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Investments Types

Life is about choices; some choices are better than others

 

Financial investments are essential tools for individuals and businesses seeking to grow their wealth over time. By understanding the various types of investments available, one can make informed decisions that align with their financial goals and risk tolerance. Here, we explore the main categories of financial investments.

The various investment categories and products operate different tax codes thus having different IRS rules for contributions and disbursements making it very important to select and manage them correctly. In many cases, improperly moving money or setting up protection products cannot be reversed and may cause strategies to fail.

If possible, it is recommended to have a mixed balance of investment types (diversification) in a portfolio, depending on several factors, including total investment capital and age.

The "Rule of 100" in finance is a guideline for determining how to allocate investments, particularly within a retirement portfolio. It's based on the idea that you should subtract your age from 100 to get a percentage that represents the amount of your portfolio that should be allocated to more risk-bearing investments like stocks.

For example, if you are 60 years old, the rule suggests that 40% of your portfolio could be in stocks, and the remaining 60% in less risky investments. This rule is a starting point and should be adjusted based on individual risk tolerance and investment time horizon.

Employer Sponsored

401(k): Pre-taxed savings provided by an employer, managed by an investment company. Employers may contribute a matching percentage to your voluntary contributions. The value is impacted by stock market performance.

Thrift Savings Plan (TSP): A retirement savings and investment plan for federal employees and uniformed service members, offering similar benefits to 401(k) plans in the private sector, with contributions deducted from paychecks. Tier 1 risk.

Pension: Guaranteed income from an employer often for life), managed by the employer or designated custodian (Railroad, Teacher, Government employees etc.). They are based on tenure. Pension plans were popular until the 1980s when most private companies opted to provide 401(k) plans instead. These fall into the Tier 3-4 risk range.

Employee Stock Ownership Plan (ESOP): A type of qualified retirement plan managed by an employer, similar to a 401(k), but with a focus on company ownership. These fall into the Tier 5 risk.

Banking Related

Most banking related instruments are FDIC insured.

Checking: A deposit account at a bank or credit union where you can easily deposit, withdraw, and transfer funds for daily transactions. It's designed for everyday spending and provides access to your money through checks, debit cards, ATMs, and online banking. Tier 1 risk.

Traditional savings: Disciplined accumulation of money placed in a bank which typically grows at a small, fixed percentage (1-4%). This type of product does not provide protection against inflation, but it is a great place to keep funds that need to be liquid (readily available). Some banks offer high yield saving accounts that are worth investigating for keeping liquid funds. Tier 1 risk.

Certificates of deposit (CDs): CDs are time deposits offered by banks with a fixed interest rate and maturity date. They are low-risk investments, making them suitable for conservative investors. However, they typically offer lower returns compared to other investment options and may have penalties for early withdrawal. They are like a short-term savings account. It is advised to be proactive and reevaluate your earnings options each time a CD matures, otherwise it may automatically get rolled into something that has a lower return. Tier 1 risk.

Personal

Individual Retirement Account (IRA): Several IRA types are available.

Annuities: Designed to help protect your money (Typically qualified but also can be non-qualified funds).

Life insurance: Designed to help protect your family and investments.

Life insurance is a contract between you and an insurance company. You pay premiums, and in return, the insurance company promises to pay a lump sum (the death benefit) to your designated beneficiaries upon your death. Tier 1 risk.

There are two broad types of life insurance. Term Life and Whole Life.

Term Life provides coverage for a specific period (the "term"), such as 10, 20, or 30 years,

Whole Life provides coverage for your entire life

The life insurance death benefit is tax free to the beneficiary.

Market Based

Stocks: Also known as equities, that represent ownership shares in a company. When you purchase stock, you become a shareholder and own a piece of that company. Stocks are traded on exchanges, and their prices can fluctuate based on market conditions and the company's performance. Investing in stocks can yield high returns, but it also comes with higher risks compared to other types of investments. Since stock prices fluctuate, the price of stocks can also go down resulting in a loss. Stocks are more of a speculative wealth building game that has high risks associated. Tier 4-6 risk range

Bonds: Fixed-rate debt securities issued by governments, municipalities, or corporations. When you buy a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the bond's face value at maturity. Bonds are generally considered safer investments than stocks, but they typically offer lower returns. They are like an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time. Tier 1-6 risk range.

Treasury bills (T-bill): A short-term U.S. government debt obligation backed by the U.S. Department of the Treasury. Terms range from four to 52 weeks. Tier 1 risk

Mutual funds: Mutual funds pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. Managed by professional fund managers, mutual funds offer investors the benefits of diversification and professional management. They come in various types, including equity funds, bond funds, and balanced funds, each with their own risk and return characteristics. Tier 3-4 risk range.

Money market: A mutual fund that invests in low-risk, short-term debt securities, such as Treasury bills, municipal debt, or corporate bonds. Tier 2 risk.

Exchange-traded funds (ETFs): Similar to mutual funds but trade on stock exchanges like individual stocks. They offer the benefits of diversification and lower management fees. ETFs can track a specific index, sector, commodity, or other asset classes. They provide flexibility and liquidity, making them a popular choice for investors. Tier 3-6 risk range.

Real Estate

All forms of property, including land and buildings, along with their natural resources. It encompasses residential, commercial, industrial, raw land, and special-use properties.

Real estate (direct ownership): Real estate investments involve purchasing property to generate income or achieve capital appreciation. This can include residential, commercial, or industrial properties. Real estate can provide steady rental income and potential tax benefits, but it requires significant capital and may involve maintenance and management responsibilities. Purchasing a home is for example. Tier 2 risk.

Real estate (indirect investment or loan): Buying shares in a fund or a publicly or privately held company. May also involve providing short-term loans to companies that invest in real estate. Also called Alternate Real Estate Transaction. Returns often exceed 15% APY. Tier 5 risk.

Other

Commodities: Commodities are physical assets like gold, silver, oil, and agricultural products. Investing in commodities can be done through direct purchase or via futures contracts, ETFs, or commodity-focused mutual funds. Commodities can serve as a hedge against inflation and diversify an investment portfolio, but they can be volatile and influenced by various factors such as supply and demand. Tier 7 risk.

Cryptocurrencies:: Cryptocurrencies are digital or virtual currencies that use cryptography for security. Bitcoin, Ethereum, and other cryptocurrencies have gained popularity as alternative investments. They offer high potential returns but come with significant risks due to their volatility and regulatory uncertainties. A decentralized digital or virtual currency whereby trading is based on speculation. Tier 7-8 risk range.

Collectibles: Paintings, cars, memorabilia etc. Keep in mind, the value of a collectible is only worth as much as someone is willing to pay for it at the time you want to sell it. Tier 6 risk.

 

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