Smart Things to Invest In
A smart investment for one person may not be the best choice for another investor. What's smart for you depends on your lifestyle and your tolerance for risk. You must also take into account your time lines and your ultimate goals. No matter what, a smart investment is one you understand.
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Investments You Understand
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While it is enticing to invest in something you've heard can bring spectacular returns, it is not a smart investment if you are not also aware of its inherent risks. Not understanding an investment generally means not knowing when might be the right time to pull back or reallocate assets, which can be a very dangerous thing.
Real Estate
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Since everyone needs a roof over their heads, owning that home can be a wise investment. Homeowners create wealth in two ways. They build equity each month when they pay down the principal on their mortgage. They also make money when property values appreciate. Though it is possible to lose money in real estate, it is also true that over the long term prices tend to rise. It's probably not a smart investment unless you plan to stay in a home for a minimum of five or more years, long enough to hopefully ride out a market decline and to recuperate some of the transactional costs of buying and selling.
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Retirement Accounts
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IRAs and 401(k) plans allow investors to put money away towards retirement with significant tax advantages. Traditional IRAs and 401(k)s grant immediate tax deductions, which reduces your current tax burden and leaves more money available to invest. Roth IRA investors pay ordinary income taxes upfront but benefit later by not paying taxes when distributions are taken. If your employer matches your own contributions into your 401(k), consider that free money and an immediate return on the initial amount invested. Even if your current financial situation does not allow you to maximize your 401(k) contributions, make sure to invest at least as much money as your employer matches.
Stocks and Bonds
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Although the stock market has faced some black days and bear markets, it remains a smart investment for people who can stomach its ups and downs. Over the long term, stocks have consistently outperformed bonds and other investments. They are widely considered to be one of the best investments to help keep up with the cost of inflation. Because of volatility, the stock market is not a smart place to invest assets you plan to cash out in the short term. Investing in bonds adds diversity to a portfolio, and sometimes when stocks fall bonds rise. Municipal bonds provide tax shelters for investors in high tax brackets and hold a worthy place in many portfolios.
Liquid Assets
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It is a smart idea to put some of your investment portfolio into cash or cash equivalents. You need an emergency fund in case you lose your job, have an unexpected home or car repair or in the event of a medical or other personal emergency. Moreover, it is good to have some liquid assets so that you can jump on new investment opportunities. If a high-yielding bond comes on the market or you get a hot stock tip, you cannot get into the investment unless you have cash on hand for the purchase. Look for the highest-yielding savings or money market you can find in an FDIC-insured bank or financial institution.
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