For the everyday investor, stocks are the bread and butter investment of any portfolio. They’re easy to trade, not too difficult to understand and have the potential to provide a high return. But stocks have downsides. They can be volatile, riskier than other investments and hard to predict.
“According to data compiled by Ibbotson Associates, large stocks (think S&P 500) returned 10% compounded annually from 1926 to 2018,” said Robert R. Johnson, professor of finance at Creighton University. “Stocks have much higher returns over time, but those returns are much less certain.”
A wise investor will diversify beyond stocks to hedge against market downturns. Here are seven ways the everyday investor can invest outside of the stock market.
Bonds go hand in hand with stocks as a common investment type for everyday investors. (Learn how to get started investing.) Essentially, bonds are loans that investors make to a business or government organization, with the promise that the loan will be paid back with interest over a predetermined amount of time. Bonds are less risky than stocks but their potential return is also lower.
Compared with stocks, bonds offer no ownership stake in a corporation, said Johnson. The bondholder only receives what is promised in terms of interest and repayment. That’s why bonds are commonly called “fixed income securities.”
There are many types of bonds, including:
- U.S. Treasury securities: Issued and backed by the federal government, Treasury securities include Treasury bills, Treasury notes and Treasury bonds, ranging from short-term to long-term options.
- U.S. savings bonds: Issued and backed by the federal government, savings bonds can be purchased for as little as $25. Unlike Treasury securities, savings bonds are registered to an individual and cannot be resold.
- Corporate bonds: issued by businesses as a way to raise capital.
- Municipal bonds: issued by states, cities, counties or other local government entities to raise money for projects.
The organization that issues the bond will make periodic interest payments to the bondholder, repaying the loan in total by the time the bond reaches maturity. Bonds can reach maturity in a matter of months, like Treasury bills. Longer-term bonds can take decades to mature, though they also generally pay higher interest rates.
Like stocks, there are many different ways to invest in bonds and bond funds (a basket of multiple bonds). Common methods include 401(k) or individual retirement accounts, college savings plans like 529s, buying funds through a broker or buying individual bonds yourself.
2. Certificates of deposit
Certificates of deposit are a type of bank account where your money gains interest for a predetermined amount of time, from a few months to 10 years. The longer you keep funds in a CD, the more you’ll earn when the CD matures.
CDs usually earn much higher interest rates than traditional savings accounts, with recent interest rates for five-year CDs around 3.1% to 3.4%. The downside is you have to keep your money in a CD for a long time to see it bear fruit. Early withdrawals will incur a penalty fee.
3. High-yield savings accounts
Typically offered by online banks, high-yield savings accounts are bank accounts that pay higher interest rates than the typical savings account, which currently offers a miniscule average rate of 0.1%. High-yield savings accounts typically offer interest rates at 2% or more, which is 20 times what you’d earn from a traditional savings account.
High-yield savings accounts are more liquid than CDs, and you aren’t forced to pay penalties if you need to pull out your cash. However, it can take a few days to withdraw the cash in an online high-yield savings account, so it’s a good idea to keep a separate emergency savings fund in a traditional account for easy access.
4. Real estate
Anyone who wishes to invest in real estate has multiple options:
- Renting out your home (or part of your home) to travelers via rental websites like Vrbo or Airbnb
- Purchasing a property to rent out or fix up and sell
- Real estate crowdfunding sites like Fundrise and RealtyShares let multiple investors pool their money to invest in real estate that would otherwise be unaffordable. You may be able to invest with a few hundred or few thousand dollars, though the type of investments you are eligible to make depends on your income.
5. Equity crowdfunding
Similar to real estate crowdfunding, equity crowdfunding allows investors to pool their money and invest in companies that are looking to raise capital. Investors can put in as little as a few hundred dollars in exchange for equity in the business. Your shares can be sold at a later date — unless the company fails.
“Essentially, [JOBS] Act legislation allows anyone to be a mini angel investor and support the startups that they believe in,” said Brian Belley, founder of CrowdWise. “Startups as an asset class are less correlated with the public markets. Thus, investing a small portion of one's portfolio in venture assets allows one to diversify holdings with the potential to boost returns with non-correlated assets.”
However, this comes with the same risks as investing in individual stocks.
6. P2P lending
Peer-to-peer lending lets individuals supply loans to other individuals, bypassing traditional lenders like banks. With websites that facilitate P2P lending, investors contribute funds that are pooled with other investors’ contributions and disbursed in the form of loans. Over time, the investor receives interest as the loan is paid back, though there is always the risk of the borrower defaulting. Popular P2P platforms include Peerform, Lending Club and Prosper.
7. Paying off debt
Paying off debt isn’t exactly an investment as there is no return on your money. However, paying down your existing debt can help set you up for a better financial future. The faster you pay down your debt, the less interest you pay and the more money you keep in your pocket.
Of course, paying off debt doesn’t replace an investment strategy, but it can free up more money down the line to put toward your investments.
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