You won’t have to look far when seeking advice on ways to invest money.
There’s the cancer cure stock your cousin loves, the wind farm in Kazakhstan that’ll double your money in a month, the Kickstarter genius who’s definitely the next Steve Jobs. Getting rich is so exciting!
Sorry to say, but in truth the best ways to invest money are usually the most boring.
Investment strategies: An overview
Investing is earning money without going in to work every day; your money does the work for you. But you do pay a price for being able to kick back and watch your bank account grow—and that price is risk.
All but the most conservative forms of investing involve taking some risk, since you could actually lose your money. In fact the riskier the investment the more you stand to gain, which is only fair. Fortunately, the best ways to invest money include ways to mitigate your risk, mainly by considering two important variables: horizon and diversification.
Understanding your investment horizon
How you invest depends on what you’re saving for. Most people have multiple investment goals, such as buying a home, paying for kids’ college and funding retirement. Each goal has its own horizon.
- For long-term goals like retirement (or a college fund for a newborn), the best investment will be in stocks, which have the most potential to grow. Of course stock values can also fall, sometimes at heart-stopping rates—but time is on your side because you can “ride out” the inevitable downturns. There is almost no chance that a 40-year investment in the stock market will lose money.
- By contrast, short-term goals (like a house down payment in four years) should be parked in safe havens like money market accounts. That’s because if the stock market tanks, you won’t have enough time to make your money back.
- For intermediate goals of a decade or so, a mix of stocks and U.S. government bonds, which are safer than stocks but return more than simple savings accounts, are best. How you arrange that mix will depend on your tolerance for risk.
Of course, as time passes your horizons move closer. As you near retirement you will want to move money out of stocks and into safer investments. Some investment target funds do this for you automatically.
It’s one thing to understand how much of your investment should be allocated to stocks. You also need to spread your stock investments among a lot of companies. That way, a downturn in one company or sector won’t wipe you out. If you’re just starting out, you should be investing in mutual funds that put your money into a diverse spectrum of companies.
Keep it simple
If you’re investing for retirement through your employer’s 401(k), you’ll likely be presented with several plans tailored to different risk tolerances. In some cases they do the work for you—including re-balancing your portfolio every year to keep it on track, and adjusting your mix of stocks and bonds as you get older. Likewise, 529 plans for college savings will consider your investment horizon and risk tolerance when allocating funds.
Pay attention to fees charged by investment plans. One percent might seem small but will add up over the years. Your best bet for low fees (0.5 percent or less) and good performance is index funds, which track a particular group of companies like the S&P 500. And when you hear about that hot stock tip, plug your ears and remember that when it comes to investing, boring is best.