10 Best Investments In 2021
Municipal bonds are a good selection for investors who live in high-tax states, allowing them to avoid levies and generate income. However, their lower yields may be less attractive to investors in low tax brackets or low-tax states.
Risk
Individual bonds carry default risk, meaning the issuer becomes unable to make further income or principal payments. Cities and states don’t go bankrupt often, but it can happen, and historically muni bonds have been very safe — although a rough 2020 challenged that safety a bit.
Bonds may also be callable, meaning the issuer returns principal and retires the bond before the bond’s maturity date. This results in a loss of future interest payments to the investor. A bond fund allows you to spread out potential default and prepayment risks by owning a large number of bonds, thus cushioning the blow of negative surprises from a small part of the portfolio.
Liquidity
You can buy or sell your fund shares every business day. In addition, you can typically reinvest income dividends or make additional investments at any time.
If you want to achieve higher returns than more traditional banking products or bonds, an S&P 500 index fund is a good alternative, though it does come with more volatility.
The fund is based on about five hundred of the largest American companies, meaning it comprises many of the most successful companies in the world. For example, Amazon and Berkshire Hathaway are two of the most prominent member companies in the index.
Like nearly any fund, an S&P 500 index fund offers immediate diversification, allowing you to own a piece of all of those companies. In addition, the fund includes companies from every industry, making it more resilient than many investments. Over time, the index has returned about 10 percent annually. These funds can be purchased with very low expense ratios (how much the management company charges for running the fund), and they’re some of the best index funds.
An S&P 500 index fund is an excellent choice for beginning investors because it provides broad, diversified exposure to the stock market.
Best investment for
An S&P 500 index fund is a good choice for any stock investor looking for a diversified investment and who can stay invested for at least three to five years.
Risk
An S&P 500 fund is one of the less-risky ways to invest in stocks because it’s made up of the market’s top companies and is highly diversified. But, of course, it still includes stocks to be more volatile than bonds or any bank products. It’s also not insured by the government to lose money based on fluctuations in value. However, the index has done quite well over time.
The index closed 2020 near all-time highs after a strong rebound and has stayed strong through 2021, so investors may want to proceed with caution and stick to their long-term investment plan rather than rushing in.
Liquidity
An S&P 500 index fund is highly liquid, and investors will be able to buy or sell it on any day the market is open.
Even your stock market investments can become a little safer with stocks that pay dividends.
Dividends are portions of a company’s profit that can be paid out to shareholders, usually quarterly. So with a dividend stock, not only can you gain on your investment through long-term market appreciation, but you’ll also earn cash in the short term.
Whether they pay dividends or not, buying individual stocks is better suited for intermediate and advanced investors. But you can buy a group of them in a stock fund and reduce your risk.
Best investment for
Dividend stock funds are a good selection for almost any kind of stock investor but can be better for those looking for income. In addition, those who need income and can stay invested for longer periods of time may find these attractive.
Risk
As with any stock investments, dividend stocks come with risk. They’re considered safer than growth stocks or other non-dividend stocks, but you should choose your portfolio carefully.
Make sure you invest in companies with a solid history of dividend increases rather than selecting those with the highest current yield. That could be a sign of upcoming trouble. However, even well-regarded companies can be hit by a crisis, so a good reputation is finally not a protection against the company slashing its dividend or eliminating it.
Liquidity
You can buy and sell your fund on any day the market is open, and quarterly payouts are liquid. To see the highest performance on your dividend stock investment, long-term investment is key. It would help if you looked to reinvest your dividends for the best possible returns.
An index fund based on the Nasdaq-100 is a great choice for investors who want to have exposure to some of the biggest and best tech companies without having to pick the winners and losers or having to analyze specific companies.
The fund is based on Nasdaq’s 100 largest companies, meaning they’re among the most successful and stable. Such companies include Apple and Facebook, each of which comprises a large portion of the total index. Microsoft is another prominent member company.
A Nasdaq-100 index fund offers you immediate diversification so that your portfolio is not exposed to the failure of any single company. In addition, the best Nasdaq index funds charge a meager expense ratio, and they’re a cheap way to own all of the companies in the index.
Best investment for
A Nasdaq-100 index fund is a good selection for stock investors looking for growth and willing to deal with significant volatility. In addition, investors should commit to holding it for at least three to five years.
