Whatever your personal financial goal is, you need a fundamental understanding of the various investment instruments that can help you put your money to work, ensure you're on the path to beat inflation, reduce your tax burden, and grow the wealth you need to reach your financial goals.
The Five Most Common Types of Investments
Investing in stocks literally makes you a partial owner, or "shareholder," in a publicly-traded company. As the value of the company's stocks grows, so does the value of the stocks you own. Depending on the particular stock, you may also earn money through dividends, which are a percentage of a company's profit that is paid out to shareholders on a regular basis. Stocks carry more risk than more conservative investments like bonds, as they regularly fluctuate in value on a daily, hourly, or minute-to-minute basis. However, the upside is that stocks have historically beat inflation and interest rates over time — gaining, on average, about 8% annually. This makes them a strong portfolio choice for an investor who plans on holding them for several years or longer.
Important to know about stocks: For the vast majority of investors, experts say the best time to invest in stocks is sooner rather than later. “Stocks are for the long run," says Robert Johnson, chief executive officer at the American College of Financial Services. "If you have a longtime horizon for goals like retirement savings, invest in stocks as soon as possible."
A bond is an investment where you essentially loan money to the issuer (typically a company or a government), and you earn interest on the amount you loaned or invested. Companies and government agencies issue bonds to raise the funds needed to build roads, invest in infrastructure, or conduct much-needed research and development. Bonds are rated by their quality and safety, which is based on the financial condition of the issuer. Bonds are a more conservative type of investment, usually paying out a fixed interest rate over the duration of the bond.
Important to know about bonds: “If you have a shorter time horizon and want to protect wealth, bonds are appropriate as they aren't as volatile as investing in stocks," Johnson adds.
3. Mutual Funds
Mutual funds allow you to "pool" your cash with other individuals to invest in a wide range of stocks and bonds. As a mutual fund shareholder, you'll share in any gains or losses in the fund. Because mutual funds allow you to invest in a variety investments simultaneously, they're a great way to spread your investment risk while benefiting from the financial success of the companies included in the mutual fund. You can learn more about a particular mutual fund by thoroughly reviewing the fund's prospectus (essentially an owner's manual for mutual fund investors) that includes the fund's investment goals, strategy, fund manager, and fee structure, among other key features.
Important to know about mutual funds: As mutual funds tend to spread investment risk around, they're considered more conservative than individual stock investments. “In general, someone closer to retirement age will be allocated in more conservative investments (like fixed-income and mutual fund investments), and someone farther from retirement age will be allocated in more aggressive investments, like stocks," explains Kevin Kleinman, an investment manager with Blue Haven Capital and founder of Watchhimtrade.com.
Tip: There's no substitute for good financial advice. But make no mistake, you have to educate yourself too.
Individual retirement accounts, also known as IRAs, are a tax-efficient way to save for retirement. Let's look at two different options: Traditional IRAs and Roth IRAs.
Contributions to Traditional IRAs — the most common type of IRA investment — are tax-deductible, meaning you do not pay income tax on the money you put into the IRA or any earnings the IRA generates, until you take that money out of the account. Since most investors wind up in a lower tax bracket in retirement, withdrawals from a Traditional IRA are usually taxed at a lower rate than they would've been at the time contributions were made and earnings were accruing.
By contrast, contributions to Roth IRAs are made with post-tax dollars. However, as with Traditional IRAs, any earnings in Roth IRAs accrue tax-free. The real tax savings with Roth IRA comes at retirement, because all withdrawals from Roth IRAs are tax-free.
Important to know about IRAs: You should begin investing in IRAs as early as possible to build momentum and earn more money. “Younger investors can take more risks (own a larger percentage of equities) with their IRAs and 401(k)s because they [don't need to] use that money until they retire," says Gabriel Pincus, president of GA Pincus Funds.
5. 401(k) Plans
401(k) plans are employer-sponsored retirement investment plans that enable employees to set aside tax-deferred income for retirement. In some cases, employers will match your contribution dollar-for-dollar, up to a specific percentage (usually between 3% and 6%). Like IRAs, the earlier you start investing in a 401(k) plan, the more money you'll earn over the long term. Most 401(k) plans hold a majority of stocks and mutual funds (which boost returns), especially when plan participants are younger and can take more risk. If your employer offers any kind of matching plan, you should park your retirement money in the 401(k) before investing in an IRA — the rate of return on those matching funds can't be beat!
Important to know about 401(k) plans: 401(k) plans provide long-term tax-deferred investing for retirement. The sooner you start investing in a 401(k) plan, the more likely it is that you'll see stronger investment returns. “If you want to lower your tax bill and accumulate wealth for retirement, participate in your employer-sponsored retirement plan," adds Johnson.
The Takeaway: Focus on Investment Fundamentals
Because everyone has unique financial goals, there isn't just one investment approach that works for everyone. To find the investment strategy that works for your personal situation, talk to a Synovus financial advisor. We can help you create a sound investment strategy and choose the types of investments that best fit your unique financial goals.
Ready to talk with someone to help you get started? Call us at 1-888-SYNOVUS (1-888-796-6887) to find a Synovus financial advisor near you.
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