“Essentially, employees who are more burned out feel less included at work,” it noted. How to beat burnout Gabrielle Novacek, a managing director and partner at BCG, underscored that inclusion is an ongoing process that shouldn’t end at recruitment. “It requires listening to workers on an ongoing basis and addressing their pain points. It must … [Read more…]
When investing, you often want to know how much money an investment is likely to earn you. That’s where the expected rate of return comes in; expected rate of return is calculated using the probabilities of investment returns for various potential outcomes. Investors can utilize the expected return formula to help project future returns.
Though it’s impossible to predict the future, having some idea of what to expect can be critical in setting expectations for a good return on investment.
Key Points
• The expected rate of return is the profit or loss an investor expects from an investment based on historical rates of return and the probability of different outcomes.
• The formula for calculating the expected rate of return involves multiplying the potential returns by their probabilities and summing them.
• Historical data can be used to estimate the probability of different returns, but past performance is not a guarantee of future results.
• The expected rate of return does not consider the risk involved in an investment and should be used in conjunction with other factors when making investment decisions.
What Is the Expected Rate of Return?
The expected rate of return — also known as expected return — is the profit or loss an investor expects from an investment, given historical rates of return and the probability of certain returns under different scenarios. The expected return formula projects potential future returns.
Expected return is a speculative financial metric investors can use to determine where to invest their money. By calculating the expected rate of return on an investment, investors get an idea of how that investment may perform in the future.
This financial concept can be useful when there is a robust pool of historical data on the returns of a particular investment. Investors can use the historical data to determine the probability that an investment will perform similarly in the future.
However, it’s important to remember that past performance is far from a guarantee of future performance. Investors should be careful not to rely on expected returns alone when making investment decisions.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
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How To Calculate Expected Return
To calculate the expected rate of return on a stock or other security, you need to think about the different scenarios in which the asset could see a gain or loss. For each scenario, multiply that amount of gain or loss (return) by its probability. Finally, add up the numbers you get from each scenario.
The formula for expected rate of return looks like this:
In this formula, R is the rate of return in a given scenario, P is the probability of that return, and n is the number of scenarios an investor may consider.
For example, say there is a 40% chance an investment will see a 20% return, a 50% chance that the investment will return 10%, and a 10% chance the investment will decline 10%. (Note: all the probabilities must add up to 100%)
The expected return on this investment would be calculated using the formula above:
Expected Return = (40% x 20%) + (50% x 10%) + (10% x -10%)
Expected Return = 8% + 5% – 1%
Expected Return = 12%
What Is Rate of Return?
The expected rate of return mentioned above looks at an investment’s potential profit and loss. In contrast, the rate of return looks at the past performance of an asset.
A rate of return is the percentage change in value of an investment from its initial cost. When calculating the rate of return, you look at the net gain or loss in an investment over a particular time period. The simple rate of return is also known as the return on investment (ROI).
Recommended: What Is the Average Stock Market Return?
How to Calculate Rate of Return
The formula to calculate the rate of return is:
Rate of return = [(Current value − Initial value) ÷ Initial Value ] × 100
Let’s say you own a share that started at $100 in value and rose to $110 in value. Now, you want to find its rate of return.
In our example, the calculation would be [($110 – $100) ÷ $100] x 100 = 10
A rate of return is typically expressed as a percentage of the investment’s initial cost. So, if you were to sell your share, this investment would have a 10% rate of return.
Recommended: What Is Considered a Good Return on Investment?
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Different Ways to Calculate Expected Rate of Return
How to Calculate Expected Return Using Historical Data
To calculate the expected return of a single investment using historical data, you’ll want to take an average rate of returns in certain years to determine the probability of those returns. Here’s an example of what that would look like:
Annual Returns of a Share of Company XYZ
Year
Return
2011
16%
2012
22%
2013
1%
2014
-4%
2015
8%
2016
-11%
2017
31%
2018
7%
2019
13%
2020
22%
For Company XYZ, the stock generated a 21% average rate of return in five of the ten years (2011, 2012, 2017, 2019, and 2020), a 5% average return in three of the years (2013, 2015, 2018), and a -8% average return in two of the years (2014 and 2016).
Using this data, you may assume there is a 50% probability that the stock will have a 21% rate of return, a 30% probability of a 5% return, and a 20% probability of a -8% return.
The expected return on a share of Company XYZ would then be calculated as follows:
Expected return = (50% x 21%) + (30% x 5%) + (20% x -8%)
Expected return = 10% + 2% – 2%
Expected return = 10%
Based on the historical data, the expected rate of return for this investment would be 10%.
However, when using historical data to determine expected returns, you may want to consider if you are using all of the data available or only data from a select period. The sample size of the historical data could skew the results of the expected rate of return on the investment.
💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.
How to Calculate Expected Return Based on Probable Returns
When using probable rates of return, you’ll need the data point of the expected probability of an outcome in a given scenario. This probability can be calculated, or you can make assumptions for the probability of a return. Remember, the probability column must add up to 100%. Here’s an example of how this would look.
Expected Rate of Return for a Stock of Company ABC
Scenario
Return
Probability
Outcome (Return * Probability)
1
14%
30%
4.2%
2
2%
10%
0.2%
3
22%
30%
6.6%
4
-18%
10%
-1.8%
5
-21%
10%
-2.1%
Total
100%
7.1%
Using the expected return formula above, in this hypothetical example, the expected rate of return is 7.1%.
Calculate Expected Rate of Return on a Stock in Excel
Follow these steps to calculate a stock’s expected rate of return in Excel (or another spreadsheet software):
1. In the first row, enter column labels:
• A1: Investment
• B1: Gain A
• C1: Probability of Gain A
• D1: Gain B
• E1: Probability of Gain B
• F1: Expected Rate of Return
2. In the second row, enter your investment name in B2, followed by its potential gains and the probability of each gain in columns C2 – E2
• Note that the probabilities in C2 and E2 must add up to 100%
3. In F2, enter the formula = (B2*C2)+(D2*E2)
4. Press enter, and your expected rate of return should now be in F2
If you’re working with more than two probabilities, extend your columns to include Gain C, Probability of Gain C, Gain D, Probability of Gain D, etc.
If there’s a possibility for loss, that would be negative gain, represented as a negative number in cells B2 or D2.
Limitations of the Expected Rate of Return Formula
Historical data can be a good place to start in understanding how an investment behaves. That said, investors may want to be leery of extrapolating past returns for the future. Historical data is a guide; it’s not necessarily predictive.
Another limitation to the expected returns formula is that it does not consider the risk involved by investing in a particular stock or other asset class. The risk involved in an investment is not represented by its expected rate of return.
In this historical return example above, 10% is the expected rate of return. What that number doesn’t reveal is the risk taken in order to achieve that rate of return. The investment experienced negative returns in the years 2014 and 2016. The variability of returns is often called volatility.
Standard Deviation
To understand the volatility of an investment, you may consider looking at its standard deviation. Standard deviation measures volatility by calculating a dataset’s dispersion (values’ range) relative to its mean. The larger the standard deviation, the larger the range of returns.
Consider two different investments: Investment A has an average annual return of 10%, and Investment B has an average annual return of 6%. But when you look at the year-by-year performance, you’ll notice that Investment A experienced significantly more volatility. There are years when returns are much higher and lower than with Investment B.
Year
Annual Return of Investment A
Annual Return of Investment B
2011
16%
8%
2012
22%
4%
2013
1%
3%
2014
-6%
0%
2015
8%
6%
2016
-11%
-2%
2017
31%
9%
2018
7%
5%
2019
13%
15%
2020
22%
14%
Average Annual Return
10%
6%
Standard Deviation
13%
5%
Investment A has a standard deviation of 13%, while Investment B has a standard deviation of 5%. Although Investment A has a higher rate of return, there is more risk. Investment B has a lower rate of return, but there is less risk. Investment B is not nearly as volatile as Investment A.
Recommended: A Guide to Historical Volatility
Systematic and Unsystematic Risk
All investments are subject to pressures in the market. These pressures, or sources of risk, can come from systematic and unsystematic risks. Systematic risk affects an entire investment type. Investors may struggle to reduce the risk through diversification within that asset class.
Because of systematic risk, you may consider building an investment strategy that includes different asset types. For example, a sweeping stock market crash could affect all or most stocks and is, therefore, a systematic risk. However, if your portfolio includes different types of bonds, commodities, and real estate, you may limit the impact of the equities crash.
In the stock market, unsystematic risk is specific to one company, country, or industry. For example, technology companies will face different risks than healthcare and energy companies. This type of risk can be mitigated with portfolio diversification, the process of purchasing different types of investments.
Expected Rate of Return vs Required Rate of Return
Expected return is just one financial metric that investors can use to make investment decisions. Similarly, investors may use the required rate of return (RRR) to determine the amount of money an investment needs to generate to be worth it for the investor. The required rate of return incorporates the risk of an investment.
What Is the Dividend Discount Model?
Investors may use the dividend discount model to determine an investment’s required rate of return. The dividend discount model can be used for stocks with high dividends and steady growth. Investors use a stock’s price, dividend payment per share, and projected dividend growth rate to calculate the required rate of return.
The formula for the required rate of return using the dividend discount model is:
So, if you have a stock paying $2 in dividends per year and is worth $20 and the dividends are growing at 5% a year, you have a required rate of return of:
RRR = ($2 / $20) + 0.5
RRR = .10 + .05
RRR = .15, or 15%
What is the Capital Asset Pricing Model?
The other way of calculating the required rate of return is using a more complex model known as the capital asset pricing model.
In this model, the required rate of return is equal to the risk-free rate of return, plus what’s known as beta (the stock’s volatility compared to the market), which is then multiplied by the market rate of return minus the risk-free rate. For the risk-free rate, investors usually use the yield of a short-term U.S. Treasury.
The formula is:
RRR = Risk-free rate of return + Beta x (Market rate of return – Risk-free rate of return)
For example, let’s say an investment has a beta of 1.5, the market rate of return is 5%, and a risk-free rate of 1%. Using the formula, the required rate of return would be:
RRR = .01 + 1.5 x (.05 – .01)
RRR = .01 + 1.5 x (.04)
RRR = .01 + .06
RRR = .07, or 7%
The Takeaway
There’s no way to predict the future performance of an investment or portfolio. However, by looking at historical data and using the expected rate of return formula, investors can get a better sense of an investment’s potential profit or loss.
There’s no guarantee that the actual performance of a stock, fund, or other assets will match the expected return. Nor does expected return consider the risk and volatility of assets. It’s just one factor an investor should consider when deciding on investments and building a portfolio.
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FAQ
How do you find the expected rate of return?
An investment’s expected rate of return is the average rate of return that an investor can expect to receive over the life of the investment. Investors can calculate the expected return by multiplying the potential return of an investment by the chances of it occurring and then totaling the results.
How do you calculate the expected rate of return on a portfolio?
The expected rate of return on a portfolio is the weighted average of the expected rates of return on the individual assets in the portfolio. You first need to calculate the expected return for each investment in a portfolio, then weigh those returns by how much each investment makes up in the portfolio.
What is a good rate of return?
A good rate of return varies from person to person. Some investors may be satisfied with a lower rate of return if its performance is consistent, while others may be more aggressive and aim for a higher rate of return even if it is more volatile. Ultimately, it is up to the individual to decide what is considered a good rate of return.
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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Mutual funds provide a collection of many investments in a single basket, while stocks allow you to own shares in individual companies.
Either type of asset can help you reach your investing goals — and of course it’s possible to own mutual funds shares as well as stocks. But there are advantages and disadvantages to mutual funds vs. stocks.
Key Points
• Mutual funds offer a diversified portfolio in a single investment, whereas stocks are shares in individual companies.
• Mutual funds can be actively or passively managed, with some tracking market indexes.
• Stocks provide direct ownership in a company, offering potential for higher returns and greater risk.
• Mutual funds are managed by professionals, making them a good option for those who prefer not to manage their investments.
• The choice between mutual funds and stocks depends on individual financial goals, risk tolerance, and investment strategy.
What’s the Difference Between Mutual Funds and Stocks?
The biggest difference between a mutual fund and a stock lies in what you own: a mutual fund is a type of pooled investment fund, and a stock refers to shares of ownership in a single company.
Mutual funds can hold multiple investments in a single vehicle (e.g. stocks, bonds, or other assets). Sometimes a mutual fund can hold a mix of stocks, bonds, and short-term debt; these are called blended funds.
Different Types of Mutual Funds
Another difference between mutual funds vs. stocks: Mutual funds can be structured in a variety of ways. Often, a mutual fund manager is responsible for choosing the investments the fund holds, according to the fund’s objectives and investment strategy. But not all funds are actively managed funds; some are passively managed and track a market index (see bleow).
