If you’re reading this, you’re already thinking like an investor. Wise investors know not to blindly put all their eggs in one basket. Instead, they become familiar with a few a types of investments and use their knowledge of each to make money in different ways.
Thankfully, there are lots of baskets to choose from.
But you should know:
It’s important to understand all your options as an investor before you actually invest your money and build an investment portfolio.
Of course, every type of investment has its upside and downside. The best types of investments to make for yourself depends on a few things. These include your risk tolerance, level of understanding of certain markets, timeline, and reason for investing.
Among the different types of investments out there, there are probably a few that will work well for you. Let’s explore them all so you can decide what to invest in.
Cash and Commodities
Cash and commodities are typically considered low-risk types of investments, so if you’re new to investing or risk-averse, one of these options could be a good place to start.
Keep in mind that low-risk types of investments also tend to have low returns. That’s definitely the case with some of these investment types…
Yes, you can invest in gold and other commodities such as silver or crude oil. In fact, the practice of investing in gold goes way back, but that doesn’t necessarily mean it’s a great investment. Gold is a commodity so its price is based on scarcity and fear, which can be impacted by political actions or environmental changes.
If you are investing in gold, be aware that your protection against a price drop, your moat, is based on external factors so the price can fluctuate a lot, and quickly. The price tends to go up when scarcity and fear are abundant and down when gold is widely available and fear is abated.
If you think the world is going to be a more fearful place in the future, then gold could be a good investment for you.
Takeaway: The thing to remember is that betting on commodities such as gold is usually just that — betting. It’s not Rule #1 investing unless you KNOW that scarcity is going to create a demand for gold and drive up the price.
2. CDs and Bank Products
Bank products are investment types offered by banks that include savings accounts and money market accounts, which are similar to savings accounts but typically earn higher interest rates in return for higher balance requirements.
A CD, short for certificate deposit, is another type of bank product. When you purchase a CD you agree to loan the bank an amount of money for a designated amount of time and interest.
CDs are an extremely low-risk investment, but with low risk, comes low reward. Most banks offer CDs at a return of less than 2% per year, which is not even enough to keep up with inflation.
Takeaway: Don’t waste your time on CDs. While they can be a safe place to save your money and get a little more interest than you would in a savings account, they aren’t a great place to grow your money.
Cryptocurrencies are the newest type of investment. They are unregulated digital currencies bought and sold on cryptocurrency websites.
Cryptocurrencies such as Bitcoin or Dogecoin have gained a lot of interest in recent years as an investment vehicle. However, they remain an incredibly risky investment due to many unknown factors; there is the possibility of government regulation and the possibility that the cryptocurrency will never see widespread acceptance as a form of payment.
How to Invest in Bitcoin
In the same way that you are able to exchange US Dollars for any other currency such as Yens or Euros, you can also exchange your USD for cryptocurrencies.
Though cryptocurrencies aren’t technically part of the Forex market, the mechanics of investing in cryptocurrencies is very similar, and the hope of cryptocurrency investors is that the value of those cryptocurrencies goes up against the dollar, and they are relatively simple to buy online.
Takeaway: Someone who invested in Bitcoin in 2013 and sold it today would certainly make some incredible profits. The problem is that there’s no way to time the cryptocurrency market. Bitcoin and other cryptocurrencies could continue to dramatically increase in price, or they could drop to zero.
Take my advice and stay away. At this point, no one knows for sure what the future holds for cryptocurrencies, so investing in cryptocurrencies is little more than speculation.
We don’t invest in things we don’t know. That’s not investing, that’s gambling.
Bonds and Securities
Bonds and securities are other types of low-risk investments. Bonds can be purchased from the US government, state and city governments, or from individual companies. Mortgage-backed securities are a type of bond typically issued by an agency of the U.S. government, but can also be issued by private firms.
4. U.S. Savings Bonds & Corporate Bonds
When you purchase any kind of bond, you are loaning money to the entity you purchase it from for a predetermined amount of time and interest.
Bonds are considered safe and low risk because the only chance of not getting your money back is if the issuer defaults. U.S. saving bonds are bonds backed by the U.S. government, which makes them almost risk-free.
Governments issue bonds to raise money for projects and operations, and the same is true for corporations who issue bonds.
