Investing can be a scary concept. “Investing” is often associated with financial planning and financial advisors since financial advisors used to be primarily focussed on managing their clients’ investments. In the modern world, however, investing in stocks, bonds and other investments, are much more accessible to non-financial professionals. That’s why the focus has become more on planning and less on the technical aspects of investing. At Life Managed, we go even further to truly help you understand and plan every aspect of your life that requires money – in other words, just about everything.
Investment management is only one part of your financial plan – something that forms part of your financial life, but isn’t the sole focus.
It’s important to understand the differences between investing and saving in order to grow your wealth, allowing you to redefine your relationship with money and live the life you want. By investing, you put your money to work for you.
Types of Investments
Investing isn’t one-size-fits-all! Your financial goals, unique financial situation, time frame, risk tolerance, and comfort levels are all part of your investment strategy. So, here’s a crash course on the basics of investing. If you feel a little overwhelmed, don’t worry – we’re here for you.
Investing in Stocks
When you purchase stock, you trade cash for shares (equity) in a company. You can invest in small-capitalization companies or big guys like Apple and Tesla, invest in an individual stock or take advantage of investing packages like mutual funds or ETFs. Stocks pay you through dividend payouts or price increases that you can sell for a profit. While there’s definitely risk, the returns are generally higher than what you might expect with bonds, which tend to be more conservative. Stocks are popular financial assets when it comes to liquidity, tax benefits, and diversification.
Rather than taking a gamble on the latest and greatest recommendation of “stocks to buy now” that you might hear from a colleague, it is smarter to first understand how you define financial security and how you connect money and wealth. You should also consider whether you are expecting any major lifestyle changes, such as starting a family or moving into a new job, or early retirement and how much time and ability you have to monitor and manage your stock investment portfolio. When you invest in stocks with a strategy and a plan, you will be better positioned to ride out the inevitable ups and downs that characterize the stock market.
Life Managed will help you to define these elements and strategies. With this information in hand, we can then help you select optimum stock investment products that are cost and tax efficient.
Investing in Cryptocurrencies
Cryptocurrencies are yet to be proven as a core ingredient to a well-diversified portfolio. For now, consider them as a somewhat volatile commodity (think gold, silver, etc.) which in the future could serve as a potential small sleeve in a portfolio that can help further diversify risk. Bitcoin is one of the most popular forms of digital money (cryptocurrency). Unlike standard money issued by a central bank, digital currency is created by open-source software (blockchain). Companies can release their own cryptocurrencies with an Initial Coin Offering to raise funds for business. You can then buy crypto-tokens with your cryptocurrency. Cryptocurrencies are hailed as a revolutionary way of transferring borderless money securely and without fees, but it is still a very new technology, the future implications of which are barely understood.
Investing in CD’s
CD’s are low-risk investments similar to high-yield savings accounts or short-term bonds. This type of investment has a promising blend of safety and yield. Banks offer anywhere from one-month to 20-year CDs. By purchasing one, you agree to leave your money tied up in the account for the specified period. In return, the bank pays you interest, backed by FDIC insurance.
The longer you invest in CDs, the higher the reward, but cashing out early can be costly.
Some investors create a “CD ladder” with staggered maturity dates to create the ideal balance of liquidity and yield.
Investing in Bonds
When you buy a bond, you are like a miniature bank, offering a company your money in exchange for regular interest payments. For example, if you were to invest $1,000 in a bond that matures over a 10-year period with 5% interest, you will receive $50 back each year. After 10 years, you’ll receive your original investment back. You can also sell at any time to earn capital gains.
For instance, interest rates may fall after five years and your bond may be priced at $1,100, so you may sell to lock in the $100 gained. No bond is without risk, but their prices are considered more stable than daily fluctuating stocks. Most people invest in bonds through a well-diversified mutual fund or ETF..
Investing in Mutual Funds
Mutual funds are investments where several investors combine their money into a single pool in order to purchase securities. Mutual funds are managed by portfolio specialists who allocate and distribute the pool of money into various investment types including stocks, bonds, and other securities. Mutual funds can be a great investment choice for diversifying your portfolio and building out your long-term financial plan, as they tend to have a lower risk profile than singular stocks.
Mutual funds can also be actively managed, being updated by portfolio specialists who regularly adjust allocations within the fund Yearly management fees and up-front charges are often associated with these actively managed accounts, which can translate to lower returns.
Investing in Exchange Traded Funds (ETFs)
ETFs are similar to mutual funds but are traded via the stock exchange. ETFs are able to track and mimic a specific stock index like the S&P 500, Dow Jones, or NASDAQ. ETFs stock “baskets” can be comprised of stocks focusing on business sectors, commodities, emerging markets, and more.
ETFs are a great tool to have in a long-term financial planning strategy or if you are approaching retirement or in retirement and your risk tolerance has decreased.
Common Types Of ETFs
- Index – Seeks to mirror the performance of a specific investment index, such as the S&P 500 or Dow Jones.
- Commodity – Seeks to mirror the performance of a specific commodity or commodity group, such as gold or oil.
- Bond – Seeks to mirror performance of a specific bond index or product, such as U.S. Treasury or municipal bonds.
- Currency – Seeks to mirror the performance of a specific currency or combination of U.S. or international currencies, such as the Euro or Yen.
- Industry – Seeks to mirror the performance of a specific industry segment, such as healthcare or manufacturing.