Some types of mutual funds include:
• Equity funds: These funds can hold the stocks of hundreds of companies. An equity fund typically has a specific focus, e.g. large-cap companies, tech companies, and so on.
• Bond funds: These provide access to various types of bonds. Similar to equity funds, bond funds can offer exposure to different sectors, e.g. green bonds, short-term bonds, corporate bonds, etc.
• Target-date funds: Often used in retirement plans, target-date funds use algorithms to adjust their holdings over time to become more conservative.
• Index funds: Index funds are designed to track or mirror a specific market index, e.g. the S&P 500, the Russell 2000, and so on. These are considered passive vehicles vs. mutual funds that are led by a team of portfolio managers.
• Exchange-traded funds (ETFs): ETFs are similar to mutual funds in that they hold a variety of different securities, but shares of these funds trade throughout the day on an exchange similar to stocks.
What Are Stocks?
Simply put, a stock represents an ownership share in a single company. There’s no fund manager here; you decide which stocks you want to buy or which ones you want to sell, often using a brokerage account. You might buy 10 shares of one company, 50 shares of a second, and 100 shares of a third — it’s up to you.
Just as there are different types of mutual funds, there are different types of stocks that reflect the underlying company. For example, your portfolio might include:
• Value stocks: Companies that are trading lower than their potential value, based on fundamentals.
• Growth stocks: Companies with a track record of steady growth.
• Dividend stocks: Companies that payout a portion of their earnings to shareholders in the form of dividends. Note that value stocks often pay dividends, but growth stocks tend to reinvest their profits (per their name) toward growth and expansion.
Here’s another way to think of the differences between mutual funds and stocks. If a mutual fund is a carton of eggs, a stock is one egg in that carton.
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Pros and Cons of Mutual Funds
Investing in mutual funds can be a good option for beginners who are ready to wade into the market but aren’t savvy about individual stocks just yet. There are, however, some downsides to keep in mind.
Pros
Cons
Diversification is simplified
Some funds may underperform
Easy access to the markets
Higher minimum investments
May be cheaper than stocks
Not all funds are low-cost
Pros of Mutual Funds:
• Mutual funds make portfolio diversification easier. Diversifying your portfolio can help manage risk. When you buy a mutual fund, you get immediate diversification since the fund may hold a variety of securities or alternative investments.
• Someone else makes the decisions. Choosing the right investments for a portfolio can be complicated for many investors, but a mutual fund takes care of the selection process. In the case of an active fund, the fund manager is in charge of buying or selling investments within the fund. A passive fund tracks an index, as mentioned above. Either way, all you have to do is invest your money.
• Costs may be lower. When you invest in mutual funds, you’ll pay what’s called an expense ratio. This is a fee that represents the cost of owning the fund annually. While some funds are more expensive than others, there are plenty of low-cost options which means you get to keep more of your investment earnings.
Cons of Mutual Funds:
• Performance isn’t guaranteed. While some actively managed mutual funds attempt to beat the market, others are structured to match the performance of an index. The main thing to know, however, is that results are never guaranteed, and your fund investments may fall short of expectations.
• Minimum investments may be high. Some mutual funds have a low barrier to entry, and you can get started with a relatively small amount of money, especially if you invest via automatic deposits. Others, however, may require you to have a high minimum investment requirement (e.g. $5,000), which could be challenging if you’re a beginner. With stocks, on the other hand, it’s possible to buy fractional shares with as little as $1.
• Potentially higher costs. Mutual fund expense ratios can vary widely, and some can be much more expensive than others. In general, active funds charge higher fees. In addition, some brokerages charge load fees to buy or sell funds which can add to your overall costs. It’s important to understand what you’re paying for your investments, as fees can eat into returns over time.
Pros and Cons of Individual Stocks
Investing in stocks might appeal to you if you’d like more control over where your money goes. But just as with mutual funds, there are some potential drawbacks to consider.
Pros
Cons
High return potential
Higher risk
Greater flexibility
More difficult to diversify
Low costs
More time-consuming
Pros of Individual Stocks:
• Potentially earn higher returns. Owning individual stocks could lead to better results in your portfolio compared with mutual funds. It’s important to remember, however, that not all stocks offer the same rate of return, and performance of any stock (or any investment) is never guaranteed.
• You’re in control. Investing in stocks means you have total control of what to buy and sell, and when to make trades. You’re not relying on a fund manager to make decisions for you. That’s something you might appreciate if you prefer a DIY or active approach to investing.
• Trading costs may be low. When you buy and sell stocks, your brokerage can charge a commission fee each time. However, more brokerages are moving to a $0 commission-fee model for stock trades which can cut your investing costs down dramatically.
Cons of Individual Stocks:
• Stocks are volatile. Mutual funds are often viewed as being less risky than stocks since you’re diversified across a range of securities. If you’re putting a large chunk of your portfolio into a smaller pool of stocks or just one company, you could be at risk of a major loss if volatility hits that part of the market.
• Diversification is harder. When you invest in individual stocks, you may have to buy more of them to create a diversified portfolio. With a mutual fund, you don’t have to do that since you’re getting exposure to multiple investments in one fund.
• Stock trading can be time intensive. Taking a buy-and-hold approach to stocks means you don’t have to pay as much attention to your portfolio. You can buy stocks, and then hang onto them for the long term. However, if you’re more interested in active trading then you’ll need to spend more of your day keeping up with stock trends and monitoring the markets so you don’t miss any opportunities to make gains.
💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
Choosing Between Mutual Funds and Stocks
There’s no rule that says you must choose between mutual funds vs. stocks. Deciding which one to invest in can depend on your time horizon for investing, risk tolerance, and goals. And you might decide that both make sense in your portfolio.
Here’s a simple breakdown of how to compare the two when deciding where to invest.
Consider mutual funds if you…
Consider stocks if you…
Want a simple way to build a portfolio under the guidance of an experienced fund manager who knows the market.
Prefer to have more control of which companies you invest in, and when you buy or sell those investments.
Are more comfortable with the idea of generating returns over time vs. chasing the highest rewards of the moment.
Want to leverage investments to produce the highest returns possible, even if it means taking a little more risk in your portfolio.
Don’t have the time or inclination to spend hours researching different investments or conducting in-depth market analyses.
Are comfortable researching stocks on your own, and understand how to apply different types of technical analysis to evaluate them.
The Takeaway
Investing is one way to build wealth, but both mutual funds and stocks can help investors realize their financial goals — but in different ways. Weighing the pros and cons of mutual funds vs. stocks as well as your personal preferences for investing can help you decide how to build a portfolio that meets your needs.
Ready to expand your portfolio’s growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi’s easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it’s important to consider your portfolio goals and risk tolerance to determine if they’re right for you.
Invest in alts to take your portfolio beyond stocks and bonds.
FAQ
Which is riskier, stocks or mutual funds?
Both stocks and mutual funds expose investors to the risk of loss, though the degree of risk can vary by investment. Mutual funds may help to distribute risk thanks to a diverse mix of underlying investments, while individual stocks can concentrate risk. However, it’s important to remember that you can lose money with either.
Which investment is best for beginners, mutual funds or stocks?
Mutual funds can be a good place for beginning investors to get started since they offer basic diversification. The key to choosing a mutual fund as a beginner is to consider the underlying investments in light of your own asset allocation, the fund’s track record, and the fees you’ll pay.
Are mutual funds worth it?
Mutual funds can be a worthwhile investment because they provide a cost-effective way to access a range of sectors that may align with your goals. For example, if you want to invest in big companies in the U.S., you can buy shares of a large-cap fund. If you want to invest in the environment, you can invest in a green bond fund or green tech equity fund.
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An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing. Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor’s risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds. Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investing in mutual funds has become a cornerstone strategy for those looking to grow their wealth over time. With a mutual fund, you’re essentially pooling your money with other investors to buy a large portfolio of stocks, bonds, or other securities. This collective investment approach allows individuals to participate in a diversified range of assets, which might be difficult to achieve on their own.
What exactly is a mutual fund?
At its core, a mutual fund gathers money from many investors to invest in various securities. These can include stocks, bonds, and other financial instruments. The beauty of mutual funds lies in their ability to offer immediate diversification, spreading out the risk across different investments.
When you buy a share of a mutual fund, you’re buying a piece of a large, varied portfolio. For example, a single mutual fund share could include small portions of companies like Apple, Microsoft, and Berkshire Hathaway.
How Mutual Funds Work
Mutual funds are a popular choice for investors looking to diversify their portfolios without the hassle of managing each investment individually. Let’s break down how these investment vehicles operate, focusing on the collective investment strategy, the pivotal role of mutual fund managers, the principle of diversification, and the critical concept of Net Asset Value (NAV).
Pooling Money for Diverse Investments
At its most basic, a mutual fund works by pooling money from multiple investors. This pool of funds is then used to buy a wide array of securities, including stocks, bonds, and other financial instruments. This collective buying power allows individual investors to access a broader range of investments than they might be able to afford or manage on their own.
The Crucial Role of Fund Managers
A mutual fund manager is a professional that is tasked with making the day-to-day decisions about where to invest the fund’s money. Their goal is to select securities that will help the fund achieve its investment objectives, whether that’s growth, income, or stability. Through their expertise, they strive to maximize returns for investors while adhering to the fund’s stated investment strategy.
Emphasizing Diversification and Risk Management
One of the key benefits of investing in mutual funds is diversification. By holding a wide variety of investments within a single fund, mutual fund investors can reduce the impact of poor performance from any single security. This strategy helps manage risk and can lead to more stable returns over time. Mutual funds make diversification easier and more accessible, particularly for investors with smaller amounts of capital.
Understanding Net Asset Value (NAV)
The net asset value (NAV) is a fundamental concept in the world of mutual funds, serving as a critical measure of a fund’s per-share market value.
The Definition and Importance of NAV
NAV represents the total value of all the securities held by the fund, minus any liabilities, divided by the number of shares outstanding. This figure is crucial because it determines the price at which shares of the mutual fund can be bought or sold at the end of the trading day. Investors pay close attention to NAV to assess the performance and value of their mutual fund investments.
Calculating NAV: A Closer Look
To calculate the NAV of a mutual fund, you subtract the fund’s liabilities from its assets and then divide this figure by the number of shares outstanding. This calculation is typically done at the end of each trading day to reflect the current market value of the fund’s holdings. By understanding NAV, mutual fund investors can make informed decisions about when to buy or sell shares of a mutual fund, ensuring they are aligned with their investment strategies and goals.
Types of Mutual Funds
Investors have a wide array of mutual fund types to choose from, each catering to different investment goals, risk tolerances, and time horizons. Understanding the nuances of these various funds can significantly aid in constructing a diversified and effective investment portfolio. Here’s a comprehensive look at some of the key types of mutual funds available:
Equity Funds (Stock Funds)
Equity funds, or stock funds, are mutual funds that invest primarily in stocks of publicly traded companies. They are categorized based on the market capitalization of the companies they invest in (small-cap, mid-cap, large-cap) or their investment strategy (growth, value, dividend income).
Equity funds aim to provide capital appreciation over the long term and can be either actively managed, where a fund manager picks stocks to try to outperform the market, or passively managed, mimicking the performance of a specific index.
Fixed-Income Funds (Bond Funds)
Fixed-income funds, often referred to as bond funds, invest in bonds and other debt securities that pay a fixed rate of return. These funds are designed to provide investors with steady income and are generally considered less risky than equity funds. They can invest in various types of bonds, including government bonds, municipal bonds, and corporate bonds, each offering different levels of risk and return.
Asset Allocation Funds
Asset allocation funds are designed to invest across different asset classes, including stocks, bonds, and sometimes alternative investments like real estate or commodities. These funds adjust their asset allocation based on the fund’s investment objectives and the current market conditions, aiming to balance risk and return. They can be a good choice for investors looking for a diversified investment in a single fund.
Index Funds
Index funds aim to replicate the performance of a specific market index, such as the S&P 500 or the Dow Jones Industrial Average, by investing in the securities that make up that index. These funds are known for their low expense ratios and passive management strategy, making them an attractive option for cost-conscious investors seeking market-matching returns.
Target Date Funds
Target date funds are a type of asset allocation fund that automatically adjusts its investment mix as the fund’s target date (usually retirement) approaches, shifting from more aggressive investments to more conservative ones. These funds are designed for investors who prefer a hands-off approach to managing their retirement savings.
Money Market Funds
Money market funds invest in short-term, high-quality debt securities, such as Treasury bills and commercial paper. They aim to provide investors with a safe place to invest easily accessible, liquid assets, offering a higher return than regular savings accounts, though with slightly higher risk.
