Depending upon where you look, certain forums and online groups might lead you to believe there is a “best” way to invest. But that couldn’t be further from the truth.
There is essentially an unlimited number of ways to invest, but not one of them is the be-all and end-all. Instead of trying to find the best way to invest, you should instead find what works best for you.
There is a large number of investing strategies out there, and many of them will work for most investors. In other words, just because you are not doing things the same way as someone else does not necessarily mean you are missing out.
Every type of investment is different and fulfills different roles. As we will see during the course of this article, one size does not fit all.
1.Index Funds, Mutual Funds, and ETFs
While index funds, mutual funds, and ETFs are different investment vehicles, they often plan similar roles. Broadly speaking, that role is to provide strong performance with a (relatively) low level of risk.
Of the three investment vehicles mentioned, mutual funds are the odd man out in the sense that they typically have a fund manager. This means there is a company that actively manages the fund, researching and selecting securities it believes will match the desired performance.
Technically, index funds can be a type of mutual fund or ETF; as you can see, there is overlap in terminology. Index funds look to track a given index (such as the S&P 500).
Meanwhile, ETFs are considered a “basket of securities” that align with various investing goals; this can be anything from responsible investing to target-date funds to total-market funds.
Despite their differences, these investments all tend to perform well with a low level of risk when compared to some other investments mentioned in this article.
Of course, no investment is completely without risk.
The next major type of investing is real estate. That may be nothing new to you, but we don’t always think about what real estate investing offers compared to other investments.
Perhaps the biggest benefit of real estate investing is two words: cash flow.
Real estate provides cash flow on an ongoing basis. That isn’t always the case for stocks, particularly for index funds and mutual funds.
Ongoing cash flow allows you to collect on your investments long before you retire.
And, these days, there are many different ways to invest in real estate. You have more options than buying that house down the street and managing it yourself.
For example, real estate investment trusts, crowdfunding, and real estate investment marketplaces are just a few of your options. Check out Roofstock for one great crowdfunding option.
However you choose to invest in real estate, it’s always a solid investment because it is always in-demand and is less sensitive to market volatility than stocks.
Day trading is a fast-paced, high-octane with the potential to make huge returns. Day traders take advantage of short-term price trends to turn a profit.
Unlike most index fund investors, day traders hold stocks for a very short period of time - from a few hours to a few weeks.
This strategy, at its most basic level, is to buy low and sell high. But it isn’t quite so simple.
Things change very quickly in the stock market, and it isn’t exactly easy to predict price changes. That means that while day traders can make a hefty profit, they can lose just as much.
Oh, and day traders must have at least $25,000 on hand at all times, per FINRA regulation.
This style of day trading is certainly not for everyone, but it can be incredibly lucrative for those who prefer it.
Stock picking sits somewhere between day trading and index fund investing. This style of investing is long-term, like index fund investing, but it involves dealing with individual stocks, like day trading.
What is the perceived benefit of doing things this way? Well, the stock market naturally has many “winners and losers.” Some investors don’t believe it’s in their best interest to invest in the losers and would prefer to only invest in the winners.
Of course, that is, yet again, easier said than done. Still, so-called “blue-chip” stocks, such as Apple (News - Alert) and Amazon, do perform well year after year.
Picking winners isn’t guaranteed; all stock pickers are bound to have some bad picks eventually. You might want to consider a service like Motley Fool to help with stock picks.
Nevertheless, many stock pickers have done quite well for themselves over the years.
Many investors like dividend stocks for the very benefit after which they are named. Dividends are doled out on a quarterly basis and thus allow investors to earn a small return simply for holding them.
The dividend yield on these stocks is modest - often in the 3 to 4 percent range annually. But that can still represent a nice return, especially for investors with large portfolios.
There are certainly arguments against dividend stocks, however. If a company is constantly paying out dividends to investors, that is money it can’t use on R&D and other important initiatives.
It’s important to point this out because, again, no investment style is right for everyone. Everyone has their own investment philosophy and holds different investing principles.
Despite their name, penny stocks can trade for more than just a few pennies. In fact, anything that trades for less than $5 is considered a penny stock.
Investors are drawn to penny stocks for a number of reasons. The share price is much lower than other stocks, making them easier to buy.
In addition, it’s much easier for a stock price to double from $2 to $4 than it is for a stock to go from $500 to $1,000. This gives at least the appearance of an easy way to make money.
In reality, making money with penny stocks is easier said than done. If many investors buy a given stock, the price increases. Hence, if the price on a stock is that low, that means few investors are buying it.
More often than not, that is for good reason. Companies with a penny stock likely have serious problems that are hindering their growth.
You could get lucky with penny stocks, but this one should be considered more of a gamble; a way to invest in a smaller company just for fun.
If you browse online discussions, you are bound to find people who invest in commodities. By commodities, I mean things like gold, silver, oil, and other goods.
And although cryptocurrency is not usually considered a commodity, investing in it is the same as investing in gold in many ways.
Although gold has remained popular with certain investors, it’s important to understand the benefits of commodity goods. For example, gold is best suited as a hedge against inflation - and a bearish stock market.
However, gold itself has no yield and no intrinsic value. Unlike stocks, it doesn’t represent a stake in a growing company that does produce something of value.
As such, while commodities do have their place, their scope is a bit limited. Since the Gold Rush is in the distant past, getting rich on gold alone is, unfortunately, not likely.
8.Which Investing Strategy is Right For You?
As mentioned earlier, there is no single investing strategy that is right for everyone. In fact, there is no reason to pick just one investing strategy.
For example, you might own index funds, a few rental properties, and some commodities as well. Or you might own shares in some ETFs and day trade full-time.
Depending on your financial goals, your risk tolerance, and your personality, any number of investing styles could be ideal.
If you aren’t sure where to start and feel you need more guidance, you can always consult a fee-only financial advisor.
Whatever style you choose, investing is key to building wealth for the future. Don’t wait to start working toward your financial goals!