Risk
Like any publicly traded stock, this collection of stocks can move down, too. While the Nasdaq-100 has some of the strongest tech companies, these companies also are usually some of the most highly valued. That high valuation means that they’re likely prone to falling quickly in a downturn, though they may rise again during an economic recovery.
Liquidity
Like other publicly traded index funds, a Nasdaq index fund is readily convertible to cash on any day the market is open.
Rental housing can be a great investment if you have the willingness to manage your own properties. And with mortgage rates hitting all-time lows recently, it could be a great time to finance the purchase of a new property. However, the unstable economy may make it harder to actually run it since tenants may be more likely to default due to unemployment.
To pursue this route, you’ll have to select the right property, finance it or buy it outright, maintain it and deal with tenants. You can do very well if you make smart purchases. However, you won’t enjoy the ease of buying and selling your assets in the stock market with a click or a tap on your internet-enabled device. Worse, you might have to endure the occasional 3 a.m. call about a broken pipe.
But if you hold your assets over time, gradually pay down debt, and grow your rents, you’ll likely have a powerful cash flow when it comes time to retire.
Best investment for
Rental housing is a good investment for long-term investors who want to manage their own properties and generate regular cash flow.
Risk
As with any asset, you can overpay for housing, as investors in the mid-2000s found out. With low-interest rates and a tight housing supply, housing prices surged in 2020 and 2021, despite the economy’s struggles. Also, the lack of liquidity might be a problem if you ever need to access cash quickly. You may have to come up with serious cash for some expenses, such as a new roof or air conditioning if they’re needed. Then, of course, you’ll run the risk of the property sitting empty while you’re still paying the mortgage.
Liquidity
Housing is among the least liquid investments around, so if you need cash in a hurry, investing in rental properties may not be for you ( though a cash-out refinance or home equity loan is possible). And if you sell, a broker may take as much as 6 percent off the top of the sales price as a commission.
Cryptocurrency is a kind of digital electronic-only currency that is intended to act as a medium of exchange. It’s become popular in the last decade, with Bitcoin becoming the leading digital currency. Crypto has become a hot property in the last few years in particular, as dollars have flown into the asset, pushing up prices and drawing even more traders to the action.
Bitcoin is the most widely available cryptocurrency, and its price fluctuates a lot, attracting many traders. For example, from a price below $10,000 a coin at the start of 2020, Bitcoin soared to around $30,000 at the start of 2021. it has since more than doubled above the $60,000 mark.
Unlike other assets listed here, it’s not backed by the FDIC or the money-generating power of either a government or a company. Instead, its worth is determined solely by what traders will pay for it.
Best investment for
Cryptocurrency is good for risk-seeking investors who wouldn’t mind if their investment goes to zero in exchange for the potential of much higher returns. But, unfortunately, it’s not a good choice for risk-averse investors or those who need any safe investment.
Risk
Cryptocurrency has very significant risks, including turning any individual currency into a complete zero, such as being outlawed. In addition, digital currencies are highly volatile and may fall (or rise) precipitously even over concise time frames, and the price depends entirely on what traders will pay. Traders also run some risk of being hacked, given some high-profile thefts in the past. And if you’re investing in cryptocurrencies, you’ll have to pick the winners that manage to stick around when many could well disappear entirely.
Liquidity
Cryptocurrencies are generally liquid, especially the major ones such as Bitcoin and Ethereum, and you can buy and sell them at any time of day. However, the commissions on them tend to be very high (relative to typical investments such as stocks), and you’ll need to see significant appreciation to break even. So it’s important to find the best broker to minimize these costs.
What to consider
As you’re deciding what to invest in, you’ll want to consider some factors, including your risk tolerance, time horizon, your knowledge of investing, your financial situation, and how much you can invest.
If you’re looking to grow wealth, you can opt for lower-risk investments that pay a modest return, or you can take on more risk and aim for a higher return. But, of course, there’s typically a trade-off in investing between risk and return. Or you can take a balanced approach, having absolutely safe money investments while still giving yourself the opportunity for long-term growth.
The best investments for 2021 allow you to do both, with varying levels of risk and return.
Risk tolerance
Risk tolerance means how much you can withstand when it comes to fluctuations in the value of your investments. Are you willing to take big risks to get big returns potentially? Or do you need a more conservative portfolio? Risk tolerance can be psychological as well as simply what your personal financial situation requires.
