Investments

Choosing the best investment can be an overwhelming process, especially if you are just getting started. There are thousands of different investments and each one has its own level of potential risk and reward.

Since there are so many ways to invest, it is good to know what your risk tolerance is. Higher risk investments are associated with higher returns and losses, while lower risk investments will result in lower returns and minimal losses. When it comes to exploring investments, seeking professional help is a great idea. Let’s explore some of the most common investment opportunities available.

CDs:  A CD, or Certificate of Deposit, is a deposit you can make at most banks and credit unions. These deposits will be held for a set amount of time and have a guaranteed interest rate. A CD is also insured through the NCUA, which protects the investment up to $250,000.

Typically a CD will have terms that vary from three months to five years. Beehive will hold the deposit for the agreed amount of time and during that time the money will accrue interest at a fixed rate. When the CD matures, your funds will be available to you with the accrued interest added to the balance. With a CD, you basically have a risk free investment. The rates are usually higher than a normal savings account, but are much lower than the possible return of other investment options. Also, at most financial institutions there is an early withdrawal penalty. Therefore, if you plan on investing your money in CDs, make sure that you will not need access to those funds for the term of the CD, or you may end up losing some or all of your interest earnings.

Bonds: Put simply, a bond is a loan that you give to an entity that pays a promised rate of return to you over time. Your money acts as a loan to the government, public company, or municipality that issued the bond. Bonds have a fixed term and, at the end of the set term, the organization promises to repay you in full, plus interest.

Stocks: A stock is a type of security that signifies ownership in a company. Generally, companies will issue stock to the public with the purpose of raising money. The company’s stock price changes based on how the company is performing, and stockholders are free to buy or sell the shares that they own at any time while the market is open.

Mutual funds: A mutual fund is a great way to diversify your money by investing in a lot of different companies. When you purchase a share of a mutual fund, your money is combined with that of the other shareholders of the mutual fund and, in turn, is invested. The investments are managed by a fund manager who makes the decisions as to what stocks the money should be invested in. The value of the mutual fund rises and falls, much like a stock. Rather than the value changing based on the performance of a single company, the mutual fund’s value fluctuates based on the cumulative performance of the many companies that make up the investments within the mutual fund. A mutual fund can be comprised of money markets, bonds, stocks and other investments which diversify your money and reduce risk.

If you are looking for a way to diversify your money but do not have enough to invest in several different companies, then a mutual fund is a great way to diversify your investment.

Annuities: An annuity is a contract with an insurance company that provides a steady source of income after a set amount of time. In the contract you will specify the amount of money, or payments that you will make to the insurance company. At the end of the term the annuity will pay you back. There are different kinds of annuities and they have different benefits. Most annuities require that you don’t touch the funds until you are 59 ½ years old, otherwise there is a 10% penalty and, in some cases, income tax on the earnings.

Fixed annuities: A fixed annuity is a type of investment that pays a fixed interest rate of return over a fixed amount of time. The issuer of the annuity will guarantee a minimum interest rate during the investment, but it could increase after some time. Annuities are low-risk investments because they will return the amount of money that you place in the annuity, plus the interest accrued.

Variable annuities: Variable annuities are flexible annuities. Instead of having a minimum rate of return, variable annuities allow you to choose from one or more sub-accounts or investments. The sub-account will allow you to invest in stocks, bonds, money markets and other investments. As with any investment, there is a risk. Variable annuities will give a return according to the performance of the stock, bond, or investment market that you are invested in.

Indexed annuities:  An indexed annuity is a hybrid version of fixed and variable annuities. The combination allows you to reap some of the benefits from each. Your money will be tied to an investment, so if the investment does well you will have returns above average. However, if the investment does poorly, you are still guaranteed to receive the money you invested in the first place. An indexed annuity allows you to take advantage of the market upside while still having downside protection.

Immediate annuities: An immediate annuity is a type of annuity that is often used by people who are close to retirement. Using this type of annuity, people will annuitize their investment for the rest of their life. During this time, the owner of the annuity will receive payment from the money that has already been invested while the rest continues to accrue interest. These annuities are excellent for people who do not want to run out of money in their old age. The risk associated with these annuities is that if you die before the payout date the insurance company will keep your presently invested funds; however, if you outlive that date, you gain from the set contract.

REIT:  REIT stands for Real Estate Investment Trust. A REIT enables people to invest in real estate without having to personally front all the money needed to purchase a property.  These investments work in a similar fashion to mutual funds. When you purchase a share of a REIT your money is pooled together with the money of other investors. This makes it possible for the REIT managers to buy commercial properties, apartment buildings, shopping malls, etc. This means your money will be diversified and invested into many different real estate properties.  This, in turn, will generate revenue through rent of those buildings, resale value or through interest rates.

Summary

As you can see, there are many ways to invest and save for retirement. While considering your options it is important to know your risk tolerance and what your goals are. If you have money available to invest you should ask yourself, “How long do I need/want this money to be invested for?” If you only have money available for 6 months you may want to choose an investment that does not require an extended period of time to earn a return and make sure you have access to the money if needed. Some investments require as little as 3 months while others are best invested for 15 years or more. Another thing to consider is the risk you are willing to take on. A high-risk investment can result in higher yields, but can also increase the chance of losing a substantial portion of your money. On the other hand, a lower risk investment will have lower returns, but a minimized chance of loss.