can expect more volatility than if you invest in bonds or cash in a savings account. As a result, the risk is in what you own.
Rewards: The potential reward on a robo-advisor account varies depending on the investments, and it can range from very high if you own mostly stock funds to very low if you hold safer assets like cash in a high-yield savings account.
10. Roth IRA
Overview: A Roth IRA may be the best retirement account available. It allows you to save after-tax money, grow it tax-free for decades, and then withdraw it tax-free. Furthermore, you can pass that money on to your heirs tax-free, making it a more appealing option than a traditional IRA.
Who can benefit from them? A Roth IRA is an excellent vehicle for anyone earning an income to accumulate tax-free assets for retirement.
Risks: A Roth IRA is not an investment in and of itself, but rather a wrapper around your account that provides special tax and legal benefits. So, if you have a Roth IRA account with one of the best brokerages, you can invest in almost anything that meets your needs.
Rewards: If you want to take it up a notch, you can invest in stocks and stock funds and reap potentially much higher returns – all while remaining tax-free.
Of course, you’ll have to accept the increased risks that investing in stocks and stock funds entails.
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