There are many investment options out there, but how do you decide which ones to invest in? It all comes down to the level of risk you are willing to take and whether you are looking to invest in short- or long-term investments. Available investing options include:
- Certificates of Deposit (CDs)
- 401K plans
- Life insurance policies
- Stock market
- Angel or seed investing
- Real estate
This list can be overwhelming for many people, so we want to simplify your options. Let’s go over the basics of each investment type and cover their associated risks.
A CD is a certificate of savings with a fixed maturity date and interest rate, which means the holder of the CD does not have access to its funds until the maturity date. CDs are sold by banks and credit unions, and are insured for up to $250,000 per individual. They are low risk investments because they are limited with fixed rates and do not fluctuate with the market changes.
CDs are often used to safely store money for long periods of time. Grandparents often gift their grandchildren CDs to help fund their college education or another large purchase when they turn a certain age.
However, CDs do not keep up with inflation, which means investors are not taking advantage of purchasing power when investing in CDs. The average interest on a CD is between 0.17% and 1.44%, but inflation rates have been about 2% in the U.S. over the past few years. This means investors who utilize CDs are actually losing purchasing power and money.
A 401K is a retirement savings plan offered by an employer. Most companies offer their employees a 401K, although this offering is dwindling as jobs diversify and are available in less traditional formats. If your employer offers a 401K plan and contributes to it, it’s essentially free money for your future, so don’t miss that opportunity.
401K plans often offer a variety of investing options, so it’s important to speak to your Human Resources or Finance department to learn your options. Your employer decides what options to offer. As an employee, it’s then up to you to decide how much you contribute, regardless of how much your employer does or does not contribute. You may have the chance to decide between company stocks; individual stocks, bonds and other securities; or variable annuities.
A 401K is a standard investment option for many investors because it is offered through your employer, takes little time to set up and is low risk. However, there is a limit to how much you contribute, depending on your age, so ask your HR department about the maximum you can contribute.
For those looking to use their retirement funds for investing to grow their retirement funds further, a 401K may be seen as less attractive than other possibilities.
Life insurance policies
Life insurance covers your family’s expenses upon your death. While morbid to think about, investing in a life insurance policy can give you and your family peace of mind.
The two basic forms of life insurance are term and permanent life insurance. Term life insurance covers you for a short term, typically 5-30 years, and is overall the least expensive life insurance policy available because it is short-term.
Permanent life insurance doesn’t expire and typically comes in two forms: whole life and universal life insurance. Whole life insurance is the most expensive kind of insurance because it doesn’t expire and is guaranteed upon the policy holder’s death.
Universal life insurance is a bit more tricky because it comes in two forms: guaranteed universal and indexed universal. Guaranteed universal life insurance is guaranteed at a certain age, such as 95, but if the policy holder misses a payment, they forfeit the entire policy and their previous payments. Indexed universal life insurance, on the other hand, gives you flexibility within the plan, such as premium amount and death benefits, and it allows you to utilize some of that money to invest in other investments.
Purchasing life insurance is a low risk investment because investors are offering financial security for a time of emotional hardship. However, the amount of return changes with the type of policy, so discuss your options with your financial adviser before purchasing life insurance. Just like any investment, it’s important to evaluate your life insurance needs according to your age, health and financial goals, and always be informed on exactly what the policy allows and doesn’t allow.
These details on the different kinds of insurance policies only scratch the surface of the options out there. We will dive into more details concerning investing in insurance in a future blog post.
Bonds are securities that act like loans. Governments and corporations issue bonds to finance new projects, maintain daily operations or refinance property payments. The issuer pays back investors over a set amount of time plus interest. Once the issuer pays the initial investment back, the bond reaches maturity and the investor’s principal is returned.
While bonds may offer a steady stream of income, they generally have low risk and low returns. They do, however, help investors diversify their portfolios by offering low risk options to balance higher risk options.
Investment funds are a way for individual investors to combine their investment money with other investors in order to benefit from the larger investing pool. Funds are typically managed by a fund manager, which means they are a hands-off investment opportunity. In this passive investment option, investors purchase securities and maintain ownership of their shares. Then the fund manager decides the course of action for the fund as a whole.
Investors choose an investment fund based on the fund’s goals, risks and fees. There are many types of investment funds, including mutual funds, exchange-traded funds (ETFs), money market funds, hedge funds and real estate funds.