Corporate bonds are slightly riskier than government bonds because there’s more risk of a corporation defaulting on the loan. Unlike when you invest in a corporation by purchasing its stock, purchasing a corporate bond does not give you any ownership in that company.
Takeaway: A bond might only net you a 3% return on your money over multiple years. This means that when you take your money out of the bond, you’ll have less buying power than when you put it in because the rate of growth didn’t even keep up with the rate of inflation.
There is nothing “safe” about running out of money in retirement because your rates of return couldn’t keep up with inflation. It’s not worth it to put your money in bonds.
5. Mortgage-Backed Securities
When you purchase a mortgage-backed security, you are once-again lending money to a bank or government institution, but your loan is backed by a pool of home and other real estate mortgages.
Unlike other bonds, which pay the principal at the end of the bond term, mortgage-backed securities pay out interest and principal to investors monthly.
Takeaway: While they can be a type of income investment that provides steady returns, mortgage-backed securities are one of the more complex investment types, and so should be avoided by beginner investors.
Investment funds are made up of a pool of money collected from multiple investors that are then invested into many different things including, stocks, bonds, and other assets. The collection of investments typically tracks a market index.
6. Mutual Funds
A mutual fund is a type of investment fund operated by a money manager who invests your money for you, and attempts to get good returns.
Mutual funds are typically made up of a combination of stocks and bonds, however, they carry less risk because your money is diversified across many stocks and bonds. You’ll only reap rewards from stock dividends and bond interest, or if you sell when the value of the fun goes up with the market.
When it comes to value, while mutual funds are built and managed by so-called “financial experts”, they typically have a hard time beating the market, especially when you factor in the fees that the money managers charge to those who invest in their fund.
The truth is, you shouldn’t care whether you beat the market or not. Your financial skill is judged by whether you’re living comfortably when you’re 75.
Rule #1 investors expect a minimum annual compounded rate of return of 15% a year or more. If we can get that, we don’t care what the market did because we’re going to retire rich anyway.
Takeaway: You’ll have a much easier time (and more fun!) learning how to invest your own money rather than relying on some mutual fund manager who can’t beat the market.
7. Index Funds
Similar to mutual funds, index funds are one of the types of stock investments that diversifies your investment across multiple stocks. The difference between index funds and mutual funds is that index funds are passively managed, not overseen by a money manager.
Because index funds are passively managed, there are less fees involved, which means you have the potential for slightly higher returns than with a mutual fund. However, your returns will be based totally on how well the index your fund is tracking does.
Given that most major indexes are used to track the overall movement of the market, indexes perform about as well as the overall market does in the very long term. In other words, they tend to yield an average return of about 7% per year.
While this isn’t as high as the returns you can achieve through successfully picking individual companies with the right research, it IS a respectable return that is considerably higher than the interest rates of a savings account or the return rates of bonds.
When you invest in an index, you’re essentially betting your money on the future of America. If you’re confident the American economy will keep growing, you’re probably going to come out ok.
The problem here is that if you put your money into an index, and we go into a recession, the market could be down for a significant amount of time. If you’re invested in an index, that means your portfolio will also be down. That’s another plus of investing in individual companies. The really great ones tend to perform, even in times of recession.
Takeaway: If you don’t want to do the work (and reap the rewards) of learning to invest in individual companies, an index fund is a good “put your money in and forget about it” option that will typically generate better results than a mutual fund.
8. Exchange-Traded Funds
Exchange-Traded Funds, or ETFs as they’re commonly called, are similar to an index fund in that they track a popular index and mirror its performance. Unlike index funds, though, ETFs are bought and sold on the stock market.
Because ETFs are traded on the stock market, you have more control over what price you purchase them at and will pay fewer fees. Your reward is completely dependent on how well or how poorly the index you invest in performs.
You can minimize your risk by investing in an ETF that tracks a broad index such as the S&P 500.
Takeaway: Simply putting your money in an exchange-traded fund like the S&P 500 (SPY), a collection of the 500 biggest companies in the market, allows you to profit from the market’s growth without having to pay fees to a fund manager. Aside from investing in individual companies (Rule #1 Investing), this is the best option beginner investors have available.
The Stock Market
There are a number of ways to invest in the stock market. As I mentioned above, you could invest in a stock market index, or you could invest with stock options, or—and this one’s my favorite—you could invest in individual stocks.