Conservative investors or those nearing retirement may be more comfortable allocating a larger percentage of their portfolios to less-risky investments. These are also great for people saving for both short- and intermediate-term goals. In addition, if the market becomes volatile, investments in CDs and other FDIC-protected accounts won’t lose value and will be there when you need them.
Those with stronger stomachs, workers still accumulating a retirement nest egg, and those with a decade or more until they need the money are likely to fare better with riskier portfolios, as long as they diversify. A longer time horizon allows you to ride out the volatility of stocks and take advantage of their potentially higher return, for example.
Time horizon
Time horizon means when you need the money. Do you need the money tomorrow or in 30 years? Are you saving for a house downpayment in three years, or are you looking to use your money in retirement? Time horizon determines what kinds of investments are more appropriate.
If you have a shorter time horizon, you need the money to be in the account at a specific point in time and not tied up. And that means you need safer investments such as savings accounts, CDs, or maybe bonds. These fluctuate less and are generally safer.
If you have a longer time horizon, you can afford to take some risks with higher-return but more volatile investments. Your time horizon allows you to ride out the ups and downs of the market, hopefully on the way to greater long-term returns. For example, with a longer time horizon, you can invest in stocks and stock funds and then be able to hold them for at least three to five years.
Your investments must be calibrated to your time horizon. So, for example, you don’t want to put next month’s rent money in the stock market and hope it’s there when you need it.
Your knowledge
Your knowledge of investing plays a key role in what you’re investing in. Investments such as savings accounts and CDs require little knowledge, especially since the FDIC protects your account. But market-based products such as stocks and bonds require more knowledge.
If you want to invest in assets that require more knowledge, you’ll have to develop your understanding of them. For example, if you want to invest in individual stocks, you need a great deal of knowledge about the company, the industry, the products, the competitive landscape, finances, and much more. Unfortunately, many people don’t have the time to invest in this process.
However, there are ways to take advantage of the market even if you have less knowledge. One of the best is an index fund, which includes a collection of stocks. If any single stock performs poorly, it’s likely not going to affect the index much. In effect, you’re investing in the performance of dozens, if not hundreds, of stocks, which is more a wager on the market’s overall performance.
So you’ll want to understand your knowledge and its limits as you think about investments.
How much you can invest
How much can you bring to an investment? The more money you can invest, the more likely it’s going to be worthwhile to investigate higher-risk, higher-return investments.
If you can bring more money, it can be worthwhile to make the time investment required to understand a specific stock or industry because the potential rewards are much greater than with bank products such as CDs.
Otherwise, it may not simply be worth your time. So you may stick with bank products or turn to ETFs or mutual funds that require less time investment. These products can also work well for those who want to add to the account incrementally, as 401(k) participants do.
How to invest your child tax credit
If you’ve been receiving a monthly advance for the child tax credit and are thinking about investing it, you’ll want to consider a few questions first. Investing is for money that you can live without, not for the money you need soon:
- Do you have immediate expenses that you may have trouble paying?
- Do you have an emergency fund with at least six months of spending saved up?
- Do you have substantial outstanding debt?
It’s important to have your current financial situation under control before you can invest.
You have multiple ways to invest your money, including the options above. If you want to invest in stocks, bonds, or funds, you’ll need to have an account with a broker. If you’d prefer to have someone else do the investing for you, turning to a robot advisor is one excellent option. You’ll pay a small management fee, and the robot-advisor handles the rest.
If you’re a new investor, consider sticking with investment choices that are on the safer side. For example, investments such as an S&P 500 index fund or Nasdaq-100 index fund tend to be safer than a portfolio of a few individual stocks. A Robo-advisor can help you with these choices, too, and the cost is reasonable.
Bottom line
Investing can be a great way to build your wealth over time, and investors have a range of investment options, from safe lower-return assets to riskier, higher-return ones. That range means you’ll need to understand the pros and cons of each investment option and how they fit into your overall financial plan to make an informed decision. While it seems daunting at first, many investors manage their own assets.
But the first step to investing is actually easy: opening a brokerage account. Investing can be surprisingly affordable even if you don’t have a lot of money. (Here are some of the best brokers to choose from if you’re just getting started.)
Recap of the ten best investments in 2021
- High-yield savings accounts
- Certificates of deposit
- Government bond funds
- Short-term corporate bond funds
- Municipal bond funds
- S&P 500 index funds
- Dividend stock funds
- Nasdaq-100 index funds
- Rental housing
- Cryptocurrency
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Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
Originally published at https://www.bankrate.com on November 2, 2021.
