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There are several common investment options available to those looking for ways to help build wealth. Most investment options come with a risk profile, potential return, features, benefits and drawbacks.
Investing doesn't have a one-size-fits-all option that works for everyone. That's why it's important to understand the factors that impact each choice so you can choose what's right for you.
Whatever type of investment option you select, it's crucial to understand the risks and benefits associated with each before investing your hard-earned money. Investing is a long-term endeavor that requires patience, discipline and continuous monitoring. Therefore, you may benefit from working with a financial advisor, who will consider your risk profile, timeline and circumstances as you navigate and select appropriate investment options..
In this article, we cover these key points:
- Investment options and their features.
- How your risk profile, timeline and circumstances may impact your investment selection.
- Financial and tax professionals can assist in helping select investment options for your situation.
Investment Options and Their Features
Stocks
Stocks are shares in a company's equity. When you purchase stocks, you buy a small percentage of ownership in that company. Stocks come with some risk, and prices can fluctuate depending on factors such as company performance, market trends, economic indicators and investor sentiment. However, stocks may offer higher returns as they have historically provided some of the highest long-term returns when compared to other asset classes.
Bonds
Bonds are loans made to entities such as governments or corporations. When you invest in a bond, you are lending money to the issuer in exchange for regular interest payments and the return of the principal amount when the bond matures.
Unlike stocks, bonds do not provide ownership rights. Bonds' main feature is their relative stability and predictability, making them appropriate for conservative investors seeking steady income. However, the trade-off is lower potential returns compared to stocks.
Mutual Funds
Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds or other assets. They offer diversification, which may help lower risk, as losses from one investment can offset gains in another.
Mutual funds are professionally managed by fund managers who aim to deliver targeted returns. They also provide convenience, as fund managers handle all investment decisions and transactions; however, mutual funds charge fees for these services, which can lower net returns.
Exchange Traded Funds (ETFs)
Exchange-traded funds, or ETFs, are similar to mutual funds but trade like stocks on an exchange. They offer the diversification of mutual funds and the flexibility to buy and sell throughout the trading day at market prices. ETFs typically have lower expense ratios compared to mutual funds, making them a cost-effective option. However, they also have risks, are subject to market fluctuations, and may have brokerage commissions.
IRAs
Roth IRAs and Traditional IRAs are retirement savings accounts with tax advantages. Both options are suitable for long-term retirement savings, but your choice may depend on your current tax situation, retirement goals and timeline. Here are the differences between them:
- Roth IRA - Contributions to a Roth IRA are made with after-tax dollars, and the contribution and accumulation are tax-free when withdrawn in retirement. After the account has been open for five years, the contributions can be withdrawn tax-free and without penalty.
- Traditional IRA - Contributions to a Traditional IRA are made pre-tax or are tax-deductible. However, you pay taxes on the contribution and accumulation when withdrawing funds in retirement. Withdrawing IRA funds before age 59 ½ will result in a 10% IRS penalty.
Fiduciary Advisory Accounts
Fiduciary advisory accounts offer personalized investment management and guidance from financial advisors who must act in the client's best interest. They must advise and recommend investments appropriate to the client's needs, regardless of how the financial advisor might benefit.
Although this personalized service and investment management level may be comprehensive, it comes with an advisory fee.
529 plans
529 plans are tax-advantaged savings plans designed to encourage saving for future education costs. States, state agencies, or educational institutions sponsor them. The earnings in 529 plans are not subject to federal taxes.
In many cases, no state tax applies when used for qualified education expenses, such as:
- College tuition and fees.
- Vocational and trade school tuition and fees.
- On-campus room and board and meals.
- Books and supplies.
- Computers and software related to the area of study.
- K-12 tuition at a private school.
- Student loans.
Financial and tax professionals can help you understand other expenses that may qualify. In the case of an IRS audit, saving all receipts for tax time and in your tax return records is vital. Note that if 529 plan funds are used for non-qualified expenses, taxes will be due on the contribution and accumulation and a 10% IRS penalty will be applied.