9. Individual Stocks
Stocks are “shares” of ownership in a particular company. When you purchase an individual company’s stock, you become a partial owner of that company. That means when the company makes money, so do you, and when the company grows in value, the value of your stock grows as well.
When the price of a company’s stock goes up, the value of the owner’s investment in that company goes up. The owner can then choose to sell the stock for a profit. However, when the price of a company’s stock goes down, the value of the owner’s investment goes down.
Stock owners can also receive rewards via dividends if the company chooses to distribute earnings to their shareholders.
On average, the entire stock market grows at a rate of about 7% a year, but it is possible to achieve much higher returns by investing in hand-selected individual companies. You can minimize the risk of your investment value going down by purchasing shares of stock in only wonderful companies at prices that guarantee a big return. That is the Rule #1 way
Takeaway: Among the many things to invest in, stocks are my personal favorite and by far the most rewarding. The most successful investors invest in stocks because you can make better returns and retire a lot faster by doing so than with any other investment type. Warren Buffett became a successful investor by buying shares of stocks, and you can too.
Investing in stocks the Rule #1 way is the best way to grow your money over time. If you want to learn more about investing in individual stocks, here’s course 101.
10. Stock Options
When you purchase an option in a company, you are betting that the price of that company’s stock will go up or down. Purchasing an option gives you the option to buy or sell shares of that company at a set price within a set timeframe without actually owning the stock.
Options are incredibly risky. As with most high-risk types of investments, there is potential for high returns, however, there is also the potential for great loss, especially if you don’t know what you’re doing
With a PUT option, you’re agreeing to SELL a stock when it gets to a certain price at a specific time. With a CALL option, you’re agreeing to BUY a stock at a certain price at a specific time.
PUT options are similar to an insurance policy. You get them at a set price, over a certain period of time and sell the stock regardless of the price. Investors generally buy PUTS when they are concerned that the market will fall. This is because a PUT gives you the right to sell a stock at a fixed price, and it will typically increase in value if the price of the underlying stock starts to drop.
CALL options have a market price, referred to as a premium. You pay the premium of the call option to secure the contract to buy the underlying stock.
Investing in CALL options is a fantastic way to generate cash flow and reduce basis on companies we already own.
Takeaway: In addition to stocks, options are a good choice if you are looking for high-return types of investments. However, I don’t recommend investing in options for beginners. Learn more about options here.
There are two major types of retirement accounts: a 401K and an IRA. Both accounts are made up of cash you put aside and then invest in various ways.
The risk and reward of retirement accounts are completely dependent on what they are invested in, which can vary greatly. In addition to these retirement accounts, annuities are another investment time that you may want to consider as part of your retirement plan.
A 401k is a retirement account offered by your employer. The big benefit of this retirement option is that your employer may offer a “match”, which is when they will put in the same amount of money into your account that you put into it up to a certain percentage.
Typically, there are a limited amount of investment options for 401Ks, most of which are mutual funds, which means your retirement is in the hands of a money manager.
The Big Problem with 401ks
All of the money invested in a 401(k) ends up in mutual funds. The problem is that these mutual funds almost always fail to outperform the market average.
In other words, simply putting your money into an index such as the S&P 500 and leaving it there with zero management would still net you more returns than you are likely to see when you invest in a 401(k).
The reason why mutual funds fail to outperform the market once again goes back to the fact that the managers of these funds charge a considerable fee for their services. Once this fee is deducted, any returns that the manager was able to yield beyond the overall market’s performance are quickly diminished.
Remember, diversifying your investment portfolio does not inherently mean that you are lowering your potential for risk.
Takeaway: My problem with a 401K is that most of them force you to invest in mutual funds. This means your retirement is in the hands of a money manager.
401ks are not something that should be avoided in all situations. An employer match that doubles your investment is almost always worth it. However, they should not be relied on as your sole means of investment.
Stick to the employer match. Investing any more than that in a 401k is just a wasted opportunity.
An IRA is an individual retirement account you can set up for yourself. In terms of IRAs, there is traditional, which is tax-deferred, and Roth, which is tax-free. Did you hear that? A Roth IRA is tax-free! The money you invest in a Roth IRA is taxed before it is invested, so when you take it out during retirement you aren’t taxed on the income from your investments.