Commodity Funds
Commodity funds invest in physical commodities, such as gold, oil, or agricultural products, or in commodity-linked derivative instruments. These funds can offer investors a hedge against inflation and a way to diversify their portfolios away from traditional stocks and bonds, though they can be more volatile.
Environmental, Social, and Governance (ESG) Funds
ESG funds select investments based on ethical, social, and environmental criteria, in addition to financial considerations. Investors who wish to align their investment choices with their personal values may find these funds appealing. ESG funds can invest across a range of industries and asset classes, excluding companies that do not meet specific ethical standards.
Setting Up a Mutual Fund Account
Embarking on your mutual fund investment journey begins with setting up an account. This process is straightforward, but there are a few key considerations to keep in mind to ensure you’re making informed decisions right from the start.
Here’s a step-by-step guide to getting your mutual fund account up and running, along with insights into selecting a broker and understanding the fees involved.
Step-by-Step Guide to Opening an Account
Determine your investment amount: Start by deciding how much money you’re ready to invest. Mutual funds often have minimum investment requirements, but these can vary widely from one fund to another.
Choose a broker or investment platform: Research brokers or investment platforms that offer access to the mutual funds you’re interested in. Look for platforms that align with your investment goals and budget.
Understand the fees: Before making your choice, thoroughly investigate the fees associated with buying, holding, and selling mutual funds on the platform. These can include management fees, transaction fees, and any other charges that could affect your investment’s growth.
Open your account: Once you’ve chosen a broker or platform, go ahead and open your account. This process typically involves providing some personal information and setting up a way to fund your account.
Start investing: With your account open, you’re ready to start buying shares of mutual funds. Consider starting with a diversified fund that aligns with your risk tolerance and investment goals.
Selecting a Broker and Understanding Fees
When choosing a broker or investment platform, consider not only the fees but also the services and support offered. Some investors prefer platforms with robust educational resources and customer service, while others might prioritize low fees or the availability of a wide range of funds. Understanding the fee structure is crucial because fees can significantly impact your investment returns over time.
Making Money and Managing Risks with Mutual Funds
Investing in mutual funds can be a profitable endeavor, but it’s important to understand how returns are generated and the risks involved. Here’s what you need to know about making money with mutual funds and managing the inherent risks of investing in the market.
How Investors Earn Returns
Mutual fund returns can come from several sources, including dividend payments from stocks within the fund, interest payments from bonds, and capital gains from selling securities at a higher price than they were purchased.
The fund’s performance, and consequently, your return as an investor, is influenced by the market performance of its underlying investments. As the value of the fund’s holdings increases, so does the value of your shares in the fund.
Understanding the Risks and Market Volatility
While mutual funds can offer a more diversified and thus potentially less risky investment than individual stocks, they are not immune to market volatility. The value of your investment can fluctuate based on overall market conditions, the performance of the securities within the fund, and economic factors. Diversification can help manage risk, but it cannot eliminate it entirely.
It’s vital to have a long-term perspective and recognize that market fluctuations are a normal part of investing. By staying informed about your investments and maintaining a diversified portfolio aligned with your risk tolerance and financial goals, you can navigate market volatility more effectively and work towards achieving your investment objectives.
Comparing Mutual Funds with ETFs
When expanding your investment portfolio, understanding the differences between mutual funds and exchange-traded funds (ETFs) is crucial. Both investment types offer unique advantages and come with distinct fee structures and management styles.
Differences Between Mutual Funds and ETFs
Mutual funds are investment vehicles that pool money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. They are typically managed by a professional fund manager and are bought or sold at the end of the trading day based on the fund’s net asset value (NAV).
ETFs, on the other hand, are similar in that they also pool investor money to buy securities, but they trade like stocks on an exchange. This means they can be bought and sold throughout the trading day at market prices that can fluctuate.
Fee Structures and Management Styles
Mutual funds often have higher expense ratios due to active management, where fund managers make decisions on which securities to buy or sell. ETFs tend to have lower fees, partly because many are passively managed, aiming to track the performance of a specific index rather than outperforming the market.
See also: What’s the Difference Between ETFs and Mutual Funds?
Benefits of Investing in Mutual Funds
Mutual funds offer several advantages that make them an attractive option for individual investors, including diversification, liquidity, and professional management.
Diversification
By investing in a mutual fund, you gain access to a broad array of securities in one transaction. This diversification can help reduce your investment risk by spreading it across various assets.
Liquidity
Mutual funds offer high liquidity, meaning you can buy or sell your shares of the fund at the end of each trading day at the NAV, making it easier to manage your investments.
Professional Management
Actively managed mutual funds benefit from the expertise of a fund manager who makes investment decisions aimed at achieving the fund’s objectives. This is particularly valuable for investors who do not have the time or experience to manage their investments.
Fund managers actively select and manage the investments within the fund to try to outperform the market, providing a potential advantage over passively managed funds.
Withdrawing Money from Mutual Funds
Withdrawing money from your mutual fund investments can have financial implications, especially when it comes to retirement accounts.
Penalties and Taxes on Withdrawals
If you withdraw from a mutual fund within a retirement account like an IRA or 401(k) before the age of 59 and a half, you may face early withdrawal penalties and income taxes on the amount withdrawn. For non-retirement accounts, selling shares of a mutual fund can trigger capital gains taxes if the investment has increased in value.
Starting Your Mutual Fund Investment
Beginning your journey with mutual funds involves a few key steps, including understanding the initial investment requirements and the importance of research.
Initial Investment Requirements
Mutual funds often have minimum investment requirements, which can vary significantly from one fund to another. It’s important to choose a fund that matches your financial situation and investment goals.
Importance of Research and Understanding Fund Performance
Before investing, thoroughly research potential mutual funds to understand their investment strategy, past performance, and fee structure. Reviewing historical returns can provide insight into how the fund performs in different market conditions, helping you make an informed decision.
Final Thoughts
Diving into mutual fund investments offers a promising path to wealth growth and achieving your financial aspirations. It’s crucial to engage in thorough research and choose mutual funds that best match your investment goals and risk appetite. Mutual funds are integral to a diverse investment strategy, providing the benefits of diversification, expert management, and liquidity.
Being well-informed is key to investment success. Take the initiative to explore the various mutual fund options, their past performances, fee structures, and their role in your overall investment portfolio. With careful selection and strategic planning, mutual funds can significantly contribute to a robust and prosperous financial future.
Frequently Asked Questions
What are the differences between actively and passively managed mutual funds?
Actively managed funds are managed by professionals who actively select investments to outperform the market, leading to higher fees. Passively managed funds, or index funds, aim to mirror the performance of a specific index, resulting in lower fees due to less frequent trading and lower operational costs.
How do mutual fund dividends work?
Mutual fund dividends come from the income generated by the fund’s investments. Shareholders can either receive these dividends as cash or reinvest them to buy more shares of the fund. The approach depends on the fund’s distribution policy and the investor’s preference.
Can I lose money in a mutual fund?
Yes, investing in mutual funds carries the risk of loss. The value of a mutual fund can decrease if the investments it holds lose value. Market volatility and economic changes can affect the fund’s performance, potentially leading to losses.
How do I choose the right mutual fund for me?
Choosing the right mutual fund involves considering your investment goals, risk tolerance, the fund’s performance history, fee structure, and the fund manager’s track record. It’s important to select a fund that aligns with your financial objectives and comfort with risk.
How often should I review my mutual fund investments?
Review your mutual fund investments at least annually or when your financial situation or goals change. This helps ensure your investments remain aligned with your objectives and allows you to make adjustments based on the fund’s performance and changes in the market.
What is the impact of taxes on mutual fund investments?
Taxes on mutual fund investments can affect your returns, especially for funds in non-retirement accounts. Dividends and capital gains distributions are taxable events. Selling shares at a profit also triggers capital gains taxes. Investing in tax-efficient funds or using tax-advantaged accounts can help minimize the tax impact.
If you’ve just gotten your first $1,000 that’s free to invest, you might be freaking out a little bit. What are you going to do with that money? And how will you keep it growing so that you can continue to invest more for your future?
Well, $1,000 is a great start, but it’s not a ton of money. That means you can’t spread it out into too many different options. But you can prioritize the best ways to invest that thousand bucks. Here are some of the best ways to invest your first $1,000.
Overview: How and Where to Invest $1000
Investment Type
Best For
Paying off debt
Those with high-interest debt
High-yield savings account
Emergency fund
Tax-advantaged account
Beginner investing
Stocks
Having control over where your money goes
Real estate
Alternative investment
Art
Alternative, long-term investment
Peer-to-peer lending
High-risk/high-reward
CD
Those who don’t need the money right away
Treasury security
Safe investment to balance risk
Use a Micro-Savings app to both save and invest
Those who want to invest while shopping
1. Pay Off Debt
First, if you have high-interest debt, you’re likely best off putting your money towards that. If you’re paying 15% or more interest, you won’t likely be able to put your money towards an investment that out-earns that. So it’s best to pay off that debt.
The general rule of thumb here is that you first put enough money into an employer-sponsored account to get any matching option. Then, you put your money towards high-interest debt until that’s paid off. Once that’s done, you can move on to these other options.
2. Use a High-Yield Savings Account
If you don’t have any money saved for an emergency, put your $1,000 into a high-yield savings account for emergencies. This keeps you from going into more debt if an emergency does arise, so it’s a good idea. Look for a savings account with little to no ongoing fees and as high an APY as possible.
Here are a few of our favorite high-yield savings accounts:
Featured Savings Accounts
Bank/Credit Union
Min. Deposit
Learn More
3. Put It Into a Tax-Advantaged Account
If you don’t have an employer-sponsored retirement plan, or if you can’t put this $1,000 in there, you should consider making your investment through an IRA. Tax-advantaged investment accounts can boost that amount and grow your money over time. Luckily, some of the options below, including some robo advisors, allow you to invest through an IRA, so you can get both good returns on your investment and tax advantages.
4. Try Your Hand At Investing In Stocks
You don’t want to invest your whole portfolio over time in stocks. But if you’re interested in trying your hand at stock investing, try it through a solid platform like E*TRADE, TD Ameritrade, or Ally Invest. These platforms let you make trades on your own, so you can see what it’s like to build your custom investment portfolio. You can also opt for a semi-robo advisor like M1. This one is free to use and lets you put together your portfolio of ETFs, which tend to be more stable than individual stocks but still give you the feel for putting together your investments.
But if you don’t know what you’re doing or just don’t want to deal with the time and energy it takes to pick good stocks, fear not. One of the best ways to have your money managed for you is by working with a Certified Financial Planner. The problem is, they’re hard to find (good ones, at least).
5. Start a Robo Advisor Account
If you want more handholding or to be hands-off with this starter investment, consider using a robo advisor like Betterment. With a dollar amount on the small side like this, Betterment is probably your best bet. It’ll let you set your investment preferences and forget about managing your account daily.
6. Use a CD For Mid-Term Savings
What if you want to put that $1,000 towards the start of some larger savings goal for the medium-term? Like buying a house or a car? In this case, you might consider putting it into a CD. If you know you won’t need it to be liquid for a set period of time, a CD can get you a good return on your investment without risking your capital as you will with many investing opportunities.
Read more: Best CD Rates
7. Buy a Treasury Security
If you have a higher income tax rate, you might get a better deal from a Treasury security versus a CD. They do tend to have slightly lower rates, but their earnings are exempt from state and local taxes. Before you decide to lock your money up in either option, be sure you do the math to get the best bang for your buck.
8. Put it in your kid’s 529 account
What if you’re already maxing out your retirement accounts or saving as much as you feel like you should? In this case, consider adding that $1,000 to a 529 college savings account for your kid. These accounts act as an IRA for education spending, so they’re a valuable way to save up now for those hefty college expenses you’ll see in the future.
9. Use a Micro-Savings App to Both Save and Invest
Did you know that you don’t even need to wait to accumulate $1,000 to begin investing? Naturally, there’s more you can do with your portfolio if you have that kind of money. But if you have been having difficulty accumulating it, or you have at least $1,000 and want an automated system to increase it, Stash Invest needs to be on your radar.
Stash Invest provides you with a debit card. You can set the card to use round-ups to make regular contributions to your investment account. For example, if you make a purchase for $9.15, your account will be charged the full $10, with $.85 going into your investment account. Multiply that by dozens of transactions per month, and you can easily see $20, $30, $40, or even $50 going into your investment account each month.
Stash Invest even makes investment recommendations for you. You’ll have the option to choose from more than 400 individual stocks and exchange-traded funds. They provide a portfolio model based on your risk tolerance, time horizon, and investment goals. They won’t manage the portfolio for you but will guide you toward creating one that works for you. As much as anything else, Stash Invest is an excellent introduction to self-directed investing, both helping you to accumulate funds for investment and then gradually helping you get your feet wet with managing your portfolio.
