While stocks are a popular choice when it comes to wealth-building, there are many other investment options you can look at and consider.
In investing, you need to have a well-diversified portfolio that includes assets that align with your financial goals, timeline, and risk tolerance.
Here are six assets you need to add to your investment portfolio:
Stocks are an integral part of investing. By buying stocks or equities, you obtain some ownership in a publicly traded company. And as that company grows and generates more profits, you should see your shares’ value increase over time.
To hold stocks, you first need to have an account. You can open a tax-advantaged account, such as an individual retirement account (IRA) or a taxable brokerage account.
Once you have your account, you can decide which stocks to invest in. To help you decide, here are four popular types of stocks available in the market that you can take advantage of:
- Growth Stocks: These refer to companies that are expected to grow their revenues, profits, and cash flow faster than their peers or the broader market.
- Value Stocks: Firms considered to be undervalued in the stock market. They are stocks trading below the estimated value of their companies, which still have good business fundamentals.
- Blue-Chip Stocks: These are shares of established, large, and well-known companies that have a long and proven history of stability in growth and financial performance. Such stocks are owned by public firms that have become household names like Apple Inc., Coca-Cola Co., Microsoft Corp., and IBM Corp.
- Dividend Stocks: Companies that pay dividends consistently usually provide their shareholders with a steady income stream.
Bonds are fixed-income securities issued by companies, governments, or other organizations to raise funds. They are debt instruments, representing loans made to the issuer. So when you purchase a bond, you’re providing a loan to the issuer in exchange for interest payments.
Once the bond reaches maturity, the issuer should be able to pay your initial investment money back to you.
Compared to stocks, bonds carry less risk, although their potential returns are also lower. Moreover, the inverse relationship bonds have with interest rates can make them less or more valuable.
Higher interest rates can weaken investors’ interest in a bond’s lower fixed interest rate, leading its price down. Conversely, if interest rates fall, a bond’s fixed interest rates become more attractive, resulting in stronger demand and a surge in its price.
You can buy bonds directly from an issuer or via a brokerage account.
- Mutual Funds
A mutual fund is pooled money from investors used to invest in stocks, bonds, or other securities. Its portfolio is then handled and operated by professional money managers.
Mutual funds have less risk than individual stocks, and opting for such an investment vehicle provides you with instant diversification. That’s because investing in a mutual fund allows you to hold many stocks and other securities simultaneously.
You can also purchase mutual funds through a brokerage account.
Mutual funds can be classified into the following:
- Stock Mutual Funds:These mutual funds comprise stocks handpicked by a professional money manager. Such a fund usually follows the performance of market indexes like the S&P 500.
- Bond Mutual Funds:These funds invest mainly in bonds and offer stability to a portfolio, although their potential returns can be lower than stock mutual funds.
- Balanced Funds:These mutual funds consist of both stocks and bonds, with their portfolios often having a specific asset allocation, such as 60% in stocks and 40% in bonds.
Cash in investing does not strictly refer to bills and coins. Instead, it means cash investments known as cash equivalents which are short-term securities considered the safest and most liquid investment in a portfolio.
If you have short-term financial goals or need money soon, holding cash equivalents can help you. In addition, they are popular with retired individuals that prefer to shoulder less risk.
Common cash investments are as follows:
- Certificate of Deposits (CDs):A CD is a savings account that earns higher interest than a traditional savings account. CDs hold a fixed amount of money for a certain period, which can last for six months, a year, or five years.
- Accessing the money before the end of the given period can usually result in an early withdrawal penalty.
- Treasury Bills:Also known as T-bills, treasury bills are government-backed short-term investments with a maturity of one year or less.
- Money Market Funds:Money market funds are another type of mutual fund that invests in government bonds, municipal bonds, and corporate or bank debt securities.
To invest in cash equivalents, you can find banks that support investing in them or go to the TreasuryDirect website to buy them. You can also look for brokerage firms that offer brokered CD accounts.
Derivatives are financial contracts that derive their values from an underlying asset. This instrument can be used to bet on the future price of an asset or hedge against losses. However, investing in derivatives carry significant risk and may not be suitable for the typical retail investor due to their complex nature.
Derivatives are classified into three types:
- Futures Contracts: Represent an agreement where the two parties buy or sell an asset at a specific date for a predetermined price. You will profit from the difference if the asset’s price rises above the agreed price. However, you will incur a loss if the price trades below the agreed price.
- Options Contracts:Similar to futures, options contracts allow but do not obligate investors to buy or sell an asset at a fixed price within a specific period. Call options give the purchaser the buying rights, while put options give the right to sell.
- Swaps:A swap is an agreement where both parties will exchange cash flows over a certain time. One of the two cash flows is fixed, while the other is variable based on an index price, interest rate, or a currency’s exchange rate.
Cryptocurrencies have garnered a lot of attention and interest as an investment, with Bitcoin becoming the world’s largest crypto by market capitalization and Ethereum following closely.
However, cryptocurrencies are known to be risky and volatile, with the potential for big upward and downward movements over the short term. Furthermore, such assets are not regulated like how stocks and bonds are.
Still, that may change as governments consider exercising further regulation of the crypto space.
You can invest in cryptocurrencies through a crypto exchange, where most buying and selling of these digital currencies currently occur.