Money Making Money: Investment Strategies
Often times, people wonder: “I'm making a decent amount of money, but how can I make even more of it?” The answer is: there are plenty of ways that your money can grow. The purpose of this article is to provide you with several investment vehicles/strategies that can help your money grow the way that you might desire.
Investment Strategy #1: Stocks
My personal favorite. Investopedia defines a stock as “a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings” (“Stock Definition | Investopedia”). In more basic terms, you put money into a company and you gain a return (or a loss) based on how the stock market and that company is performing. The stock market can be quite risky, but offers arguably the greatest returns. There are two types of stocks: common stocks and preferred stocks. This article focuses on common stocks. My recommendation is to go with dividend-paying stocks, as they can lower some of the risks associated with stocks. These types of stocks provide a “guaranteed” payment known as dividends that are paid each quarter to the respective owners (you become an owner of a company once you own share(s) of that company).
There are many different strategies you can use as a stock investor. The key to success as an investor is to buy low, and sell high. You can use a strategy where you buy a stock at a low price, sell it as soon as it reaches a higher price to gain a high return and then repeat for other companies. New technology companies are a great place to start with these types of investments. Another strategy (which is less risky) is to use a dividend strategy (which I currently use) where you still buy the stock at a low price, hold it for a long time to accumulate dividends, and then sell it at a high price in the future. I tend to invest in companies that make things that people need as those companies are more likely to stay in business much longer. The dividend strategy is more of a long-term investment strategy, so it is essential to invest in a relatively stable company. To start investing, you can go to the company’s website and navigate to the investor relations section (direct investor) or use a broker such as TD Ameritrade. Stocks are an excellent way to generate income, but ensure that you do your research. Also, follow market updates and different trends to stay in the loop. Lastly, there are many tax benefits associated with stocks such as paying lower rates on any long-term gains, a $3,000 ordinary income (or other types of income) deduction in case you lose out on the stock, and many other benefits that will be in my next article.
Investment Strategy #2: Real Estate
The way I think of real estate is that people are always going to need a place to live. With that being said, real estate is a huge income opportunity, whether it be residential or nonresidential real estate. This strategy requires a huge investment, but also provides great returns. Always keep in mind that location is key. I would recommend using a realtor to help you choose the right properties to acquire. A basic strategy with real estate is to buy property at a low price, hold it for a short period of time, then sell it at a high price. Another basic strategy is to buy the property (preferably at a low price), rent it, and either sell it or continue holding it to collect income on it through rental payments. And as with many things, real estate also comes with tax benefits such as property tax deductions and depreciation write-offs.
Investment Strategy #3: 401(k)
Saving for retirement is very critical in today’s society. A 401(k) is an investment tool that allows you to set money aside for retirement, let the money grow through interest and dividends, then take the money out whenever you decide (preferably when you retire). The main two types of 401(k)’s are traditional (pre-tax) and Roth (post-tax). The difference between the two are extremely similar to the difference between a traditional IRA and a Roth IRA, described below in Investment Strategy #4. Many companies offer a 401(k) plan where they match your contributions up to a certain limit (i.e. 50% match up to 5% of your contributions). The best strategy to use with a 401(k) is to invest up to the maximum amount of how much your company will match you. The money grows tax-deferred and you can potentially take out the money early to cover necessary expenses such as an emergency. It is highly recommended to leave the money in the 401(k) account until you retire as it accumulates value at a pretty fast rate. And if you decide to leave your company, you can transfer the money to your next employer’s 401(k) plan or a similar retirement plan. The key is to ensure that your money is fully vested (i.e. the time period that your company requires you to stay until you can claim 100% of their contributions). The longer you stay, the more money you will likely have to spend when you retire.
Investment Strategy #4: Individual Retirement Account (IRA)
An IRA is another retirement savings investment that works extremely similar to a 401(k), but has many limitations. There are 3 main types of IRAs: deductible/traditional IRA, Roth IRA, and nondeductible IRA. The maximum amount that you can contribute to any or all of these accounts combined is $5,500 (double that if you’re married). A deductible IRA offers huge tax benefits (up to $5,500 deduction), but you can only make up to a certain amount of money to qualify for one. A Roth IRA gives you the benefit of withdrawing money tax-free. All of these IRA accounts grow tax-deferred which is a huge benefit. I use this strategy more so to save money on taxes, but it still proves to be a great investment strategy as you can never really go wrong by saving for retirement. If you expect to be in a higher tax bracket when you retire, Roth might be your best bet and vice versa for traditional.
Investment Strategy #5: Bonds
Not something we hear about often, but a bond can prove to be a valuable investment. According to Investopedia, “a bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate” (“Bond Definition | Investopedia”). In other words, you give money to a company, they pay you interest every period, and then you ultimately (hopefully) get your money/principal back. Bonds are different from stocks because the entity that owes you is obligated to not only give you the money back, but also has to pay you interest. No such benefits with stocks, although dividends often times get paid by dividend-paying companies (although they’re not obligated to). AAA rated bonds offer the lowest risk, which is what you should probably aim for. As the definition states, there are corporate bonds and governmental bonds. Corporate bonds tend to be of higher risk since a company can go out of business at any time. The benefit with bonds is that if the company goes bankrupt, you are first in line (typically) to get your money back. Bonds tend to be low risk, but also low return.
