After a bruising year marked by decades-high inflation and a Federal Reserve rate hike, investors may wonder whether it’s safe to invest. But with a long-term time horizon and the right tools, investing can deliver solid returns.
The first step is determining your risk tolerance and investment objectives. Then you can focus on investments that match your needs.
Equity
Investments are meant to grow your wealth and pave the way for a financially secure future. However, not all investments are the same. They come in various flavors and require different levels of knowledge to understand them. Investing in equity funds and stocks is considered one of the best options.
While growth stocks may be struggling in the wake of last year’s market decline, they are likely to recover in 2023. A diversified equity fund or ETF that owns several high-quality growth names should see continued gains, particularly if the economy returns to its previous growth rates.
In addition to the potential for capital gains, equities also pay dividend payments to investors. This income can help cushion a portfolio against downturns and volatility. Additionally, a dollar-cost-averaging strategy can reduce the overall average cost of owning shares by buying more shares when prices are low.
Debt
Investing can help you build wealth, fund your retirement or get you out of a financial jam. But it’s important to balance potential gains with the risk involved.
As alternatives investments like debt-based investing have gained popularity, it’s important to understand the benefits they can offer. Here are five reasons why you should consider debt investments.
In addition to offering a lower risk than equity investments, debt-based investments can also provide an impressive return. To find the right investment option for you, consider your time horizon and whether or not you want to make use of dollar-cost averaging. As an added benefit, many platforms that host debt investments reward early investors with higher rates of return. This can be a great way to boost your portfolio in volatile markets.
Real Estate
Real estate investments offer income and safety, while also providing the potential for growth. Typically, you must decide between a lower risk investment that pays modest returns or a higher return one with more potential for growth.
Many people choose to invest in rental properties in order to get. a steady stream of rent payments and build equity. Investors may have to make repairs or deal with tenants. They also need to have sufficient cash available for upfront maintenance expenses and vacancies.
Alternatively, investors can purchase large-scale residential rental portfolios through REITs or online real estate platforms. These hands-off investments often pay dividends and can diversify your portfolio. These investments can be a good addition to other, riskier investments such as stocks and cryptocurrencies.
Short-Term Bonds
With the Federal Reserve likely to remain hawkish in 2023, short-duration bonds offer investors compelling yields with relatively low risk.
While bond returns are largely determined by the length of time until maturity, other factors also influence them. For example, as inflation picks up, bond yields typically rise to reflect the higher price of goods and services.
Compared to a savings account, a short-term bond fund offers a stronger return and can provide access to your money when you need it. But it’s important to pay attention to a fund’s expense ratio, which is the percentage of each fund’s total assets that are used to cover management fees and other costs. A lower expense ratio usually results in higher total returns for investors. As such, consider focusing on funds with low expenses ratios when selecting your short-term investments.
Money Market
When it comes to investing, the right mix of investments is critical for meeting your financial goals. Investing can help you reach retirement age comfortably, grow your wealth and build your purchasing power over time.
Investing in the money market is an attractive option for many individuals who are seeking low-risk investments that have a short-term time horizon. These are typically bank-backed securities such as commercial paper, certificates of deposit and U.S. Treasury bills.
They also offer higher interest rates than savings accounts, but may require higher minimum deposits and balances to earn a competitive APY. They are a great place to hold cash savings like emergency funds, sinking funds and money you are setting aside for future purchases. They work well as a holding place before investing in long-term tax-advantaged retirement accounts.