The Best Ways to Invest Money 2024

Investing helps you build wealth, creates a powerful income stream, and funds your retirement, but to meet those goals without adding too much risk, you need the right strategy, the best investments, and time.

Poor investment choices, on the other hand, lead to underwhelming results. And it matters.

Investors can’t waste time or money when it comes to their financial goals, which likely include:

• Emergency fund
• Home down payment
• Education expenses
• Grow wealth
• Retirement savings and income

What are the best investments, who offers the best solutions, and where can you find someone who will work with you one-on-one to help design your overall investment strategy?

Compare Online Brokerages

The best brokers allow you to invest in various financial products, including mutual funds, stocks, and bonds. Shop and compare online brokerages and robo-advisors to find the lowest fees and opening balances.

Where to Invest Money

Investors have thousands of investment options from which to choose these days, but they fall into these major categories:

Stocks

• Individual stock shares
• Stock mutual funds
• Stock ETFs
• Index funds
• S&P 500 index funds
• Dividend stock funds
• Nasdaq 100 index funds
• International stocks
• Small-cap stocks

Bonds

• Treasury securities
• Government bonds
• Short-term corporate bonds
• Long-term corporate bonds
• High-yield bonds
• Municipal bond funds

Cash Equivalent Investments

• High-yield savings accounts
• Certificates of deposit (CDs)
• Money market accounts
• Money market funds

Blended Portfolios

• Balanced portfolios
• Asset allocation portfolios
• Target-date funds

Real Estate

• Rental housing
• Commercial real estate
• REITs

Annuities

• Fixed annuities
• Variable annuities

It’s a good idea to narrow the field and focus on the types of investments you’re most likely to select for your portfolio.

You’ll want to understand how each investment performs and what types of risk it involves so you can make an effective decision – especially if you’re just learning how to invest.

Here’s a brief summary of what you might expect from each of the main investment categories listed above.

Stocks

Stocks represent an ownership share in a particular company. These shares are traded on public exchanges, so they can be bought or sold at any time.

Over time, stocks as a whole have provided returns that have easily beaten inflation.

This makes them a good investment for long-term growth. However, they can also have steep losses that sometimes last for several years.

Stocks can be bought individually or in large groups via a mutual fund or diversified portfolio.

Owning several stocks instead of just one or two might water down your returns, but it also cushions the risk of any company falling out of favor or even going out of business.

Stock prices depend on two things:

1. How a company’s business is doing
2. Investor opinions about the future of the company

Because business conditions and investor moods are unpredictable and can change quickly, stock prices are subject to large, sudden moves – for better or worse.

When price volatility happens due to economic factors specific to a company or industry, it’s known as “unsystematic risk.”

However, a systematic or market risk that affects the entire stock market at the same time is due to larger economic forces like interest rate changes, political turmoil, or recession.

A diversified portfolio cannot mitigate both types of risk. It can only help hedge against unsystematic risk.

Learn more about investing in stocks:

• How to Invest in Stocks
• How to Read Stocks: Tips for Better Investments

Bonds

A bond is a debt obligation issued by a government or corporation. Investing in one is like lending that issuer money: they agree to pay you back the money at a specified time plus interest at regular intervals.

Despite these scheduled payments, bonds can increase or decrease in value and even suffer permanent losses if the issuer does not make its payments.

The amount of risk depends on how reliable the issuer is and how far in the future the repayment date is.

Bonds can provide an investor with regular income and also add some stability compared to owning just stocks.

However, the level of income and amount of stability depends a great deal on the type of bonds.

Bonds can be bought individually or via mutual funds. Because bonds typically trade in large amounts, it can be more efficient for a typical investor to buy groups of them through mutual funds.

Learn more about investing in bonds:

• Differences Between CDs and Bonds: A Secure Investment Showdown

Cash Equivalents

“Cash equivalents” is a broad term for investments that combine total stability with easy access. They are also often referred to as liquid investments.

Cash equivalents include accounts and instruments that do not go up or down in value.

They typically pay interest, but because of their safety and accessibility, their interest rates are generally pretty low.

The purpose of cash equivalents is to keep money ready for near-term spending. They can also be a useful place to put money while you are deciding where to invest it next.

Examples of cash equivalents include savings and money market accounts. Money market funds are also commonly used as cash equivalents, but these are different from money market bank accounts.

Certificates of deposit (CDs) can be used as cash equivalents in some cases, though they usually have some restrictions on their access.

