How to invest today

Why invest? Investing can provide you with another source of income, help fund your retirement or
even get you out of a financial jam in the future. Above all, investing helps you grow your wealth —
allowing your financial goals to be met and increasing your purchasing power over time. Or maybe
you’ve recently sold your home or come into some money, then it’s a wise decision to let that money
work for you and grow over time.

While investing can build wealth, you’ll also want to balance potential gains with the risk involved. As
2020 showed with the COVID-19 pandemic, markets can become volatile very quickly. In March, the
market rang up some of its biggest daily declines ever, followed by some of its strongest rises ever. After
a strong sell-off early in the year, the market rebounded and set a new all-time high in the summer,
despite an ongoing recession. Concerns surrounding the presidential election year may also be driving
markets to be more volatile.

Regardless of the overall climate, you have many ways to invest — from very safe choices such as CDs
and money market accounts to medium-risk options such as corporate bonds, and even higher-risk picks
such as stock index funds. That’s great news, because it means you can find investments that offer a
variety of returns and fit your risk profile. It also means that you can combine investments to create a
well-rounded and diversified – that is, safer – portfolio.

What to consider

Risk tolerance and time horizon each play a big role in deciding how to allocate your investments. The
value of each can become more obvious during periods of volatility.

Conservative investors or those nearing retirement may be more comfortable allocating a larger
percentage of their portfolios to less-risky investments. These are also great for people saving for both
short- and intermediate-term goals. If the market becomes volatile, investments in CDs and other FDIC-
protected accounts won’t lose value and will be there when you need them.

Those with stronger stomachs and workers still accumulating a retirement nest egg are likely to fare
better with riskier portfolios, as long as they diversify. A longer time horizon allows you to ride out the
volatility of stocks and take advantage of their potentially higher return, for example. Be prepared to do
your homework and shop around for the types of accounts and investments that fit both your short- and
long-term goals.
If you’re looking to grow your wealth, you can opt for lower-risk investments that pay a modest return
or you can take on more risk and aim for a higher return. Or you can do both and take a balanced
approach, having absolutely safe money now while still giving yourself the opportunity for growth over
the long term. Below are a range of investments with varying levels of risk and potential return.

Here are the best investments in 2020:

High-yield savings accounts

Certificates of deposit

Money market accounts

Treasury securities

Government bond funds

Short-term corporate bond funds

S&P 500 index funds

Dividend stock funds

Nasdaq 100 index funds

Rental housing

Municipal bond funds

Overview: Best investments in 2020

1. High-yield savings accounts

Just like a savings account earning pennies at your brick-and-mortar bank, high-yield online savings
accounts are accessible vehicles for your cash. With fewer overhead costs, you can typically earn much
higher interest rates at online banks. Plus, you can typically access the money by quickly transferring it
to your primary bank or maybe even via an ATM.

A savings account is a good vehicle for those who need to access cash in the near future.

Risk: The banks that offer these accounts are FDIC-insured, so you don’t have to worry about losing your
deposit. While high-yield savings accounts are considered safe investments, like CDs, you do run the risk
of earning less upon reinvestment due to inflation.

Liquidity: Savings accounts are about as liquid as your money gets. You can add or remove the funds at
any time.
2. Certificates of deposit

Certificates of deposit, or CDs, are issued by banks and generally offer a higher interest rate than savings
accounts.

These federally insured time deposits have specific maturity dates that can range from several weeks to
several years. Because these are “time deposits,” you cannot withdraw the money for a specified period
of time without penalty.

With a CD, the financial institution pays you interest at regular intervals. Once it matures, you get your
original principal back plus any accrued interest. It pays to shop around online for the best rates.

Because of their safety and higher payouts, CDs can be a good choice for retirees who don’t need
immediate income and are able to lock up their money for a little bit. But there are many kinds of CDs to
fit your needs, and so you can still take advantage of the higher rates on CDs.

Risk: CDs are considered safe investments. However, they do carry reinvestment risk — the risk that
when interest rates fall, investors will earn less when they reinvest principal and interest in new CDs
with lower rates, as we saw in 2020. The opposite risk is that rates will rise and investors won’t be able
to take advantage because they’ve already locked their money into a CD.

Consider laddering CDs — investing money in CDs of varying terms — so that all your money isn’t tied up
in one instrument for a long time. It’s important to note that inflation and taxes could significantly erode
the purchasing power of your investment.

Liquidity: CDs aren’t as liquid as savings accounts or money market accounts because you tie up your
money until the CD reaches maturity — often for months or years. It’s possible to get at your money
sooner, but you’ll often pay a penalty to do so.

3. Money market accounts

A money market account is an FDIC-insured, interest-bearing deposit account.

Money market accounts typically earn higher interest than savings accounts and require higher
minimum balances. Because they’re relatively liquid and earn higher yields, money market accounts are
a great option for your emergency savings.

In exchange for better interest earnings, consumers usually have to accept more restrictions on
withdrawals, such as limits on how often you can access your money.

These are a great option for beginning investors who need to build up a little cash flow and set up an
emergency fund.