With both an IRA and a Roth IRA, you have more control over where you invest your money than you do with a 401K. You can choose to invest the money in these accounts in individual stocks, bonds, ETFs, and mutual funds.
The more control you have over your investments and the more diversified they are, the less risk.
Takeaway: No matter who you are or where you work, a Roth IRA is one of the best things to invest in because you can have total control over what it is invested in and your money grows tax-free! Max it out and invest it the Rule #1 way.
Annuities are a contract between an investor and an insurance company where the investor pays a lump sum in exchange for periodic payments made by the insurer. They are typically used to supplement income and lock down a steady, monthly payment during retirement.
There’s no real risk to annuities, but there’s no real chance of return either. They are simply a way to set aside income for retirement, not ensure growth.
Takeaway: While annuities may be helpful for some retirees, they are not an ideal investment option for beginner investors or a way to grow your money.
There are a variety of ways to invest in real estate: homes, flip houses, business buildings, apartments, farms and trailer parks, to name a few. While the options are many, the price of entry is high, but there are a couple of ways to get around this…
Property such as buildings for business operations, land, and homes is often an expensive investment, which easily crowds out investors with less capital. However, crowd-funded real estate investment opportunities are beginning to pop up, providing new types of investments for those who want to invest in real estate but don’t have the cash.
The hardest part about investing in real estate is finding a property that you can purchase with a margin of safety. If you can do that, you can make some decent returns investing in property. You can make money by buying the property at a below-market rate and selling it at full price, as well as by renting or leasing the property to tenants.
Takeaway: The various types of property investments can all be good types of investments as long as you treat them the same as any other Rule #1 investment. This means the property should have meaning to you, have a moat, good management, and be purchased with a margin of safety.
While it’s possible to find a great deal on real estate, it might be easier to invest in the stock market, make the same returns or better, and not have to deal with having a bunch of rental properties to take care of.
15. Real Estate Investment Trust
A Real Estate Investment Trust, or REIT, is similar to a mutual fund in that it takes the funds of many investors and invests them in a collection of income-generating real estate properties. Plus, REITs can be bought and sold like stocks on the stock market so they can be cheaper and easier to invest in than property.
Takeaway: Without having to buy, manage, or finance any properties yourself, investing in a REIT reduces the barriers of entry common to property real estate investment.
You don’t need a lot of money and you don’t need to worry about maintaining the properties. While you won’t make as much money from property appreciation, you can receive a steady income from REITs.
What Are the Worst Types of Investments for Beginners?
While you want to know what to invest in, it may be even more important to know what not to invest in.
A good rule of thumb as a beginner is if you’re putting a lot of money into it but not getting anything out of it other than a bunch of debt or an ego boost, it’s a bad investment. This includes expensive cars, fancy interiors, and other items that decrease in value over the period of time you own them.
While fancy material things may help you keep up with the Jones’ on your block, the benefit is ultra temporary. It’s so important to live within your means and spend your money wisely so you can afford the life you want in the future.
Avoid these common money traps and you’ll have more money for the good things to invest in both now and in the future.
Takeaway: Putting your money into expensive possessions or setting it in a savings account because you think it’s “safe” will only hurt you in the long run. None of these are investments—they’re money traps. Like cars and boats, money sitting in a savings account is losing value over time. Put your money into the only type of investment that’s guaranteed to make you money—the stock market.
What Are the Best Types of Investments for Beginners?
Here I’ve talked about 15 different types of investments, which gives you a lot of options. So, what are the best ones for beginners?
Well, everyone’s reasons for investing and personal risk tolerance are different, so you have to decide for you which investment types suit your lifestyle, timeline, goals, and risk tolerance best.
I’m not your financial advisor, but here’s what I would do:
First, I’d open up a Roth IRA and invest for retirement so my money can grow tax-free. Then, if I just wanted to invest my money with little research and forget about it, I’d put a chunk of it into an Index Fund such as the S&P 500 or the Russel 2000.
Lastly, but certainly not the least of these, I’d invest in the stock market. This is the best place to invest with a small amount of money and get big returns.
If you are on the fence about investing in stocks because you think they are “riskier” than these other different investment options, come join me at my Live 3-Day Virtual Investing Workshop. Here, I’ll help you overcome your fear of the stock market and learn how to make great investments with minimal risk.
See you there.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.