Learn more about cash equivalents and liquid investments:

• Certificate of Deposit (CD)
• How Risky Are Certificates of Deposit?
• Complete Guide to Setting Up a CD Ladder
• Unconventional CDs: Raise-Your-Rate CDs and Indexed CDs

Blended Portfolios

Different types of investments, such as stocks, bonds, and cash equivalents, are known as asset classes. Each acts differently, but it is unlikely that any one asset class can always meet all of an investor’s needs.

That’s why investors typically own a mix of different asset classes.

A blended portfolio is a popular way of coordinating ownership in different asset classes.

A blended portfolio combines some of the characteristics of specific asset classes but without the extremes.

So, a blended portfolio will typically be less erratic than stocks but with less return potential. It should do better than cash over the long run but with less stability and access.

It will probably have a lower income yield than bonds but with more growth potential.

Blending asset classes in an attempt to achieve the right mix of risk and return can be done in different ways. Examples include balanced portfolios, asset-allocation portfolios, and target-date funds.

Learn more about investing in blended portfolios:

• Asset Allocation: Maximizing Returns, Minimizing Risk
• Portfolio Rebalancing: Rebalancing an Investment Portfolio
• Don’t Pigeonhole Investment Portfolios: Why Use a Multi-Asset Class Approach

Real Estate

For most homeowners, real estate is already their biggest single investment. However, aside from the house you live in, you can also benefit from other ways of investing in real estate.

Real estate investments can perform in a number of different ways:

• They can provide rental income
• They have the potential to increase in value
• They can simply be assets that respond differently than the stock and bond markets

Real estate investments are broadly divided between residential and commercial real estate.

You can own individual properties or invest in a pool of different properties via a Real Estate Investment Trust (REIT).

When investing in real estate, it is best to be in it for the long haul.

Also, understand that the particular risk and reward characteristics of the real estate you buy depend greatly on the type of properties you purchase, where they are located, and what price you pay for them.

Learn more about how to invest in real estate:

• REITs: What They Are and How They Work
• Real Estate Investing: Individual Properties or REITs?
• How to Invest in Real Estate: Getting Started
• REIT Diversyfund Review

Annuities

An annuity is a financial product designed to provide consumers with a pre-determined form of investment return in the years ahead.

This is accomplished through a contract with an insurance company that often has two components:

Insurance component

The insurance component comes in the form of a death benefit for the annuity owner’s spouse.

Investment component

The investment component can come in a variety of forms.

Investment features of annuities

The key choices for the investment features of an annuity involve when it will start paying out money to you and how those payments are determined.

In terms of the timing of payouts, the two major choices are:

Immediate annuities

These types of annuities start making payments right away.

Deferred annuities

These annuities start making payments at a specified date in the future.

The investment return can come in one of two forms:

• Fixed annuities paying a specified return year-in and year-out
• Variable annuities paying a return that depends on investment conditions

Advantages of annuities

The perceived advantage of annuities is that their returns are structured, thereby taking some of the uncertainty out of investing and retirement planning. However, whether those returns are a good deal for the consumer depends on the specific terms offered by the annuity.

How to shop for an annuity

It is very important to shop around and compare products when considering an annuity. Key variables to consider include:

• When benefits will start being paid
• How long benefits will be paid
• Death benefit, if applicable
• Initial investment required
• Up-front fees
• Ongoing management fees
• Surrender charges for taking money out early
• Payout rate

Besides comparing annuity products with one another, it is also a good idea to see if you can accomplish the same results less expensively with other financial products, such as buying an insurance policy and investing separately in a CD or mutual fund.

What Is Your Risk Tolerance?

Every investment involves an element of risk. You can’t avoid risk altogether, but you can manage it.

Deciding how much risk to accept is a personal decision that takes into account your time horizon and your risk profile.

With so many investment choices, a key to determining which is right for you is getting a handle on what types of risk you’re comfortable with.

There are several ways to define risk.

Permanently losing money is an obvious one, but even temporary ups and downs can be damaging depending on how soon you need your money.

Then there’s inflation risk (where your returns don’t keep up with the rate of inflation) and longevity risk (where you might outlive your investments).

So, figuring out your risk tolerance starts with deciding what types of risk you are most sensitive to and how much of that risk you can take.

Since risk is most often defined by how well you can bear changes in the value of your investments, risk tolerance is often described in terms of low, moderate, and high risk.

Conservative (low-risk) investors

Conservative investors generally cannot tolerate any wide swings in the value of their investments.

This may be because they need their money soon or simply because they do not want the aggravation of watching their hard-earned money fluctuate in value.