SECURE 2.0 allows funds from an established 529 account to be transferred tax-free to a Roth IRA for the beneficiary of the 529 account. Now, unused educational funds have the potential to kickstart a beneficiary's Roth IRA savings. This change, however, comes with limitations, work with your financial advisor to learn more.
What Else Should You Know Before Investing?
Before investing, it's vital to have a basic understanding of the following concepts and products.
Insurance
Insurance is integral to protecting your investments and other assets. A financial advisor may discuss these types of insurance with you:
- Life insurance - Life insurance pays a death benefit to your beneficiaries if you die. This insurance can help pay off debt, pay for funeral expenses and replace lost income due to death.
- Long-term care insurance (LTCI) - LTCI helps pay for professional care in a long-term care facility when people can no longer care for themselves or perform daily activities.
- Property and Casualty (P&C) insurance - P&C insurance protects property such as homes or cars and against claims such as death or injury that may arise due to an accident through monetary compensation.
- Health Insurance - Health insurance helps protect against early liquidation of assets due to a health-related condition or injury.
- Annuities - Annuities are contracts between the insured, also called the annuitant, and an insurance company to pay a predetermined amount later. People purchase annuities by making monthly premium payments or lump-sum payments. In exchange for these payments, the insurance company issues a stream of payments for a specified period or the remainder of the annuitant's life. Annuities are mainly used for retirement income because they help address the risk of outliving one's retirement savings.
Sustainable Investing
Sustainable investing is a strategy in which investors consider a company's environmental, social and governance (ESG) factors when making investment decisions, such as buying stocks or bonds.
Tax-Efficient Investing
Tax-efficient investing involves selecting investments to help manage taxes, which can impact the investment's return. Financial and tax professionals may recommend specific investments and a managed portfolio as part of a tax-aware investment strategy.
Remember, no investment is without risk, and all have some uncertainty. The key is to work with a financial advisor that can help you:
- Diversify investments across different asset classes.
- Regularly monitor each investment's performance.
- Adjust your portfolio's holdings as needed.
- Continuously monitor the market landscape.
In conclusion, investing is a powerful wealth accumulation strategy. With careful planning and prudent decision-making, these investment options may deliver financial returns. A financial advisor can help you understand and select investment options appropriate to your circumstances, preferences, and objectives.
Contact a Financial Advisor
Financial advisors at BECU Investment Services can help provide guidance with investment and retirement strategies to help you prepare for the future. Our team will take the time to get to know you, understand your goals and wishes to help build a plan and implement an investment strategy that's appropriate for you. Set up a complimentary consultation or call 206-439-5720 today.
For more resources or to stay up to date on market updates follow BECU Investment Services on social media: LinkedIn; Facebook
Sources:
https://www.investopedia.com/terms/i/investing.asp
https://www.investopedia.com/terms/i/investmentstrategy.asp
https://www.investopedia.com/terms/a/annuity.asp
https://www.usnews.com/education/best-colleges/paying-for-college/slideshows/qualified-expenses-you-can-pay-for-with-a-529-plan?slide=11
https://www.investopedia.com/articles/stocks/11/intro-tax-efficient-investing.asp
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The LPL Financial registered representatives associated with this website may discuss and/or transact business only with residents of the states in which they are properly registered or licensed. No offers may be made or accepted from any resident of any other state.
529 Disclosure:
Prior to investing in a 529 Plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
Bond Disclosure:
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Diversification Disclosure:
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Roth General
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Traditional IRA
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
Mutual Fund Disclosure:
Investing in mutual funds involves risk, including possible loss of principal. Fund value will fluctuate with market conditions and it may not achieve its investment objective.
ETF Disclosure:
ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF's net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.
Insurance Disclosure:
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state's insurance department for more information.
Annuity Disclosure:
Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.
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