Read our full review on Stash Invest.
Start Keeping Track
Whatever you decide to do with that $1,000, be sure you keep the cycle going by keeping track of both your budget and your investments. One way to do this is with Empower, a platform that lets you pull all of your investing and spending data together into a single place. With it, you can watch your original investment grow, but you can also manage your budget to live on less than you earn and invest the rest.
FAQ
How much interest will I earn on $1k?
To determine the interest you’ll earn on $1k, multiply 1,000 by the rate of return you expect. So, for example, if you expect a 6% rate of return, you’d earn $60 in interest by the end of the year (1,000 x .06 = 60).
How should I invest $1k to make 100k?
To turn $1k into $100k, you expect to 100x your investment. The best way to do this is to start with $1k and continue to invest at regular intervals over time. For example, if you started with $1,000 and invested $200 per month, every month, for 20 years and earned a modest rate of return of 6.5% (compounded monthly), you’d end up with just over $100k.
How can I invest $1k wisely?
To invest $1k wisely, you should open an account with a robo advisor and let them do the work for you. $1k isn’t enough to invest in most mutual funds or even some index funds, but it is enough to start investing with a robo advisor. This way, your investment will be broadly diversified and actively managed on your behalf.
What’s the best way to invest $1k short term?
The best way to invest $1k in the short term is to put it into an ETF or index fund that captures a wide scope of the total stock market (like VTI, for instance). Most brokers will allow you to open an account with $1k, but you might have to search for a fund that will let you buy in for $1k (many require a minimum investment of $2,500, for example). Alternatively, you can put the $1k in a robo-advisor account and let them manage it.
Bottom Line
Having $1k to invest is more than many people have. Most Americans don’t have $1,000 to cover an emergency without going into debt. So consider yourself lucky in that sense. That’s why you want to make sure it lasts, and it’s invested wisely.
Related: Savings by Age: How Much to Save in Your 20s, 30s, 40s, and Beyond
Review our advice above, choose a safe, short-term investment, and keep a close eye on it. Your $1,000 investment isn’t going to get you to retirement by itself, but it can serve as a wonderful safety fund and a foundation for a larger portfolio.
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Abby is a freelance journalist who writes on everything from personal finance to health and wellness. She spends her spare time bargain hunting and meal planning for her family of three. She has a B.A. in English Literature from Indiana University Purdue University Indianapolis, and lives with her husband and children in Indianapolis.
The average rate of return on 401(k)s is typically between 5% and 8%, depending on specific market conditions in a given year. Keep in mind that returns will vary depending on the individual investor’s portfolio, and that those numbers are a general benchmark.
While not everyone has access to a 401(k) plan, those who do may wonder if it’s an effective investment vehicle that can help them reach their goals. The answer is, generally, yes, but there are a lot of things to take into consideration. There are also alternatives out there, too.
Key Points
• The average rate of return on 401(k)s is typically between 5% and 8%, depending on market conditions and individual portfolios.
• 401(k) plans offer benefits such as potential employer matches, tax advantages, and federal protections under ERISA.
• Fees, vesting schedules, and early withdrawal penalties are important considerations for 401(k) investors.
• 401(k) plans offer limited investment options, typically focused on stocks, bonds, and mutual funds.
• Asset allocation and individual risk tolerance play a significant role in determining 401(k) returns and investment strategies.
Some 401(k) Basics
To understand what a 401(k) has to offer, it helps to know exactly what it is. The IRS defines a 401(k) as “a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.”
In other words, employees can choose to delegate a portion of their pay to an investment account set up through their employer. Because participants put the money from their paychecks into their 401(k) account on a pre-tax basis, those contributions reduce their annual taxable income.
Taxes on the contributions and their growth in a 401(k) account are deferred until the money is withdrawn (unless it’s an after-tax Roth 401(k)).
A 401(k) is a “defined-contribution” plan, which means the participant’s balance is determined by regular contributions made to the plan and by the performance of the investments the participant chooses.
This is different from a “defined-benefit” plan, or pension. A defined-benefit plan guarantees the employee a defined monthly income in retirement, putting any investment risk on the plan provider rather than the employee.
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Benefits of a 401(k)
There are a lot of benefits that come with a 401(k) account, and some good reasons to consider using one to save for retirement.
Potential Employer Match
Employers aren’t required to make contributions to employee 401(k) plans, but many do. Typically, an employer might offer to match a certain percentage of an employee’s contributions.
Tax Advantages
As mentioned, most 401(k)s are tax-deferred. This means that the full amount of the contributions can be invested until you’re ready to withdraw funds. And you may be in a lower tax bracket when you do start withdrawing and have to pay taxes on your withdrawals.
Federal Protections
One of the less-talked about benefits of 401(k) plans is that they’re protected by federal law. The Employee Retirement Security Act of 1974 (ERISA) sets minimum standards for any employers that set up retirement plans and for the administrators who manage them.
Those protections include a claims and appeals process to make sure employees get the benefits they have coming. Those include the right to sue for benefits and breaches of fiduciary duty if the plan is mismanaged, that certain benefits are paid if the participant becomes unemployed, and that plan features and funding are properly disclosed. ERISA-qualified accounts are also protected from creditors.
💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
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401(k) Fees, Vesting, and Penalties
There can be some downsides for some 401(k) investors as well. It’s a good idea to be aware of them before you decide whether to open an account.
Fees
The typical 401(k) plan charges a fee of around 1% of assets under management. That means an investor who has $100,000 in a 401(k) could pay $1,000 or more. And as that participant’s savings grow over the years, the fees could add up to thousands of dollars.
Fees eat into your returns and make saving harder — and there are companies that don’t charge management fees on their investment accounts. If you’re unsure about what you’re paying, you should be able to find out from your plan provider or your employer’s HR department, or you can do your own research on various 401(k) plans.
Vesting
Although any contributions you make belong to you 100% from the get-go, that may not be true for your employer’s contributions. In some cases, a vesting schedule may dictate the degree of ownership you have of the money your employer puts in your account.
Early Withdrawal Penalties
Don’t forget, when you start withdrawing retirement funds, some of the money in your tax-deferred retirement account will finally go toward taxes. That means it’s in Uncle Sam’s interest to keep your 401(k) savings growing.
So, if you decide to take money out of a 401(k) account before age 59 ½, in addition to any other taxes due when there’s a withdrawal, you’ll usually have to pay a 10% penalty. (Although there are some exceptions.) And at age 73, you’re required to take minimum distributions from your tax-deferred retirement accounts.
Potentially Limited Investment Options
One more thing to consider when you think about signing up for a 401(k) is what kind of investing you’d like to do. Employers are required to offer at least three basic options: a stock investment option, a bond option, and cash or stable value option. Many offer more than that minimum, but they stick mostly to mutual funds. That’s meant to streamline the decision-making. But if you’re looking to diversify outside the basic asset classes, it can be limiting.
How Do 401(k) Returns Hold Up?
Life might be easier if we could know the average rate of return to expect from a 401(k). But the unsatisfying answer is that it depends.
Several factors contribute to overall performance, including the investments your particular plan offers you to choose from and the individual portfolio you create. And of course, it also depends on what the market is doing from day to day and year to year.
Despite the many variables, you may often hear an annual return that ranges from 5% to 8% cited as what you can expect. But that doesn’t mean an investor will always be in that range. Sometimes you may have double-digit returns. Sometimes your return might drop down to negative numbers.
Issues With Looking Up Average Returns As a Metric
It’s good to keep in mind, too, that looking up average returns can create some issues. Specifically, averages don’t often tell the whole story, and can skew a data set. For instance, if a billionaire walks into a diner with five other people, on average, every single person in the diner would probably be a multi-millionaire — though that wouldn’t necessarily be true.
It can be a good idea to do some reading about averages and medians, and try to determine whether aiming for an average return is feasible or realistic in a given circumstance.
Some Common Approaches to 401(k) Investing
There are many different ways to manage your 401(k) account, and none of them comes with a guaranteed return. But here are a few popular strategies.
60/40 Asset Allocation
One technique sometimes used to try to maintain balance in a portfolio as the market fluctuates is a basic 60/40 mix. That means the account allocates 60% to equities (stocks) and 40% to bonds. The intention is to minimize risk while generating a consistent rate of return over time — even when the market is experiencing periods of volatility.
Target-Date Funds
As a retirement plan participant, you can figure out your preferred mix of investments on your own, with the help of a financial advisor, or by opting for a target-date fund — a mutual fund that bases asset allocations on when you expect to retire.
A 2050 target-date fund will likely be more aggressive. It might have more stocks than bonds, and it will typically have a higher rate of return. A 2025 target-date fund will lean more toward safety. It will likely be designed to protect an investor who’s nearer to retirement, so it might be invested mostly in bonds. (Again, the actual returns an investor will see may be affected by the whims of the market.)
Most 401(k) plans offer target-date funds, and they make investing easy for hands-off investors. But if that’s not what you’re looking for, and your 401(k) plan makes an advisor available to you, you may be able to get more specific advice. Or, if you want more help, you could hire a financial professional to work with you on your overall plan as it relates to your long- and short-term goals.
Multiple Retirement Accounts
Another possibility might be to go with the basic choices in your workplace 401(k), but also open a separate investing account with which you could take a more hands-on approach. You could try a traditional IRA if you’re still looking for tax advantages, a Roth IRA (read more about what Roth IRAs are) if you want to limit your tax burden in retirement, or an account that lets you invest in what you love, one stock at a time.
There are some important things to know, though, before deciding between a 401(k) vs. an IRA. 💡 Quick Tip: Can you save for retirement with an automated investment portfolio? Yes. In fact, automated portfolios, or robo advisors, can be used within taxable accounts as well as tax-advantaged retirement accounts.
How Asset Allocation Can Make a Difference
How an investor allocates their resources can make a difference in terms of their ultimate returns. Generally speaking, riskier investments tend to have higher potential returns — and higher potential losses. Stocks also tend to be riskier investments than bonds, so if an investor were to construct a portfolio that’s stock-heavy relative to bonds, they’d probably have a better chance of seeing bigger returns.
But also, a bigger chance of seeing a negative return.
With that in mind, it’s going to come down to an investor’s individual appetite for risk, and how much time they have to reach their financial goals. While there are seemingly infinite ways to allocate your investments, the chart below offers a very simple look at how asset allocation associates with risks and returns.
Asset Allocations and Associated Risk/Return
Asset Allocation
Risk/Return
75% Stock-25% Bonds
Higher risk, higher potential returns
50% Stock-50% Bonds
Medium risk, variable potential returns
25% Stock-75% Bonds
Lower risk, lower potential returns
Ways to Make the Most of Investment Options
It’s up to you to manage your employer-sponsored 401(k) in a way that makes good use of the options available. Here are some pointers.
Understand the Match
One way to start is by familiarizing yourself with the rules on how to maximize the company match. Is it a dollar-for-dollar match up to a certain percentage of your salary, a 50% match, or some other calculation? It also helps to know the policy regarding vesting and what happens to those matching contributions if you leave your job before you’re fully vested.
Consider Your Investments
With or without help, taking a little time to assess the investments in your plan could boost your bottom line. It may also allow you to tailor your portfolio to better accomplish your financial goals. Checking past returns can provide some information when choosing investments and strategies, but looking to the future also can be useful.
Plan for Your Whole Life
If you have a career plan (will you stay with this employer for years or be out the door in two?) and/or a personal plan (do you want to buy a house, have kids, start your own business?), factor those into your investment plans. Doing so may help you decide how much to invest and where to invest it.
Find Your Lost 401(k)s
Have you lost track of the 401(k) plans or accounts you left behind at past employers? It may make sense to roll them into your current employer’s plan, or to roll them into an IRA separate from your workplace account. You might also want to review and update your portfolio mix, and you might be able to eliminate some fees.
Know the Maximum Contributions for Retirement Accounts
Keep in mind that there are different contribution limits for 401(k)s and IRAs. For those under age 50, the 2023 contribution limit is $22,500 for 401(k)s and $6,500 for IRAs. For those 50 or older, the 2023 contribution limit is $30,000 for 401(k)s and $7,500 for IRAs. Other rules and restrictions may also apply.
Learn How to Calculate Your 401(k) Rate of Return
This information can be useful as you assess your retirement saving strategy, and the math isn’t too difficult.
For this calculation, you’ll need to figure out your total contributions and your total gains for a specific period of time (let’s say a calendar year).
You can find your contributions on your 401(k) statements or your pay stubs. Add up the total for the year.