Conservative or low-risk investors should concentrate on investments such as cash equivalents that do not go up and down in value.

Short-term, high-quality bond investments may work as well.

If conservative investors own riskier investments like stocks, they should do so in very small amounts relative to the rest of their holdings.

Moderate (medium-risk) investors

This probably describes most investors.

They are trying to strike a balance between protecting against extreme risks and having enough growth potential to meet long-term goals.

This mix of priorities means moderate or medium-risk investors should own a mix of different investment types.

This can include cash for stability, bonds for income, and stocks for growth. If investors have a long time frame in mind, real estate may also provide income and/or growth potential.

The blend of these different asset classes depends on whether these investors want to shoot straight down the middle between risk and reward or lean toward one side or the other.

Aggressive (high-risk) investors

It might be easy to think of aggressive or high-risk investors as those who like to roll the dice and take chances, but there is more to it than that.

The more people are focused on the need for long-term growth, the more risk they may be inclined to take.

For these investors, stocks will likely play a leading role in their holdings. They may also invest in real estate or even more exotic investments such as futures and options. They may use margin investing to ramp up their risk level.

People often assume younger investors are more aggressive and older ones more conservative, but this is an oversimplification.

Younger investors may be focused exclusively on short-term needs like meeting next month’s rent payment, while older investors who have had a chance to build some wealth may have more of a cushion to take risks.

So, risk tolerance depends on much more than age. It depends on your goals, your current level of wealth, your income, and your preferences.

How much risk can you tolerate? Try this investment quiz:

• Investment quiz: Are you a low-risk or high-risk investor?

Popular Investment Strategies

An investment strategy is a set of rules—your game plan or style of investing, if you will — that guide how you choose your investments.

There are many types of investment strategies, but here are some designed to help you build a portfolio that fits your risk tolerance and financial goals.

Growth investing

A growth investing approach is focused on picking stocks with higher growth potential compared to their industry or the market as a whole.

This strategy is well-suited for buying young or small companies but can be applied to larger companies with continued growth characteristics as well.

Value investing

A value investing strategy focuses on companies that investors believe are trading at a discount on the value of their assets or earnings.

Essentially, the stock price of the company is believed to be lower than it should be.

Income investing

An income investing strategy emphasizes investments that produce regular income rather than relying solely on increases in asset value.

Such a portfolio may consist of dividend stocks, bonds, cash equivalent accounts, and some real estate.

Diversification

Diversification is a basic investment principle designed to reduce the risk that any single investment or type of investment will cause undue damage to a portfolio.

Diversification is achieved by owning a mix of asset classes (stocks, bonds, cash equivalents, etc.) and a variety of investments within each asset class.

Typically, investors can diversify easily by investing in mutual funds and ETFs.

Asset allocation

As noted above, owning multiple asset classes helps diversify a portfolio. The mix of different asset classes – known as asset allocation – can be managed in a variety of different ways.

• Passive asset allocation sets one mix and sticks to it at all times.
• Active allocation can vary the mix depending on market conditions.
• Target-date allocation sets an asset mix based on the investor’s planned retirement date and then adjusts that allocation (becoming more conservative) as that date comes closer.

Dollar-cost averaging

Dollar-cost averaging is not a strategy for picking investments. It’s a tactic that can be applied to any investment approach.

It involves investing steadily and repeatedly over time so that some of these investments are likely to occur during downturns in the price of a particular security or the market as a whole.

This is a way to use the market’s volatility to your advantage by lowering the average cost of your overall investment. It also reduces the impact of timing on your investment results.

How to Pick Cash Equivalent Accounts

Cash equivalents may be the slow-and-steady part of your portfolio compared with the growth potential of stocks and the higher income yield of bonds – but they still deserve care and attention.

Picking the right cash equivalent accounts can make the difference between whether this part of your portfolio makes or costs you money. It can also determine whether your money is fully available to you when you need it.

Here are some types of cash equivalent accounts that are readily available at most banks:

• Savings accounts
• Money market accounts
• Certificates of deposit (CDs)

Key issues to consider when choosing a cash equivalent account are:

• Interest rate
• Fees
• Minimums
• Access
• Safety

Here’s what to know about each of these issues:

Interest rate

The interest rates offered for cash equivalent accounts vary widely, so it pays to shop around.

In the case of CDs, finding a higher interest rate can pay off for years to come. This is because most CDs have a rate that is set for the full length of the CD’s term.

While rates on savings accounts and money market accounts are subject to change at any time, it still pays to shop for rates on these types of accounts.

While rates may go up and down, in general, many of the same banks tend to offer the highest rates available at any given time.

