About Ways to Invest Money

There are many ways to invest money. The best ways make your money grow while minimizing risk to your initial investment. The more aggressive the investment, the greater its potential to increase in value over the long run. However, there is also increased risk over the short term. A well-invested portfolio contains a broad mix of aggressive and conservative investments for the long and short term.

401(k) Plans

The primary reason people invest money is for retirement. The best way to do this is with an employer-sponsored 401(k) plan. Workers designate an amount to have deducted from each paycheck before taxes are taken out. That money is then invested in a retirement savings plan. Some employers also contribute free money to your 401(k(. Both of these features will significantly increase the value of your retirement savings over many years. You can invest the money any way you want. Buy aggressive stocks and mutual funds when you have decades before retirement. When you get closer to retirement age, switch to bonds and more conservative mutual funds.

IRAs

For people who do not have employers offering 401(k) plans, Individual Retirement Accounts are a good investment option. There are two types of IRAs. Traditional IRAs offer a tax deduction for qualified contributions and defer taxes until you retire. Roth IRAs offer no tax breaks on contributions, but grow tax-free and are tax-free when distributions are taken in retirement. IRA money can be invested in any financial security. A good choice is a date-targeted fund that automatically redistributes assets to more conservative investments as you approach retirement age.

529 Plans

Another common reason for investing is to save money for a college education. The best way to do that is with a 529 plan. They are offered by states but you don't have to live in a state to participate in its 529 plan. You are allowed to shop around for the best deal. The plans offer a variety of investment options. These are usually a selection of mutual funds with varying amounts of risk. The money is allowed to grow tax-free and can also be spent tax-free as long as it is on educational expenses. Money from a 529 plan does not have to be spent at a college in the same state that sponsored the plan.

Bull Markets

Good economic times are called bull markets because a bull thrusts its horns upward. When economies are good, growth stocks do well. You can buy these individually through a stock broker or with an online brokerage like E*Trade. Investors can also purchase shares in growth mutual funds that are heavy in growth stocks. Index funds are another good option during a bull market. They contain stocks that mimic the performance of a particular market index. If the markets are doing well, index funds follow. The fees are also lower than actively managed mutual funds.

Bear Markets

Bad economic times are called bear markets because a bear swipes its paws downward. When the economy is flat or falling, focus on interest and dividends instead of growth. Some conservative stocks pay generous dividends. These are portions of the profits that are paid to investors. Investing in companies paying high dividends allows you to get paid while waiting out the market downturn. Bonds are another relatively conservative investment that pays dividends. Income-producing mutual funds are composed of bonds and dividend-paying stocks. Certificates of deposit and money market accounts pay interest. They are good places to store cash for the short term while waiting for the market to settle down or while looking for a better investment.