Your gains may be listed on your 401(k) statements as well. If not, you can take the ending balance of your account for the year and subtract the total of your contributions and the account balance at the beginning of the year. That will give you your total gains.
Once you have those factors, divide your gains by your ending balance and multiply by 100 to get your rate of return.
Here’s an example. Let’s say you have a beginning balance of $10,000. Your total contributions for the year are $6,000. Your ending balance is $17,600. So your gains equal $1,600. To get your rate of return, the calculation is:
(Gains / ending balance) X 100 =
($1,600 / $17,600) X 100 = 9%
Savings Potential From a 401(k) Potential by Age
It can be difficult to really get a feel for how your 401(k) savings or investments can grow over time, but using some of the math above, and assuming that you keep making contributions over the years, you’ll very likely end up with a sizable nest egg when you reach retirement age.
This all depends, of course, on when you start, and how the markets trend in the subsequent years. But for an example, we can make some assumptions to see how this might play out. For simplicity’s sake, assume that you start contributing to a 401(k) at age 20, with plans to start taking distributions at age 70. You also contribute $10,000 per year (with no employer match, and no inflation), at an average return of 5% per year.
Here’s how that might look over time:
401(k) Savings Over Time
Age
401(k) Balance
20
$10,000
30
$128,923
40
$338,926
50
$680,998
60
$1,238,198
70
$2,145,817
Using time and investment returns to supercharge your savings, you could end up with more than $2 million through dutiful saving and investing in your 401(k). Again, there are no guarantees, and the chart above makes a lot of oversimplified assumptions, but this should give you an idea of how things can add up.
Alternatives to 401(k) Plans
While 401(k) plans can be powerful financial tools, not everyone has access to them. Or, they may be looking for alternatives for whatever reason. Here are some options.
Roth IRA
Roth IRAs are IRAs that allow for the contribution of after-tax dollars. Accordingly, the money contained within can then be withdrawn tax-free during retirement. They differ from traditional IRAs in a few key ways, the biggest and most notable of which being that traditional IRAs are tax-deferred accounts (contributions are made pre-tax).
Learn more about what IRAs are, and what they are not.
Traditional IRA
As discussed, a traditional IRA is a tax-deferred retirement account. Contributions are made using pre-tax funds, so investors pay taxes on distributions once they retire.
HSA
HSAs, or health savings accounts, are another vehicle that can be used to save or invest money. HSAs have triple tax benefits, in that account holders can contribute pre-tax dollars to them, allow that money to grow tax-free, and then use the holdings on qualified medical expenses — also tax-free.
Retirement Investment
Typical returns on 401(k)s may vary, but looking for an average of between 5% and 8% would likely be a good target range. Of course, that doesn’t mean that there won’t be up or down years, and averages, themselves, can be a bit misleading.
While your annual return on your 401(k) may vary, the good news is that, as an investor, you have options about how you save for the future. The choices you make can be as aggressive or as conservative as you want, as you choose the investment mix that best suits your timeline and financial goals.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
FAQ
What is the typical 401(k) return over 20 years?
The typical return for 401(k)s over 20 years is between 5% and 8%, assuming a portfolio sticks to an asset mix of roughly 60% stocks and 40% bonds. There’s also no guarantee that returns will fall within that range.
What is the typical 401(k) return over 10 years?
Again, the average rate of return for 401(k)s tends to land between 5% and 8%, with some years providing higher returns, and some years providing lower, or even negative returns.
What was the typical 401(k) return for 2022?
The average 401(k) lost roughly 20% of its value during 2022, as increasing interest rates and shifting economic conditions over the course of the year (largely due to increasing inflation) caused the economy to sputter.
SoFi Invest® The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results. Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
Inside: Do you want to know the legit ways on how to make 200 dollars fast? This guide will show you how to start working on fast money ideas. With tips on side hustles, online trading, and more, you’ll be able to build up a healthy bank account in no time.
Do you want to know the different ways to make 200 dollars in your leisure time? I bet you do! We all would like extra money in our pockets.
In an era of digitization, earning an extra $200 in your spare time has become more accessible.
Various online platforms offer numerous possibilities to gain this amount swiftly without any major investments or specialized skills. Utilizing these platforms can not only help you reach your financial goal but also provide you with an enjoyable experience.
Let’s delve into the uncomplicated and quick ways to make 200 dollars fast.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
Best Ways to Make Money 200 Dollars Fast
Discover the best ways to earn 200 dollars quickly by enlisting and acquiring the necessary skills.
You don’t even need to start a business or learn new skills virtually if you need the following legit ways to make $200 fast.
Just to note, you will find many of these ideas to be similar to how to make 300 dollars fast.
1. Sell Things You No Longer Need
Want to declutter and make some quick cash, to the tune of 200 dollars?
Start selling your no-longer-needed items and hit your goal. This method perfectly fits for minimalists looking to clear out space, or parents whose kids frequently outgrow their clothes and toys.
For instance, selling gently used toys or clothes could net you $200 in no time. Who knew making money could be as easy as cleaning up?
Even better turn this into a money-making business by flipping items for a living.
2. Sell gift cards
Struggling to add cash to your wallet? Turn those neglected gift cards lounging in your drawers into quick money.
Convert idle (Gift Cards) money to tangible cash by listing and selling on sites like CardCash at a discounted rate.
Another option is to trade your gift cards (you won’t use them) into something you want (like Apple or Amazon). So, weigh your options wisely.
In fact, you can read my CardCash review on my personal experience trading in gift cards.
3. Take on freelance jobs
Let’s start harnessing our skills and take on freelancing jobs online. Freelancing offers a flexible and income-generating platform, perfect for anyone looking to make a quick buck.
It is an effective income hustle, proven by data-driven facts. Best yet, it’s not exclusive to professionals alone. As a beginner, freelance gigs can offer an excellent starting point.
To get started, build a solid profile on a freelance platform that best suits your skills. Offer your virtual skills by getting jobs done in freelancing and experience good compensation for your comfort zone through this job.
4. Get Paid to Travel by Housesitting
Immerse yourself in a world of four-legged friends, greenery, and cozy, well-furnished homes while your wallet gets a welcomed cash addition.
Housesitting is not just about watching homes; it includes pet sitting and dog walking. All you need to do is join such platforms at no cost, set your rates and hours, and voila, you’re earning money while sleeping.
Essentially make money in your leisure time while enjoying the companionship of adorable pets. Who knew earning extra money could indeed entail wagging tails and furry hugs by signing up with Trusted Housesitters?
5. Rent Out Your Spare Space
Do you have spare space gathering dust? Turn it into a $200 goldmine!
Rent your unused closet, driveway, or extra room and have a quick injection of cash. Websites like Neighbor and VRBO are ideal platforms where you can list and rent out these spaces.
Start by exploring the listings in your area, identify the market range, and list your space accordingly. The extra income is just a few clicks away.
Best suited for property owners with underutilized spaces, this idea can serve as a consistent source of income and isn’t just a one-time fix.
6. Participate in Focus Groups
Get ready to voice your opinion and earn 200 dollars instantly!
Focus groups can be your golden ticket to making a quick $200. From my personal experience, they are organized discussions run by companies eager to pay for consumer insights.
Follow these steps and you could be cashing in:
Start by signing up and participating in a focus group that typically involves finding a suitable event in your area.
Involve yourself with popular websites like Bestmark.
Once you start searching for focus groups, you are likely to be targeted with sponsored ads on Facebook that match up to your opportunities.
By participating in discussions, I have earned a range from $50 to over $200.
7. Babysitting is Great Money
Looking for a quick way to pad your wallet? Babysitting is the golden ticket.
This gig is ideal for teenagers, college students, or anyone with some free evenings or weekends who enjoys hanging out with kids and can tolerate the occasional tantrum.
Start marketing your talent by creating a profile on care portals like Sittercity. Having a certificate in CPR can increase your profile and give assurance to the parent looking for a babysitter.
Remember to start with your personal network. Friends, family, and neighbors are a great way to kickstart your babysitting journey. With a bit of effort, you could be earning in less than 24 hours.
8. Make Videos
Are you passionate about making your own video or editing someone’s video to earn an incredible 200-dollar quickly? Jumpstart your day by hitting each click on your computer and adding sound effects on various kinds of videos on any social media.
You can also monetize your own videos by becoming a YouTube vlogger content creator and signing up for the YouTube Partner Program.
With an incredible shift to a remote life, you can now instantly earn from making your own videos through ad sponsorship, brand affiliation, and paid subscription on any application.
9. Get a Side Hustle
Engage yourself in a side gig, a savvy way to rake in cash promptly. Side hustles harmonize best with go-getters seeking financial flexibility or pursuing dreams outside the 9-to-5 grind.
Kickstart your hustle journey with free webinars or training. These platforms provide insights into key strategies and the nitty-gritty of the field.
Get cracking now to transform your monetizing dreams into reality!
Very popular are these side hustles for men. Or especially these side hustles for college students!
10. Online trading with Stocks and Options
Trading stocks and options emerge as a financial adrenaline rush, providing a swift track to earning money. You can convert spare moments into potential cash gains with just a few clicks.
Expert tips include starting with research, practicing with a simulation trading account, and diversifying your portfolio to mitigate risks.
The journey to online trading success begins with educating yourself. You must participate in a free investing webinar to undergo training to grasp trading basics, understand market trends, and form your strategy.
Check out how I learned to trade stocks and options with this Trade and Travel review.
Trade & Travel
Learn to trade stocks with confidence.
Whether you want to:
Retire in peace without financial anxiety
Pay your bills without taking on a side hustle
Quit your 9-5 and do what you love
Or just make more than your current income….
Making $1,000 every.single.day is NOT a pie-in-the-sky goal.
It’s been done over and over again, and the 30,000 students that Teri has helped to be financially independent and fulfill their financial dreams are my witnesses…
11. Take Up a Part-Time Job
Eager to fill your pockets a bit more, huh? Part-time jobs are your key to fast cash without compromising your ‘me-time’.
A part-time job supplements your primary income, leaving your piggy bank a bit heavier. Where you get to choose the timing that fits around your primary commitments.
Honestly, some of the best part-time jobs are actually low-stress jobs after retirement. You don’t need to wait for extra money. So, go get that financial freedom and earn more than just the minimum.
12. Yard Sale
Hosting a yard sale is a nonchalant trick to amass cash swiftly. It’s your winning lottery ticket staring at you from your cluttered garage floor.
Kick-off by hosting it on Friday or Saturday, when shopping spirits fly high! If your neighborhood or city has a date set for a community garage sale or jackpot, you’ll be swimming in extra traffic.
Don’t hesitate to unleash your inner salesperson, but remember, no rule binds you to wait for an event to rake in cash.
Remember, yard sales are your fast lane to quick money, and with these tips, you’re ready to speed!
13. Make Money with Your Collectibles
Turn your old favorite collection of Pokemon cards or Beanie Babies into a treasure chest waiting to be unlocked.
This money-making method is perfect for those who have carefully amassed certain collectibles over time. Sign up for eBay now and enlist your collectibles, antiques, and merch items to earn from it.
Want to kickstart your financial journey with collectibles? Find the most popular items to flip as well as insights on what to look for.
14. Collect and sell items from the trash
It’s time to transform your everyday trash into a hefty stash of cash! Collecting recyclable trash can be turned into a worthwhile moneymaker.
Start by saving cans, bottles, or scrap metal that you’d usually throw away. Then, locate a local recycling center that’s willing to pay for these items – the prices may surprise you!
This method is great for anyone willing to invest a little time and energy, particularly those who are environmentally conscious and eager to declutter. Perfect job for those who are frugal green.
Think about it, that old toaster might just be your next treasure trove! You may even find some highly valuable items in the trash to flip!
15. Sell Used Clothing
Selling used clothing is a clever and straightforward way to turn spare time into real cash.
Remember, a vibrant description for your clothes will attract buyers, so play up any unique or high-quality aspects of your garments.
Fashion enthusiasts want to earn a quick buck on the side. Begin by taking a charming picture of your clothes and posting it to Facebook Marketplace and ThredUp.
16. Do Social Media Marketing
Welcome to the era of making money by simply being social media savvy. Transform your digital skills into quick cash through Social Media Marketing.
Explore the digital world that awaits with all of the social media platforms. You can create engaging content while responding to the readers.
Take your skills to the next level, consider enriching your knowledge via a free webinar or online training.
This is an easy job that pays more than $25 an hour.
17. Sell Printables on Etsy
Do you love making creative paintings and printable designs? Imagine, your beautifully designed chore chart or a fascinating word puzzle bringing joy to scores of customers.
You can dive into this free training to jumpstart your side hustle. This method is a sure-shot hit for you.