Investment Strategy #6: Mutual Funds
Keyword “mutual.” A mutual fund is a “professionally managed pool of stocks, bonds and/or other instruments that are divided into shares and sold to investors” (“Mutual Funds | Investopedia”). You give your money to a money manager, they combine it with other people’s money, and the money manager invests all of that money into a (hopefully) profitable portfolio. Great strategy for people who don’t have a lot of money to invest, but want to get in the game somehow. Keep in mind that since you share the investment, you also share the returns. Therefore, these tend to offer lower returns than individual stock/bond investments.
Investment Strategy #7: Hedge Funds
“Hedge funds are alternative investments using pooled funds that may use a number of different strategies in order to earn active return, or alpha, for their investors” (“Hedge Fund Definition | Investopedia”). Basically the same thing as a mutual fund, but on a larger scale and tends to be more diversified. This is mainly for people with a lot of money, but you can still get in on these investments with the right amount of money. This is an opportunity to earn very high returns.
Investment Strategy #8: Treasury Bills (T-Bills)
Extremely low risk, but very low returns. T-Bills are “a short-term debt obligation backed by the U.S. government with a maturity of less than one year” (“Treasury Bill Definition | Investopedia”). If you are fine with consistent, but not high returns, then this may be a good option. Also may be good if you don’t have a lot of money to invest. These are normally sold through a bidding process and don’t tend to require a large initial investment. Highly recommended for older investors.
Investment Strategy #9: Permanent Life Insurance
A permanent life insurance policy provides the benefits of a normal (term) life insurance policy, while incorporating an investment component. Most of these policies don’t require you to pay a premium once you reach a certain age (i.e. 65). The way it works is that you sign up for a policy through a financial company (i.e. Northwestern Mutual), you choose how much you want to pay in premiums (i.e. $100 a month), you receive your “guaranteed death benefit” (money that goes to your beneficiaries in the event of death), and once you begin paying your premiums, your money accumulates value known as the cash surrender value (CSV). The money grows in the form of dividends and other investments and as you pay premiums, your CSV grows and your “guaranteed death benefit” grows as well. Great investment that offers great protection. Some more benefits include: policy never expires (unless you die or miss a premium payment), you can take out a loan on the CSV of your policy (i.e. if you have a $5,000 CSV, you can take out a $5,000 loan at a stated interest rate, but must pay it back), and it’s a relatively low-risk investment. The downside: it is much more expensive than a term life insurance policy which offers no such benefits. To find out more about permanent life insurance, check out the article in the sources below.
Investment Strategy #10: Health Savings Account (HSA)
In simple terms, an HSA is a savings account that can cover your medical expenses. However, this is an investment that collects dividends and interest as any other typical investment. It provides TRIPLE tax benefits unlike any other investment: pre-tax contributions (or you can take a tax deduction of up to $3,350), accumulates income tax-free, and the withdrawals for qualified medical expenses are nontaxable. You can use the money to pay medical expenses at any time. Excellent way to protect yourself, while gaining a return on your investment tax-free. The downside: you must have a “high-deductible health plan.” For more information on HSAs, check out the article in the sources below.
Other popular investments include annuities, certificates of deposit (CDs), limited partnerships, retail/merchandise investments, and something known as a Keogh Profit Sharing Plan (Self-employed retirement plan). The strategy that is right for you depends on your risk appetite and how much money you really want to make. If you want to be a millionaire, you probably should lean more towards stocks, real estate, and potentially hedge funds. However, the retirement accounts are also very important in general as well as maintaining a life insurance policy. The general theme is: high risk = high reward. Low risk = low reward. There is risk associated with ALL of these strategies, but not all risks are created equal. The choice is yours.
If you have any questions or would like to further discuss any of these strategies, please feel free to contact me.
"Bond Definition | Investopedia." Investopedia. 23 Nov. 2003. Web. 8 Oct. 2015. <http://www.investopedia.com/terms/b/bond.asp>.
"Hedge Fund Definition | Investopedia." Investopedia. 20 Nov. 2003. Web. 8 Oct. 2015. <http://www.investopedia.com/terms/h/hedgefund.asp>.
"Mutual Funds | Investopedia." Investopedia. 5 Oct. 2015. Web. 8 Oct. 2015. <http://www.investopedia.com/university/become-your-own-financial-advisor/building-your-own-portfolio-match-your-goals.asp/mutual-funds.asp>.
"Stock Definition | Investopedia." Investopedia. 26 Nov. 2003. Web. 8 Oct. 2015. <http://www.investopedia.com/terms/s/stock.asp>.
"Treasury Bill Definition | Investopedia." Investopedia. 26 Nov. 2003. Web. 8 Oct. 2015.
Health Savings Account Article: http://www.investmentnews.com/article/20150820/FREE/150829990/maximize-an-hsa-to-fund-medicare-and-other-health-expenses
Permanent Life Insurance Article: http://www.investmentnews.com/article/20150728/BLOG05/150729897/new-life-insurance-study-debunks-buy-term-invest-the-difference