One important caution about shopping for interest rates: beware of teaser rates.

These are promotional rates offered only for a very limited time after you start your account and may not be at all representative of the rates you will have in the months and years that follow.

Fees

Many banks charge monthly fees on savings and money market accounts, regardless of how you use the account. These fees can more than wipe out the interest earned on smaller accounts, but they can be avoided too.

There are plenty of banks, especially online banks, that do not charge monthly fees on savings and money market accounts.

Most others will waive the fee if you meet certain requirements, such as maintaining a minimum balance, making regular deposits, or having an additional account at the bank.

Banks may also charge fees for things like certain types of transfers or an excessive amount of withdrawals.

It is important to think about how you are likely to use your account so you can avoid those with high fees for things you plan to do regularly.

Minimums

When shopping for a cash equivalent account, be sure to pay attention to minimum balance requirements.

There is often a minimum amount required to open an account, but there may also be other important minimum balance requirements.

Some banks require a certain minimum balance, or else they charge a monthly fee. On most accounts, these monthly fees are likely to exceed the amount of interest earned, so it is important to avoid them.

There are also cash equivalent accounts that apply rate tiers — a schedule of different rates for different account sizes.

Watch out for this when shopping for rates. A bank is likely to advertise its best rate, but you have to make sure your balance will meet the minimum required to qualify for that rate.

Access

Be advised that savings and money market accounts are limited to six third-party transfers per month, so you can’t use them like a checking account.

Some banks may impose additional restrictions on access to your money. Typically, there is a fee if you violate these restrictions.

Access to funds invested in CDs is even more restricted. Almost all CDs impose a fee if you take money out before the CD’s term is up.

These fees are typically higher for CDs with longer terms and can amount to several months or even years’ worth of interest.

Safety

CDs, savings accounts, and money market accounts from FDIC-member banks are covered by FDIC insurance. This guarantees your deposits against bank failures for up to $250,000.

There are two things you should look for to make sure you are protected by this insurance. First, make sure your cash equivalent accounts are with an FDIC-member bank.

Second, make sure your deposits in all your accounts at a given bank don’t total more than $250,000.

Even if you have money split between more than one account at a bank, the total amount you have on deposit at any one bank counts toward the $250,000 limit.

Investing Tax Considerations

Unless your investments are in a tax-deferred retirement plan like a 401(k) or an IRA, you are likely to have to pay taxes on investment earnings.

You should be aware of the tax implications of any investment decisions you make.

Capital gains tax

While securities can go up and down in value from day to day, you are not taxed on any gain in value until you sell the security.

The difference between the value at which you sell a security and what it costs to acquire will be either a gain or a loss.

For any given tax year, your gains and losses are totaled up, with loss amounts offset against your gains.

If you held the security for over a year before you sold it, the change in value is considered a long-term gain or loss. Long-term gains are taxed at the capital gains tax rate, which varies depending on your income.

Short-term gains, which are gains on securities you held for less than a year, are taxed at your ordinary income tax rate.

If you own a mutual fund, even if you do not sell your shares in the fund, you may be responsible for taxes on gains within the fund over the course of the tax year.

Ordinary income tax

Along with short-term gains, interest and dividends are typically included in your annual income and taxed at the applicable income tax rate.

Tax-loss harvesting

Since losses can be offset against gains, they reduce your tax liability. That’s why some people pursue an approach known as “tax-loss harvesting.”

For tax-loss harvesting, toward the end of the tax year, an investor with gains might review a portfolio for securities that are trading below their purchase value.

Selling those securities would create losses that could be used to offset gains and thus reduce the tax liability.

If a loss on a security is claimed for tax purposes, the investor cannot repurchase that security for 30 days. This means there may be an opportunity cost from being out of the market because of tax-loss harvesting.

A common mistake of naive investors is failing to recognize that this opportunity cost can often outweigh the tax benefit of harvesting losses.

Tax-efficient investing

Some investment strategies are more tax-efficient than others. For example, low turnover strategies (which means having few transactions over the course of the year) generate taxable gains less frequently than approaches that actively buy and sell securities all the time.

A low-turnover strategy may delay, but not necessarily reduce, your tax liability.

Municipal bonds, which are issued by state and local governments, are also popular with investors because of their tax characteristics.

Interest on municipal bonds is typically not taxable at the federal level and may also be exempt from income tax in the state in which they are issued.

With any tax-driven investment strategy, investors need to be careful to judge whether the tax benefits outweigh any reduction in investment returns.

Frequently Asked Questions