Find out which digital products to sell on Etsy.
18. Invest in Cryptocurrencies
Do you have extra money in savings in your account and don’t know where to invest it?
Since 2008, cryptocurrency has taken the world by storm. Known for its decentralizing nature and secured by cryptography, it’s no regular dough.
Turn the tides in your favor and download an investment app to make your $200 grow faster. Consider taking a free webinar or training for a crash course.
You see, investing in cryptocurrencies is not a heavy-duty task. With the right smarts and patience, you can ride the next crypto wave!
19. Get Paid to Click
Among the numerous ways to earn an extra $200, getting paid to click is a simple and fun method.
Websites provide users with the opportunity to earn money through ‘pay to click’ surveys or rewarding viewers for ad consumption. Additionally, apps such as Survey Junkie and Swagbucks allow you to earn money by taking surveys, participating in focus groups, or simply navigating the web.
Each user generally earns from a few cents to a dollar per click. With patience and consistent effort, you can gradually accumulate your earnings to reach your $200 target.
Here are the top legit survey platforms:
20. Check Out Cashback Apps
Earn a cashback every time you shop at your favorite retail store or online.
Start off by signing up for apps like Dosh, Fetch, Rakuten, and Ibotta which offer bonuses just for signing up.
Lastly, apps like Acorns or CoinOut provide cash back on everyday shopping, even rounding up your purchases to add a bit more to your savings.
21. Do Odd Jobs as a TaskRabbit
Wanna earn cash quickly? Sign up and do freelance labor with TaskRabbit.
This user-friendly job marketplace connects people in need of task assistance with capable individuals willing to complete the tasks for a fee. It offers a diverse array of tasks, from assembling furniture and helping with moves to painting, yard work, and minor home repairs.
Just by performing various tasks, such as events staffing, running errands, or crafting. With the average TaskRabbit making double the minimum wage, this might be the gig for you.
TaskRabbit
Find local jobs that fit your skills and schedule.
With TaskRabbit, you have the freedom and support to be your own boss.
Plus set your own rates!
Get Started
22. Earn Money with Your Knowledge
Using your personal set of skills is a major advantage in freelancing platforms such as Fiverr, Upwork, and Freelancer.com.
Be it graphic design, content creation, SEO mastery, or even web development, you can monetize these proficiencies directly from your home. Data shows a significant growth in the gig economy over the past decade, suggesting a flourishing potential for remote work and online income generation.
Remember, your vast knowledge pool is your strength here. So, focus on what you’re best at, and let the money flow in.
Indeed, by effectively marketing your skills, pulling in a sum over $200 within a few hours is achievable. Remember to value your work appropriately and not devalue your aptitude just to land a job.
23. Tutoring
Online tutoring provides plenty of diverse opportunities in various subjects beyond just English. You can choose to specialize in specific topics and decide to tutor students of different age groups – from young children to college students.
Platforms like VIPKID and Magic Ears allow qualified tutors to offer virtual classes, specifically in the English curriculum for kids aged 4-12 years.
Tutors are usually compensated with payments ranging from $7 – $9 per class or up to $25 or more per hour. Also, you can increase your rate once you gain experience and build a reputation as a tutor. With in-person tutoring, you can expect to earn $20 an hour or more.
24. Petsitting
Looking for a quick way to make $200 fast? If you’re an animal lover, offering pet-sitting services isn’t just enjoyable, but also quite profitable.
Simply sign up with platforms like Rover, you can possibly get paid two days after service completion and you can always set your own rates. Just by walking the dog from house sitting.
Fun fact: Dog sitters often earn up to $50 a day. This is flexible and enjoyable work that could definitely help you reach your $200 target quicker than you’d imagine!
Rover
Get paid to play with pets!
Rover makes it easy and promotes you to the nation’s largest network of pet owners.
Earn money doing something you love.
Become a Sitter
25. Collect Scrap Metals and Junk
One man’s trash is indeed another man’s treasure.
Thinking of ways to earn quick cash? Consider collecting scrap metals and junk. This simple but profitable task can be done by anyone, with no particular set of skills necessary. All you need are keen eyes, a truck, and, admittedly, a little bit of strength to do the following:
Identify Metals: Start by identifying the most valuable metals – brass, copper, and aluminum.
Collect: Gather your metals, either from your home or by browsing local dumps. Remember, one man’s trash can be another man’s treasure.
Sell: Locate a local scrapyard and sell your haul at a fair price.
Keep in mind that patience is key; you might start with just $100 a day, but with experience, this can increase to a lucrative $500 a day!
26. Cash Out Your Coins
Are you sitting on a pile of coins? Maybe it’s time to cash them out. Here’s how:
Gather all your change together. Check under the sofa cushions, in car cup holders, and even in the bottom of your bag.
Take your coins to a coin-counting machine. These can be found at many grocery and department stores as well as your local bank.
Deposit these coins in a savings bank.
Expert Tip: Many banks provide free coin-counting services to their customers. Save on the counting machine charges by using these instead.
27. Run A Dropshipping Business
Dropshipping is a retail fulfillment method where you sell products without ever handling the inventory. This side hustle could potentially make you a quick $200 if executed strategically. Ready to dive in?
To level up, consider enrolling in free webinars on sites like Skillshare or free dropshipping training programs like Oberlo 101. This method is most suitable for those game to learn the ins and outs of online retail business and are ready to deal with customer interactions.
Remember, selling high-demand items will turn a quicker profit!
28. Do Micro Tasks
Looking to make cash fast? Turn your spare time into cash by capitalizing on microtask websites and get paid for completing simple jobs!
This method is particularly effective for those with meticulous attention to detail and those who can afford to spend some time on basic tasks such as data entry, data verification, information sorting, and transcription.
Microtasking might not be a golden goose, but it sure can help you accrue $200 surprisingly fast. The beauty of this hustle is in its simplicity, making easy money with minimal to no investment.
29. Find Sign-Up Bonuses
Did you know that many banks and credit companies offer sign-up bonuses as a strategy for attracting new clients?
For instance, some banking promotions in the United States can offer bonuses of up to $300 in total value when you sign up for a new account or credit card. Also, there are several credit cards that provide bonuses ranging from $500 to $800 or more, simply for registering and spending a defined amount within a specific timeframe.
Some cards, such as Chase Sapphire Preferred, offer lucrative rewards like a $1,000 bonus after a spend of $4,000 in the first 3 months.
It’s definitely rewarding to explore these possibilities to supplement your income, but it’s crucial to maintain a good credit score and commit to paying off your balance monthly to avoid any interest charges.
30. Cash Advances
Cash advances offer a rapid solution, but it’s essential to use them wisely.
Basically, a Cash advance is an advance on your next paycheck, and yes, it’s a viable way to get your hands on some quick cash. Also, some budget apps like Chime offer this service automatically.
Keep in mind, though, it’s an advance and not additional income. So, plan your expenses wisely and make it count!
FAQ
If you’re on a quest to make $200 as fast as possible, we’ve got your back. From selling items you own to completing quick gigs online, there is a plethora of opportunities out there for everyone.
For example, suppose you’re handy at a skill – be it haircuts, car repairs, pet sitting, or painting. You can start by offering your services to people in your neighborhood.
Or, if you’re the digital savvy type, consider selling items you no longer need on online platforms such as Facebook Marketplace or Craigslist. You’d be surprised at how quickly you can make money from items collecting dust in your home.
Ultimately, make sure you choose a fast money-making plan that aligns with your skills, interests, and resources. Go forth and rake in that cash.
If you need to make $200 today, you have a range of options at your disposal.
You can try different online strategies, including participating in online surveys, offering your skills on freelance platforms, or even reselling items online. While many people will sell the idea of a blog to make money, that is not a way to make money today.
Remember, the key is to zone in on tasks that require minimal effort but offer swift returns; these could include grandma sitting, dog walking, or even participating in online offers and promotions.
To kick-start your financial venture, locate valuable items in your home that you no longer need. Your dusty old guitar or that once-loved designer handbag could do the trick. Sell these items on widely used platforms such as Craigslist or Facebook Marketplace for instant cash.
Also, in the digital age, skills are an asset. Offering your skills on platforms like Fiverrcan turn your talents into quick cash. Don’t underestimate the power of quick gigs!
Tapping into the world of free sign-up bonuses can also fill your wallet quickly. Or even participating in a paid focus group!
If you need to make $200 quickly, there are several tried and tested methods. You could start by driving for Uber or Lyft for the evening during a concert.
My preferred method is trading options in the stock market. While this one is a skill, I developed over time. It has proved to be a tried and true method for me to make $200 in a few hours.
Time to Get 200 Dollars Instantly
By reading this article, you have learned and discovered the most effective ways to earn $200 quickly.
In order to have quick success, here are tips to help you out:
Sign up for a complimentary training or webinar that focuses on effective and proven methods of earning money swiftly.
Learning from other’s experiences can certainly save you some trial and error.
Ensure these training modules offer you practical skills and insights rather than just theory. Real-world applications of these strategies are what will help you rake in some quick cash.
Remember, your motivation and dedication are as important as the information and tools you acquire.
If you are looking to make a little bit more, check out how to make 500 dollars fast. Or even how to make 2000 fast!
Know someone else that needs this, too? Then, please share!!
Investing is a way to increase your wealth based on your risk tolerance and time horizon
The best investments for low-risk investors looking for moderate returns are index funds, government bonds, and high-yield savings accounts
The best investments for high-risk investors that want high returns are individual stocks, real estate, and cryptocurrencies
Investing is one of the best ways to grow your wealth and improve your financial future. One of the keys to finding the best investments is to recognize the power of compound interest. The credit bureau Experian® describes compound interest as “when interest gets added to the principal amount invested or borrowed, and then the interest rate applies to the new (larger) principal.”
There are many ways you can invest, and some investments earn more than others, and some investments are riskier than others. Today, you’re going to learn about the nine best investments in 2023 based on average returns as well as your personal risk tolerance.
The investing information provided is for educational purposes only. We recommend consulting a financial professional before investing.
The best investments
The best investments right now to grow your wealth include:
High-yield Savings Accounts
Short-term Certificates of Deposit (CDs)
Government Bonds
Corporate Bonds
Real Estate and REITs
Individual Stocks
Index Funds
Exchange-traded Funds (ETFs)
Cryptocurrency
1. High-yield Savings Accounts
High-yield savings accounts are similar to a regular savings account, but you’ll often earn more interest by keeping your money in one of these accounts. You can sign up for a high-yield savings account through many banks and credit unions, and some accounts can earn you anywhere from three to four percent annually.
If you have or plan on making an emergency fund, Javier Simon from SmartAsset recommends using one of these accounts. “Anyone looking to open a rainy day or emergency fund that provides a higher-than-average interest rate and high liquidity should consider a high-yield savings account,” writes Simon. You’re saving anyway, so why not make money from storing your funds?
Best investment for: People with lower risk tolerance and who are good at saving. This is one of the safest investments with high returns because many banks are FDIC insured, so even if the economy has a downturn, your money is backed by the government.
Risk level: Very low
How to invest: Banks, credit unions, and online banks
Potential returns: Moderate
2. Short-term Certificates of Deposit (CDs)
When looking for where to invest money, many people turn to certificates of deposit, which are also known as CDs. Like high-yield savings accounts, CDs are another type of account. CDs work by allowing you to deposit your money with the caveat that you don’t withdraw the money for a certain amount of time. Once that time frame expires, you’ll receive your money back as well as the interest.
Best investment for: People willing to store their money for one, three, or five years, which are the average predetermined time frames. Just remember, unlike a savings account, there’s a fee for withdrawing your money early.
Risk level: Very low
How to invest: Banks and credit unions
Potential returns: Moderate returns that sometimes exceed those of high-yield savings accounts
3. Government Bonds
Sometimes, the government needs to borrow money, so they offer people the option to loan them money via government bonds. Like CDs, these bonds are for a specified period, but they provide regular payments. Peoples sometimes use bonds as one of the best passive income investments due to these payments.
One caveat to note is the return on government bonds varies depending on how the economy is doing.
Best investment for: People with a low risk tolerance often buy government bonds. Unless the government fails, there’s not much that will prevent getting your return from this investment. Unlike other investments, government bonds can last for up to 30 years.
Risk level: Very low
How to invest: The United States Treasury or through a stock broker
Potential returns: Low
4. Corporate Bonds
Like government bonds, corporate bonds are loans, but you’re providing that loan to a company. This investment helps companies that need money to invest in new products and expand their business. Since these aren’t backed by the government, they can be riskier because the company may go out of business. Although these have a higher risk, they also have a higher return than government bonds.
