BUILDING wealth underpins most people’s dreams. Whether it’s paying for a kid’s education, securing a comfortable retirement, or attaining life-changing financial independence.
What you invest in plays a huge role in your success. It’s not just about picking winning stocks, it’s about making appropriate decisions based on your goals and being able to rely on the proceeds of your investments.
Let’s take a closer look at some of the most popular investment vehicles.
INVESTING IN STOCKS
Almost everyone should own stocks.
Stocks have outperformed most investment classes over almost every 10-year period in the past century.
U.S. stocks have proven to be great investments because as the global economy grows, you own a business that becomes more valuable.
That’s why it makes up the foundation for most people’s portfolios.
Those saving for retirement can ride out many decades of market volatility by owning stocks.
However, there are two main risks with stocks:
Volatility: Stock prices can swing broadly over very short periods. This creates risk if you need to sell your stocks in a short period of time.
Permanent losses: Stockholders are business owners, and should a business fail, the company may go bankrupt, and as a stockholder you will be left with nothing.
You can limit your risk to the two things above by understanding what your financial goals are.
Protecting Your Capital – You should shift the money you’ll need in the next several years out of stocks, and into bonds and cash.
If your goals are still a long way in the future, you can hedge against volatility by doing nothing.
Even though two of the worst market crashes in history, stocks delivered incredible returns for investors who bought and held.
How to avoid permanent losses
The best way to avoid permanent losses is to own a diversified portfolio.
Don’t put too much of your wealth into any one company, industry, or end market.
Diversifications will help to limit your, while your best winners will more than makeup for it.
If you invest the same amount in 20 stocks and one goes bankrupt, the most you can lose is 5% of your capital.
Now let’s say one of those stocks goes up 2,000% in value, it makes up for not just that one loser but would double the value of your entire portfolio.
Diversification can protect you from permanent losses and give you exposure to more wealth-building stocks.
INVESTING IN BONDS
As you get closer to your financial goals, owning bonds that match up with your timeline will protect your assets
There are three main kinds of bonds:
Corporate bonds, issued by companies.
Municipal bonds are issued by state and local governments.
Treasury notes, bonds, and bills are issued by the U.S. government.
Bonds held up much better when the market crashes because they are less volatile.
INVESTING IN REAL ESTATE
Real estate investing might seem out of reach for most people. However, there are ways for people at almost every financial level to invest in and make money from real estate.
Publicly traded REITs, or real estate investment trusts, are the most accessible way to invest in real estate.
REITs trade on stock market exchanges just like other public companies. Here are some examples:
REITs are excellent investments for income since they don’t pay corporate taxes, as long as they pay out at least 90% of net income in dividends.
It’s actually easier to invest in commercial real estate development projects now than ever.
The bottom line is that everyone’s situation is different. You must consider your investment time horizon, desired return, and risk tolerance to make the best investment decision to reach your financial goals.