The best way to grow your wealth is with a diversified portfolio. A well-diversified portfolio includes various conservative and aggressive investments.
Avoiding putting all money in one investment ensures you can offset the risk of a specific investment.
Having a diversified portfolio helps you grow your wealth and reach financial goals.
Whether you’re saving for something short-term, such as buying a house, or want to secure your retirement years, holding various investments in your portfolio increases your chances of reaching your goals.
The Factors Affecting Investments
Many factors affect your chosen investments and help determine what to include in your portfolio.
The largest factor is your risk profile, or how much risk you can handle.
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Your risk aversion measures how much risk you can psychologically handle without feeling crippled physically and emotionally.
Your risk capacity refers to how much money you can lose without ruining your financial goals.
Typically, shorter-term goals have lower risk capacity than longer-term goals because there's more time to make up for the loss.
Other factors affecting the investments you choose include:
- Minimum investment requirements
- Rate of return
- Fees and commissions
- Knowledge of how the investment works
- Timeline
Time is money
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Another large factor in choosing the right investments is time.
The more time you have, the more likely your earnings will compound.
For example, the money you put in a savings account that earns interest continues earning interest, compounding your earnings as long as you leave it there. Your earnings earn money; it doesn't get much better than that!
The same is true of other investments that don't earn interest, like dividend-paying stocks.
If you reinvest the dividends, your interest earns interest. This means your earnings grow just by leaving them invested.
On the other hand, time can play against you, if you don’t invest your money, your money will lose value, meaning that you won’t be able to buy the same amount of things with the same amount of money in the future. This effect is called inflation, and we have to fight by investing in instruments with higher rates than inflation.
Liquidity
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One more aspect you must consider when you invest is your needed liquidity, this means how easy it will be to turn your investment into cash.
You should align your investment timelines to achieve your financial goals.
It’s imperative to always consider when you will need the money to make sure you will have cash in hand to face any known or even some unknown circumstances.
Most Popular Investments
According to the most recent Bankrate survey, the most popular investments Americans choose include:
- Real estate – 29%
- Stock market – 26%
- Cash investments – 17%
- Commodities, such as gold or other precious metals – 9%
- Bonds – 9%
- Cryptocurrency – 6%
- Alternative assets – 3%
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Most Common Investments
Here are some of the most common investments you have should consider to learn more about to decide over using them:
High-Yield Savings Accounts and CDs
Cash investments are always a good idea because they keep a portion of your portfolio liquid in an emergency.
High-yield savings accounts and CDs (certificates of deposit) are usually the best option because they pay higher Annual Percentage Yields (APYs) than typical savings accounts.
If you use only FDIC-insured banks, your money is protected by the Federal Deposit Insurance Corporation in case the bank fails.
Make sure you pay attention to the fine print, including the average daily balance you must carry to earn the higher APY or the CD term to avoid early withdrawal penalties.
Stocks, ETFs, and Mutual Funds
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These values are traded in the stock market and gain or lose value according to offer and demand.
Investments in stocks, ETFs (Exchange-Traded Funds), and mutual funds are good for long-term investing.
The S&P 500 has an average return of 10.23% every ten years. If you can avoid emotional investing or making rash decisions because of a sudden market change, stocks, ETFs, and mutual funds may help you reach your goals.
There’s a slight variation in the investments to understand:
- Stocks – When you invest in stocks, you invest in a single company. You purchase shares of the company and become part owner with voting rights. Some companies also pay dividends, which are a portion of the company's profits.
- ETFs – When investing in ETFs, you purchase a diversified basket of securities. Instead of owning a share of one stock, you own many, but the investment is already diversified for you. ETF shares trade throughout the stock trading day, like stocks, and they have low expense ratios because the investments within them aren’t actively traded.
- Mutual funds – Like ETFs, mutual funds are diversified investments in a single fund, but instead of passively managed like ETFs, mutual funds are actively managed. These funds often have higher expense ratios because of the cost of buying and selling assets within the fund, and they only trade at the end of the trading day.
4 Things You Should Know About Stock Dividends
- Dividends are payments to shareholders based on company profits, not stock price
- Stocks that pay dividends are known as income stocks.
- Shares Outstanding are the number of shares a company has issued. More shares can mean smaller dividends per shareholder
- To compare income stocks, use Total Shareholder Return (TSR), it shows the total profit from a stock, combining price gains and dividends
TSR = ( Current stock price - Purchase stock price ) + Dividends
Purchase stock price
Example:
You bought a stock at $40, it rose to $42, and you received $1.20 in dividends:
TSR = ($42 - $40 + $1.20) ÷ $40 = 0.08 or 8%
Bonds
A bond represents a promise by a borrower to pay, they are fixed-income securities that can be emitted by companies, governments or other entities to raise money to finance new projects.
Bonds are less risky than stocks, ETFs, and mutual funds but have lower returns, too. Series I bonds, for example, are almost risk-free and have a fixed rate of return that increases with inflation.
There's a limit of $10,000 per year in I-Series bonds, and they accumulate interest for 30 years if you don't redeem them sooner.
Real Estate
There are many ways for investors to invest in real estate, even with little capital. You can purchase physical real estate, manage it, and earn monthly rental income, or buy undervalued properties, fix them up, and sell them for a profit.
If you don't want to deal with physical real estate or don't have the capital, you can invest in REITs, which are real estate investment funds bought from a real estate investment trust that owns and operates the real estate.
As the investor, you earn passive income from the rental income received but don't have the burden of managing the property.
Other Investments
Many other investment opportunities exist, including:
- Cryptocurrency
- Legal contracts
- Forex
- Non-stock business participation (angel investors)
- Commodities
The key is to determine which investments you have the capital to invest in and if you have the risk tolerance to withstand the investment.
For example, cryptocurrency is fairly new and is high-risk, so you must ensure you can handle the risk.
Other investments, like non-stock business participation, may only be open to accredited investors or investors who earn at least $200,000 per year and have a $1 million net worth.
Final Thoughts
Diversifying your investments is the key to growing your wealth. See how you can distribute your capital across as many investments as possible, including those not tied to the stock market.
When you don’t rely on a specific market to reach your financial goals, you'll have a higher chance of achieving your financial goals and seeing your wealth grow.
You don’t have to know a lot about how each investment works if you work with a financial advisor.
Doing your own research and understanding where you’re investing your money and what could happen is the key to reaching financial freedom.