Best investment for: Individuals with a higher risk tolerance and are looking for higher returns may want to invest in corporate bonds. These bonds pay out regularly, and they’re a safer investment when buying bonds from large, stable companies that have been around for a while.
Risk level: Moderate to high
How to invest: Stock brokerages
Potential returns: High
5. Real Estate and REITs
One of the investment ideas many people turn to is real estate because it can provide extremely high returns when the housing market is good. The downside is that when the housing market has a downturn, as we saw in 2008, people experience big losses.
Rather than investing in real estate, you can invest in real estate stocks, which are called real estate investment trusts (REITs). These stocks are for companies that own properties like malls, office buildings, and other forms of real estate that generate revenue. These can be slightly less risky but still have some risk due to the nature of real estate.
Best investment for: Those who are looking for high returns or have a diversified portfolio already and can weather some higher-risk investments.
Risk level: High
How to invest: Mortgage broker for real estate and stock brokerages for REITs
Potential returns: High
6. Individual Stocks
Individual stocks are available to everyone, and when the average person buys these types of stocks, they’re known as “retail investors.” You may have heard of retail investors investing in individual stocks during the GameStop stock hype of 2021, which also showed how risky individual stocks can be.
Individual stocks come with a high risk and high reward. Basically, you’re buying a portion of a single company, also known as a share of the company. Numerous factors dictate the price of a stock including the profits or losses of the company as well as speculation of the future of the company.
Best investment for: People who are looking for higher returns and don’t mind the risk may want to invest in individual stocks. These stocks can involve doing a lot of research into a company in order to make a quality decision. It’s possible for single stocks have the potential for large returns and losses. For example, investing in Amazon (AMZN) in 2018 and selling in 2021 would have over a 100 percent return, but buying in 2021 and selling in 2022 would have a 50 percent loss.
Risk level: High
How to invest: Stock brokerage
Potential returns: Low to high
7. Index Funds
Index funds are a type of stock, but rather than owning one stock, you’ll own multiple stocks. These stocks track a specific market, like the S&P 500 or the Dow Jones. When purchasing an index fund, there are often low fees and steady returns. The famous investor and founder of The Vanguard Group, John C. Bogel, popularized investing in index funds. This type of investing is popular because indexes like S&P 500 index funds track the 500 largest companies in the United States.
Best investment for: People who are new to investing as you don’t need to regularly check in and research different companies because index funds track the top companies in the U.S.
Risk level: Low
How to invest: Stock brokerage companies
Potential returns: Moderate
8. Exchange-traded Funds (ETFs)
Exchange-traded funds (ETFs) are similar to index funds because your single stock has shares of multiple companies, but ETFs are usually for specific industries or categories. For example, ARK Invest is a well-known ETF that often invests in technology companies, and there are other ETFs that have an assortment of bonds, like Vanguard’s Bond Market Index Fund (BND).
Best investment for: People with a moderate level of risk tolerance. ETFs can be thought of as a mix between index funds and individual stocks since they’re riskier than index funds, but they’re less risky than individual stocks because you’re more diversified.
Risk level: Moderate
How to invest: Stock brokerage
Potential returns: Low to high
9. Alternative Investments
Cryptocurrency trading is a hot topic, but many people don’t fully understand how it works. Cryptocurrencies are a digital form of currency that’s traded on a network known as the blockchain. The first cryptocurrency was Bitcoin, and now, there’s an endless number of cryptocurrencies. Many people have become millionaires or billionaires from investing in crypto, but it’s an extremely volatile market, and many more have also lost their life savings.
Currently, there is very little to no regulation around cryptocurrency, and much of the investing involves speculation. Notable investors like Warren Buffett and his business partner Charlie Munger have been highly critical of crypto investing, calling it, “worthless, artificial gold.”
Best investment for: People with a high risk tolerance and can tolerate losing their investment may find high returns with crypto investing.
Risk level: Very high
How to invest: Crypto exchanges
Potential returns: Very high
How to Choose the Best Investments
There’s no single right way to choose the best investments because it’s dependent on your unique situation. To make the best choice for yourself, you’ll need to assess your personal risk tolerance and when you’re hoping to cash out on your investments.
1. Assess Your Risk Tolerance
When it comes to investing, the higher the risk, the higher the reward, but it can also mean bigger losses due to unforeseen circumstances. While looking at the top nine best investments, consider how risky they are and whether or not they’re right for you. If you’re concerned about losing money and simply want steady, average returns from your investments, you may want to choose investments that are lower risk.
2. Gauge Your Time Horizon
An important aspect of investing is when you plan on needing the returns from your investment. Many people invest as a way to save for retirement, but some people invest in order to make money to pursue another goal, like purchasing a new home or going on a big trip. For those with a longer time frame of 10 or more years, you can tolerate making low-risk investments with steady returns. If you need the returns sooner, you may want to look into taking more risks.
A simple way to invest based on your time horizon is to use target date funds. The United States Securities and Exchange Commission describes target date funds as being “designed to be long-term investments for individuals with particular retirement dates in mind.” With this type of fund, you set the date you plan on retiring or selling your investments, and it will automatically adjust for risk.
3. Recognize Your Personal Investment Knowledge
Investing does come along with some risks, and these risks vary depending on which type of investing you do. For example, investing in a high-yield savings account is much less of a risk than investing in individual stocks. As a way to minimize your risk and be fully aware of the risks you’re taking, it’s helpful to educate yourself further on each investment and gauge your personal knowledge.
There’s always room to grow your investing and personal finance knowledge. Even the greatest investors in the world continue to learn as much as they can about investment strategies.
4. Assess How Much You Can Budget for Investing
When getting started on your investment journey, it’s often a good idea to minimize your debts as much as possible before creating a budget. For example, if you have a high amount of credit card debt, the interest you’re paying will counteract the money you’re putting into different investment opportunities.
Once you have minimal debt, you can create a budget to see how much you can invest each month. With many of the investments covered here, you can set up automatic investments to make the process a little easier as well.
Best Investments: FAQ
Now, you know about various investments as well as the risk associated with each one. The following are some additional frequently asked questions to help you get started with investing.
What Is Compound Interest?
Compound interest is when the money you make from interest starts making you additional money as well. For example, with a 10 percent interest rate, $1,000 would make you $100. The following year, you’d earn 10 percent interest on $1,100 because that extra $100 you earned will earn interest as well.
Without investing anything else, your original $1,000 investment will be more than double your original investment in 10 years.
Which Investment Gives the Highest Returns?
Investments that have the highest return opportunities include real estate, individual stocks, and alternative investments like cryptocurrencies. Just be sure to keep in mind that these investments also come with the most risk.
Is It OK to Invest During Times of Uncertainty?
Investing during uncertain times can bring better-than-average returns later on. Marcus by Goldman Sachs recommends taking the long view when making your investments. Even during a bad economy, historical data shows that it eventually recovers. You’ll just need to assess your risk and decide if you can weather the storm until it rebounds.
Should You Invest with Bad Credit?
Investing is a way to save for your retirement or future purchases, and it can increase your overall net worth. If you have bad credit or a lot of debt, it may be best to wait on investing because that money could go to paying off debt, improving your credit, and increasing your financial security.
If you need help improving or repairing your credit score, allow Credit.com to help. We have services like ExtraCredit, and we can also provide you with a free credit report card. We’ll be there to help you learn how to improve your credit as well as other ways to increase your wealth, so sign up today!
I realized something important for all of you who have automatic mortgage payments and also like to automatically pay down extra principal each month. It is don’t forget to adjust your mortgage autopay amount when rates change.
When I refinanced a primary residence loan in 2019, I decided to get a 7/1 ARM at 2.625% with no fees. I had gotten a 5/1 ARM when I purchased the house in 2014 for 2.875% and I wanted to refinance before the rate reset.
Given I have an ARM, I always like to pay extra principal with each mortgage payment. So instead of making the regular $2,814.14 mortgage payment, I decided to pay $4,500 automatically each month.
$4,500 is a nice even number which pays $1,685.59 extra toward principal. This amount is on top of the $1,847 (goes up every month) that is already going to principal from the $2,814.14 mortgage payment. Not bad since the mortgage rate is so low.
Not only do I like taking out cheap debt to live a better lifestyle, I also like the feeling of paying down debt. Automatically paying down extra principal each month ensures I am making financial progress, even if I didn’t do anything else.
Over time, the extra forced savings from paying down more principal adds up! And when you’re finally done paying off your mortgage, you own a nice asset that can be rented out for cash flow.
Why Adjusting Your Automatic Mortgage Payment Is Important
Reviewing my mortgage payment history since 2019, I have consistently paid $4,500 since the beginning.
Most people just pay the mortgage amount each month, but not me. And maybe not those of you who like to accelerate your debt repayment as well.
However, since 2019, mortgage rates have surged higher thanks to the pandemic, government stimulus, supply chain issues, and the strong economy. Since 2021, I’ve also written posts such as:
In other words, even though I was recommending to not pay down extra toward a mortgage in a high mortgage rate, high interest rate, high inflation, and inverted yield curve environment, I was doing just that!
As someone who tries to act congruently with my beliefs, I was surprised to learn I had missed this financial move. As soon as I realized my inconsistency, I called the bank and had them lower my payment from $4,500 down to $2,814.14.
Paying down extra principal when the yield curve is inverted is suboptimal because you reduce liquidity in the face of a potential recession. If bad times return, you want as much cash flow and liquidity as possible to survive.
Paying down extra principal is also suboptimal when Treasury bond yields and inflation are high. You could earn a greater return risk-free and inflation is already paying down debt for you.
Why I Missed Lower My Mortgage Payment
With over 40 financial accounts to manage, it’s easy to miss things. I set up automatic payments for everything to eliminate missing payments. But the downside is that I sometimes fail to adjust my payments when conditions change.
The more complicated your net worth, the more you will miss things. There might be some big winner stock you’ve been holding for years that’s now in the gutter. It’s easy to lose track.
This is why tracking your net worth diligently using Empower or another free wealth management tool is important. Having at least a quarterly, if not monthly financial checkup, is important.
Benefits Of Autopay And Paying Down Extra Debt
Paying an extra $1,685.59 toward principal for 48 months ($80,908.32) isn’t the end of the world. I now have $80,908.32 less mortgage debt for this one property. I’ve accelerated the time to completely pay off the mortgage by several years.
However, from March 2022 until August 2023, I could have earned a guaranteed 4% – 5.5% return in Treasuries. This return compares favorably to the 2.625% return I made paying off the debt.
There is also another benefit to paying off a negative real estate rate mortgage. And that is saving money from a potential bear market. The extra mortgage principal payments I made in 2022 saved me from a ~20% loss plus the 2.625% in mortgage interest expense.
If I had never remembered to adjust my mortgage autopay, things would still be fine. I would simply have a lower principal balance in 2026, when my ARM resets.
I know only about 11% of mortgage holders have an ARM. However, if you get an ARM to save money, you might be more inclined to pay off your mortgage quicker. With a 30-year fixed mortgage, there is no sense of urgency to pay extra toward principal.
When To Resume Paying Down Extra Principal
It’s optimal to stop paying down extra principal automatically each month when rates are high and the yield curve is inverted. Therefore, the logical conclusion is to resume paying down extra principal when rates are low and the yield curve is upward sloping.
Specifically, I would resume paying down extra principal automatically when Treasury bond yields are equal to or less than your mortgage rate. The lower the 10-year Treasury bond yield is below your mortgage rate, the more you want to pay down extra principal.
Another time to start paying down extra principal automatically is when your cash flow and savings amount is strong, and you don’t know where to invest the extra cash. When in doubt, pay down debt.
We Will Earn, Save, And Invest More If We Want To
One final takeaway from this post is that most of us will rationally take action to improve our finances if we need to. Therefore, I wouldn’t worry too much about being permanently stuck financially.
I found this mortgage payment mismatch because I was motivated to find more ways to improve cash flow. We are in the process of buying another house. In addition, there is the potential for another recession.
As a result, I reviewed all our expenditures and realized this was the one expenditure that could free up a significant amount of cash flow ($20,227/year). I’ve also thought about going back to work to boost income and reduce healthcare expenses.
If I didn’t feel the need to boost our finances, I probably wouldn’t have connected the dots about this automatic mortgage overpayment. But I would if I found myself in a cash crunch.
If we need more money, we’ll find a way to save more, slash costs, and/or earn more. This logical behavior is a win for us all.
Reader Questions And Suggestions
Do you pay extra principal through your automatic mortgage payments? If so, how much more do you decide to pay? Have you remembered to lower your extra principal payments once risk-free rates surpassed your mortgage interest rate? Are you trying to improve cash flow due to another potential recession?