- Mutual funds combine money from multiple investors to invest in a portfolio of securities.
- ETFs are similar to mutual funds, but are more liquid; they are securities that track a group of assets.
- Money market funds are open-ended mutual funds that invest in short-term debt securities.
- Hedge funds are like investment partnerships with strategy. A hedge fund manager raises money from investors and then invests that money in one specialized area, such as stocks, private equity or an asset class. Hedge funds also have the potential for more risk and higher returns as they monitor individual investments differently than other funds. Plus, they are only available to accredited investors.
- A Real Estate Investment Trust (REIT) is a fund that provides capital for the use of real estate investments. Real estate funds combine money from multiple investors to invest in one large or multiple smaller real estate investments. Investors buy shares in the REIT, which may or may not be publicly traded.
Depending on the type of fund an investor chooses, their risk will be low to high according to market changes and management choices. Before choosing one or many funds to invest in, speak to your financial adviser about the risks of each.
The stock market is a well-known and volatile (high risk) investing option. A stock or share is a financial instrument that represents ownership of a portion of a company’s or corporation’s assets and earnings. Essentially, owning a stock means owning a slice of that company’s pie.
Startups often offer shares of their new companies to private investors because they typically can’t receive financing to start business without having proper collateral to do so. Instead, they sell shares of the new company to essentially pledge to the stockholders that the stockholders will earn money once the business takes off. This is risky because 50% of all small businesses fail.
Established companies use shares to further build and expand their businesses. Stocks go from private to public, and their stocks are available in the stock exchange. Then the fluctuation begins as different investors see different stocks at various levels of value. The basic principle of supply and demand play in the stock exchange, which makes investing in stocks very risky. Although, if investors are willing to ride out stock market lows, investing in stocks has a potential for high payouts.
Angel or seed investing
Seed investing, also called angel investing, happens when an investor gives seed money or a one-time investment to help fund a startup company or entrepreneur’s dream. Angel investors typically invest in people rather than securities, so the reason behind the investment is very different.
Seed investing is relatively high risk because 50% of all small businesses fail. Nevertheless, there is a chance for a high return.
Angel investors typically do not combine their money with other investors. This means the risk is only taken on by an individual or couple who are accredited investors. To utilize this investing method, it is important to ensure the startup has done their research and has a plan. While no investment is guaranteed, many angel investors recognize that they will have to be on the lookout for special opportunities, and try investing in multiple startups before one succeeds.
Investing in real estate is different from investing in real estate funds. Investing in real estate means investing in the physical land or building, not just in the opportunity of a fund. However, there is a lot of variety in real estate investing. Real estate investors can be a landlord or developer, invest in REITs and invest with companies like Quinlan|MacKay that connect investors to high-performing real estate opportunities.
- Being a landlord means buying a rental property, possibly updating it and maintaining it whether or not there is a tenant. This is a very involved way to invest and can potentially be higher risk, depending on where you are located and how well you screen potential tenants.
- Being a developer means buying land and building on it, or buying a distressed building and updating it. Being a house flipper is one way to be a developer. Some developers are professionals, while others are amateurs. This is a higher risk investment, depending on the research done before the purchase and the skill of the developer himself/herself. As with any investment, it’s important to expect setbacks when building.
- REITs (Real Estate Investment Trusts) are companies that finance or own and operate income-producing real estate. Modeled after mutual funds, they are completely passive investment options that give out dividends to investors. They are relatively high risk investments for many reasons; the biggest risk factor is that the shares are very difficult to sell.
- Quinlan|MacKay offers a different kind of real estate investing. Quinlan|MacKay connects investors to high-performing real estate opportunities. The hard work of finding the opportunities is done by Quinlan|MacKay who then offers these opportunities to their investors. Investing with Quinlan|MacKay is a form of semi-passive investing where investors have the opportunity to invest in the projects that appeal to them and meet their investing needs. While Quinlan|MacKay takes out all the hard work of finding, vetting and managing the projects, our investors choose what building projects they invest in and whether they want to pursue short-term investing, long-term investing or both.
At Quinlan|MacKay, we want our investors to be informed and empowered in their investing options. If you’re ready to invest in your future and quality real estate, look no further than Quinlan|MacKay.