Wondering where to invest a lump sum settlement or other money in order to earn a good rate of return? Before meeting with your investment advisor, it's a good idea to understand the investment options available.
Below are a list of investments and a brief explanation of each.
Certificate of deposit -
A time deposit, usually sold by banks-credit unions-thrift institutions. Commonly termed CD's and are risk free and insured. You can not withdraw the money until the end of the term. At which time you get your principal plus accrued interest.
Money market accounts -
A deposit account that pays interest at the current interest rates of money markets. The rates are usually higher than a typical savings account or checking account. Many banks require higher balances in order to avoid fees. If you require liquidity of funds, but want to earn interest a money market account is ideal for you.
United States Treasury securities -
A government debt instrument issued by the United States Department of Treasury to finance government spending as alternative to taxation. They are often referred to simply as Treasuries and are very safe instruments of investment.
Government bond funds -
Mutual funds that are made up of debt securities issued by the US government and it's agencies. These are good for the beginning investor seeking low risk opportunities with cash flow.
Short-term corporate bond funds -
These are similar to federal bonds in that they are used to raise capital. However, they are issued by corporations and are not federally insured. They usually provide a better rate of return than government or municipal bonds, but with higher risks. They are good for those looking for cash flow and liquidity. These bond funds are also ideal for those who are retired, or for investors who wish to lower their overall portfolio risk.
Dividend paying stocks -
These stocks pay shareholders a portion of the companies profits, called dividends (typically on a quarterly basis). This means you assume short-term cash through dividends and long-term market appreciation if the stock's value increases. These are considered safer than growth stock, but as with any stock purchase the focus should be on companies with consistent dividend increases rather than the highest current yield.
High yield savings account -
Savings accounts provide a low risk, highly liquid means to investing your funds. Online banks provide a higher yield for these federally insured accounts. The main drawback is that savings accounts may yield a lower return than inflation.
Growth stocks -
Referring to a portion of stocks that have historically performed well. These stocks rarely provide cash distribution since they typically reinvest funds to keep the standard of high growth. Many of these stocks are tech companies, are usually well known and can outperform the market for many years. They are best for intermediate to advanced investors due to the risk associated with being some of the hottest stocks in the market.
Growth stock funds -
These funds are for the investor who does not want to analyze and buy individual growth stocks but still want to assume the benefits associated with this segment of the market. Managed by professional fund managers who can recommend either actively managed funds or passively managed funds based on a predetermined index of growth stocks.
Mutual funds -
A fund made up of diversified holdings that is professionally managed and funded by it's shareholders. These funds provide liquidity and are regulated by a government body. The typical fees and slow reaction time to gains are the major drawbacks with mutual funds. Overall they are ideal for a intermediate investor who wishes to have a professional portfolio manager supervise the funds investments. Many times the funds are compromised of stocks that were formerly only available to larger investors.
S&P 500 Index Fund -
A fund made up of 500 largest American companies. In many cases these are the most powerful companies in the world. The fund provides diversification with multiple industries which modifies risk. The management fees are typically very reasonable and are among the best index funds to buy. An S&P Index Fund is great for the entry level investor due to it's diversification and low expense ratios.
REIT's -
Real Estate Investment Trusts are companies that own and manage real estate. These trusts are perfect for the real estate investor who would like to attain the ROI (return on investment) recognized in real estate investing but without actually having to manage it. REIT's avoid taxes since they typically funnel all of their profits back to their shareholders in the form of dividends. They are subcategorized by real estate type such as hotels, retail, residential housing. These are excellent investments for those seeking passive income and cash flow.
Real estate investment -
This can provide a significant ROI in a short amount of time based on the type of real estate investment. Some investors build, rehab or lease properties. The most common types of real estate can include commercial, residential or multi-plex housing. Real Estate investments require a great deal of knowledge with regard to the current and anticipated market conditions, contracting knowledge and real estate laws. They provide low liquidity and are considered high risk investments.
Nasdaq 100 index fund -
A fund made up of 100 of the largest Nasdaq companies. The Nasdaq 100 will be compromised of the best and brightest tech companies who have a proven track record of stability. As with any fund, the diversification provides a limited exposure risk since the failure of a single company will have little impact on your overall portfolio. Since these companies are high valued stocks, they have a higher risk of quick decline in a downward market and reasonable upswing in market recovery. They are considered liquid as they can be converted to cash any day the market is open.
Industry-Specific Index Fund -
Invest in an industry for which there is an interest or background with a Industry-Specific Fund. Some can have low expense ratios and with the fund diversification you will assume a reduced risk associated with single stock purchases in any given industry. However, with narrowed fund investing in a single industry, certain developments that have a negative impact on that industry can make these funds higher risk than a typical mutual fund or growth stock fund.
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