If you’re shopping around for a mortgage, check out Credible, a mortgage market place where you can find personalized prequalified rates. Credible has a handful of lenders on its platform competing for your business.
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At any given time, there are numerous places and ways to invest your money, ranging from the stock market to real estate. But how and where you invest your money also brings up numerous potential risks and potential outcomes — for that reason, it can be difficult to decide what to do.
And while investors are right to wonder what investments make sense given the current economic and political climates, they may be surprised to hear that other, longer-term factors are just as important. As such, you may find it useful to learn the behavior of the available investment types, and then compare those patterns to whatever it is that you’re trying to accomplish, and along what timeline.
Learning About Investment Options
If you’re wondering “where should I invest my money right now?”There are several different potential answers and investment opportunities out there. But before you do anything, you’ll need to make some key decisions.
The first is to make a decision by investment type, which involves deciding to invest in certain asset classes or asset types. Your portfolio mix will be your asset allocation, which is covered below.
Stocks, bonds, cash, and money market funds, and real estate are just a few of the asset classes available to investors. Generally, the first order of business is to determine which is most appropriate for the financial goals an investor has. In order to determine this, it’s important to understand how each investment type earns a return.
Where to Invest Money
As noted, there are many different assets that investors can utilize or add to their portfolio. Here’s a rundown.
Stocks
A stock represents a share of ownership in a company. When an investor buys a share in a company, they own a small proportion of that company. Shareholders may even receive voting rights. This is why stocks are sometimes referred to as equities; investors now own equity in that company.
A stock can earn money in two ways. The first way is through the value of shares appreciating over time; this is called capital appreciation. The second is through periodic cash payments made to shareholders, called dividends.
Stock prices can be influenced by both internal and external factors, such as a new product launch or broader national or global events like a political event or natural disaster. Because the nature of business is highly unpredictable, stock prices can be volatile.
Bonds
A bond, on the other hand, is an investment in the debt of a company or government. The bondholder earns a rate of return by collecting a rate of interest on that debt for a predetermined amount of time, such as 10 or 20 years. Because the terms are stated upon purchase, bond values generally tend to be less volatile than stocks, but have more modest returns. That said, bonds are not completely without risk, and it is possible for bonds to lose value.
When interest rates are low, overall, bonds will likely pay out a lower rate of interest. Interest rates can change, and quickly, sometimes, which is something investors may want to take into account.
Typically, stocks are considered to have a higher potential for returns over time, but that comes with the price of volatility — the possibility of an investment losing value, especially in the short-term. Bonds are often considered a safer, more stable investment that may be more appropriate for investors who aren’t as comfortable with the volatility of the stock market.
A big part of deciding where to invest has to do with determining your relative comfort level with each of the different asset classes.
Mutual Funds
Investing directly in stocks isn’t the only option available to investors. Mutual funds present another way to invest in the stock market. Think of funds as baskets that hold an assortment of some other investment type, such as those mentioned above — stocks, bonds, and real estate holdings. Funds provide investors an easy way to access diversified exposure to many investments at once, but they are not an asset class in and of themselves.
Investment funds can be an affordable and quick way to get (and stay) invested, which makes them popular with both new and seasoned investors. But even if you decide to use funds as the device for which you invest in different markets, the first order of business is to understand the fund’s underlying asset class.
For example, someone who purchases a mutual fund that holds 500 stocks, is invested in those 500 stocks — and very much invested in the stock market. If you buy a mutual fund comprising 1,000 bond holdings, then you are invested in those bonds. If you buy a fund with real estate holdings, well, you get the idea.
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Options
Options are a form of derivative, and are “higher-level” investments than, say, stocks or bonds. Options can be difficult to understand, but fairly easy to trade — you’d likely want to discuss options trading or investing with a financial professional before you get into it.
That said, investors can invest their money in various forms of options, but they’ll need to keep an eye on their portfolios. Options trading is an active form of investing, as there are strike prices and dates that they’ll need to be aware of.
Exchange-Traded Funds (ETFs)
Exchange-traded funds, or ETFs, are very similar to mutual funds in that they’re effectively a basket of different investments, all compiled into one security. There are tons of different types of ETFs, encompassing all sorts of different market indexes, sectors, and asset classes. Odds are, if you’re looking for a specific type of ETF, there’s likely one out there that fits the bill — or that comes close to it.
Retirement Plans
A retirement plan or account is another place that investors can put their money to work. There are various types of retirement plans — the list includes individual retirement accounts (IRAs), 401(k) plans, and the Roth variations of each. Not all investors may have access to each type, so, see what’s available to you, and which type of plan best fits your investing strategy.
Index Funds
As discussed, index funds offer yet another investment vehicle. These are investment funds that track an index, which is usually a specific part of the broader market. For example, there are index funds that track the S&P 500, or there are index funds that track the tech sector.
Investing in an index fund allows investors to gain exposure to their preferred market segment, and there are numerous options out there, too.
Real Estate
Real estate investing can include physical property — houses, commercial buildings, etc. — or, it comprises purchasing certain real estate-oriented investment vehicles. While many investors may not have the capital laying around to buy a house for investing purposes, they can buy real estate stocks, or even look at REITs, or real estate investment trusts, to get real estate exposure into their portfolios.
Certificates of Deposit (CDs)
Certificates of deposit, often called CDs, should also be on investors’ radar. CDs are somewhat like savings accounts, in which investors “lock up” their funds for a predetermined period of time in exchange for interest rate payments. Functionally, they’re similar to bonds, but there can be fees if you need to pull your money out of a CD before it matures.
Options for Cash
In some instances, it may make the most sense to keep the money for a particular goal in cash. It is helpful to understand what options are available for cash savings.
Savings accounts at a traditional bank or credit union: This is likely the most familiar option. Traditional and commercial banks remain popular for their large geographical footprint. Note that many traditional banks tend to pay a relatively low rate of interest on any cash holdings.
Online-only checking and savings accounts: A newer option for bankers, online-only banks and banking platforms may offer a slightly higher yield than a savings account at a commercial bank. Additionally, many do not require minimums or charge monthly maintenance or account fees.
Money market funds: Often found in brokerage accounts, a money market fund is a fund that holds cash and or other “very liquid investments,” like short-term government securities.
Certificate of deposit (CD): As discussed previously, certificate of deposit is a savings account that holds money for a fixed amount of time, like one year or three years. A fixed rate of return is paid out during that period. Generally, there is a penalty to cash out a CD prior to expiration.
When considering cash as an asset class, consider the risk and reward tradeoff, just as one would for any other investment type. Although cash might not be risky when considered in terms of volatility, it does not come without risk. Cash carries the risk of losing value over the long-term due to the effects of inflation, or prices rising over time.
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Beginner-Friendly Places to Invest
If you’re a beginner investor looking for places to put your money, it may be beneficial to revisit some basic investing rules or guidelines. For instance, you’ll likely want to build an emergency savings fund before focusing on your stock portfolio.
But assuming you’re ready to put your money in the market or otherwise start building your investment portfolio, many beginners begin with some basic investment funds. ETFs are a popular choice, as are mutual funds — but note that there are some differences to be aware of.
If you’re not sure where to turn or what to do, consider speaking with a financial professional for advice.
Which Investments Provide the Highest Returns?
You’ve probably heard a certain phrase before: The higher the risk, the higher the reward. That largely holds true in the financial space, although not in every instance. It’s all to say that riskier investments tend to provide higher returns.
Assets like stocks are probably, by and large, going to provide higher or better returns than, say, bonds. Trading options can likewise be more profitable than buying and holding stocks, too. But there are significant risks involved in any strategy, and those risks can be magnified by the specific investments involved.
Again, if you’re looking for the highest possible return, it may be best to consult with a financial professional for guidance, or to give some thought to how each type of investment fits with your overall strategy.
Creating a Goals-Based Strategy
Contrary to how many new investors are encouraged to think about investing, it may not make sense to try and pick “hot” stocks right out of the gates.
Instead, take a step back and consider the bigger picture view, and ask whether stocks are even appropriate given your goals and investing timeline. This decision on which combination of asset classes to be invested in, and in what proportions, is called asset allocation.
To determine your asset allocation, start by thinking of each “bucket” or “pot” of money independently. For example, maybe someone has $1,000 set aside for retirement and another $1,000 that they’d like to use as a down payment for a home. Think about this intuitively; these are very different goals with different timelines and therefore, may require different investing strategies.
Next, consider the financial goals, risk tolerance, and investment time horizon for each bucket. This can sound pretty boring especially if you’ve been conditioned to believe that you should invest in whatever is currently the talk of the town.
Risk vs Reward
The asset allocation decision really boils down to an examination of an investment’s risk and reward characteristics in order to determine whether it’ll work on a personal level. Here’s what’s so important to understand: with investing, risk and reward are two sides of the same coin. Investors cannot have one without the other. For more reward potential, an investor will have to take more risk. There is no such thing as an investment that produces returns with no risk.
Let’s consider, again, the two hypothetical investment goals from above: $1,000 for a down payment and $1,000 for retirement. How do goals lead one down the path of where to invest?
First, the $1,000 for a down payment: If the money is designated for use in the next few years, the risk of losing any money in a volatile investment may outweigh the potential to earn investment returns. Therefore, it might be best to keep this money in a lower-risk investment or cash equivalent.
Next, the $1,000 for retirement. Many retirement investors have the goal of reasonable growth over the long-term. Because of this long time horizon, there should be enough time to grow beyond spates of short-term volatility. Therefore, it may be suitable to create a portfolio that is primarily invested in the stock market or a combination of stocks and bonds.
Retirement investors close to retiring may opt to consider some exposure to bonds for both diversification purposes and to lower the overall volatility of the portfolio. Ultimately, a person’s comfort level with the stock market will determine their specific stock and bond allocations. And it’s worth noting that an investing strategy isn’t stagnant. As a person ages, their goals and investing strategy will likely need to evolve, too.
Opening the Right Account
Here’s another way to answer the question, “where should I invest my money?” By doing so, in an appropriate account type, at a brokerage bank or on an investing platform.
Just as it makes sense to keep cash in a bank account, the same must be done with investments. But with investments, opening the right account can be a bit trickier.
It is not uncommon to hear someone refer to a 401(k) or a Roth IRA as if one of those is, in itself, an investment. But retirement accounts are not investments — they are accounts. Granted, they can hold investments, but they are still accounts.
Money is contributed to any investment account in cash, and then those proceeds are used to purchase investments, like stocks, mutual funds, and ETFs. (In a plan sponsored by a workplace plan, like a 401(k), the investing might happen automatically, hence the confusion about it being an investment itself.)
It is also possible to invest in an account that is not designated for retirement. At a brokerage firm, these are often simply referred to as brokerage accounts. If you use a trading platform, it may be referred to as an individual or a wealth account.
Retirement accounts offer some sort of tax benefit, like tax-free growth on your investments, which make them suitable vehicles for long-term goals. But because they offer a tax benefit, there are more rigid rules for use. For example, some retirement accounts, like 401(k) and Traditional IRAs, levy a 10% penalty on money withdrawn before retirement age (there are some exceptions to this withdrawal fee). Also, there are limits to how much money can be contributed annually to retirement accounts.
Weighing Your Options
It all comes down to the individual. You’ll need to look at your risk tolerance, time horizon, and personal preferences to determine the most suitable investing path or accounts.
For short-term goals that require more flexibility, a non-retirement account may be a better choice. Because there are no special taxation benefits, there are generally no rules about when money can be withdrawn or how much can be contributed. Because of this, non-retirement accounts can also be a good place to invest for folks who have met their maximum contribution amount for the year in their retirement accounts.
Investing With SoFi
At any given time, there are a plethora of places or vehicles in which you can invest your money. You can invest in stocks, bonds, funds, real estate — the list is long. But each has its own considerations and risks that must be taken into account. Overall, an individual’s investing strategy is the most important thing to keep in mind.
As for where to open an account, new investors may want to focus on an institution or platform where they are able to keep costs low. There’s not a whole lot that investors can control, like investment performance, but how much they pay in fees is one of them. There are lots of options for investors.
SoFi Invest offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares, but restrictions apply.
Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.
FAQ
Which investment gives the highest returns?
Higher-risk investments tend to give the highest returns, but can also give the highest losses. These can include certain stocks or investment funds, particularly those focused on market segments that are risky or volatile.
Where can you invest your money as a beginner?
Beginners can use any number of investment vehicles to invest their money. Some choices include investment funds like ETFs or mutual funds, or even retirement accounts or plans.
Where can you invest money to get good returns?
There are numerous investment vehicles that can provide good returns, but those returns can be thwarted by down markets. Stocks and more volatile investments tend to provide higher returns, but also tend to have higher risks than other investment types.
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