Risk: Inflation is the main threat. If inflation rates exceed the interest rate earned on the account, your
purchasing power could be diminished. In addition, you could lose some or all of your principal if your
account is not FDIC-insured (though the vast majority are) or if you have more than the $250,000 FDIC-
insured maximum in any one account.

Liquidity: Money market accounts are considered liquid, especially because they come with the option
to write checks from the account. However, federal regulations limit withdrawals to six per month (or
statement cycle), of which no more than three can be check transactions.

4. Treasury securities

The U.S. government issues various types of securities to raise money to pay for projects and pay its
debts. These are some of the safest investments to guarantee against loss of your principal.

Treasury bills, or T-bills have a maturity of one year or less and are not technically interest-bearing. They
are sold at a discount from their face value, but when they mature, the government pays you full face
value. For example, if you buy a $1,000 T-bill for $980, you would earn $20 on your investment.

Treasury notes, or T-notes, are issued in terms of two, three, five, seven and 10 years. Holders earn fixed
interest every six months and then face value upon maturity. The price of a T-note may be greater than,
less than or equal to the face value of the note, depending on demand. If demand by investors is high,
the notes will trade at a premium, which reduces investor return.

Treasury bonds, or T-bonds are issued with 20-year and 30-year maturities, pay interest every six
months and face value upon maturity. They are sold at auction throughout the year. The price and yield
are determined at auction.
All three types of Treasury securities are offered in increments of $100. Treasury securities are a better
option for more advanced investors looking to reduce their risk.

Risk: Treasury securities are considered virtually risk-free because they are backed by the full faith and
credit of the U.S. government. You can count on getting interest and your principal back at maturity.
However, the value of the securities fluctuates, depending on whether interest rates are up or down. In
a rising rate environment, existing bonds lose their allure because investors can get a higher return from
newly issued bonds. If you try to sell your bond before maturity, you may experience a capital loss.

Treasuries are also subject to inflation pressures. If the interest rate of the security is not as high as
inflation, investors lose purchasing power.

Because they mature quickly, T-bills may be the safest treasury security investment, as the risk of
holding them is not as great as with longer-term T-notes or T-bonds. Just remember, the shorter your
investment, the less your securities will generally return.

Liquidity: All Treasury securities are very liquid, but if you sell prior to maturity you may experience gains
or losses, depending on the interest rate environment. A T-bill is automatically redeemed at maturity, as
is a T-note. When a bond matures, you can redeem it directly with the U.S. Treasury (if the bond is held
there) or with a financial institution, such as a bank or broker.

5. Government bond funds

Government bond funds are mutual funds that invest in debt securities issued by the U.S. government
and its agencies.

The funds invest in debt instruments such as T-bills, T-notes, T-bonds and mortgage-backed securities
issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac. These government
bond funds are well-suited for the low-risk investor.

These funds can also be a good choice for beginning investors and those looking for cash flow.

Risk: Funds that invest in government debt instruments are considered to be among the safest
investments because the securities are backed by the full faith and credit of the U.S. government.
However, like other mutual funds, the fund itself is not government-backed and is subject to risks like
interest rate fluctuations and inflation. If inflation rises, purchasing power can decline. If interest rates
rise, prices of existing bonds drop; and if interest rates decline, prices of existing bonds rise. Interest rate
risk is greater for long-term bonds.

Liquidity: Bond fund shares are highly liquid, but their values fluctuate depending on the interest rate
environment.

6. Short-term corporate bond funds

Corporations sometimes raise money by issuing bonds to investors.

Small investors can get exposure by buying shares of short-term corporate bond funds. Short-term
bonds have an average maturity of one-to-five years, which makes them less susceptible to interest rate
fluctuations than intermediate- or long-term.

Corporate bond funds can be an excellent choice for investors looking for cash flow, such as retirees, or
those who want to reduce their overall portfolio risk but still earn a return.

Risk: As is the case with other bond funds, short-term corporate bond funds are not FDIC-insured.
Investment-grade short-term bond funds often reward investors with higher returns than government
and municipal bond funds.

But the greater rewards come with added risk. There is always the chance that companies will have their
credit rating downgraded or run into financial trouble and default on the bonds. Make sure your fund is
made up of high-quality corporate bonds.

Liquidity: You can buy or sell your fund shares every business day. In addition, you can usually reinvest
income dividends or make additional investments at any time. Just keep in mind that capital losses are a
possibility.

7. S&P 500 index funds

If you want to achieve higher returns than more traditional banking products, a good alternative is an
S&P 500 index fund.
The fund is based on hundreds of the largest American companies, meaning it comprises many of the
most successful companies in the world. For example, Berkshire Hathaway and Walmart are two of the
most prominent member companies in the index.

Like nearly any fund, an S&P 500 index fund offers immediate diversification, allowing you to own a
piece of all of those companies. The fund includes companies from every industry, making it more
resilient than many investments. Over time, the index has returned about 10 percent annually. These
funds can be purchased with very low expense ratios (how much the management company charges to
run the fund) and they’re some of the best index funds to buy.

An S&P 500 index fund is an excellent choice for beginning investors, because it provides broad,
diversified exposure to the stock market.

Risk: An S&P 500 fund is one of the least-risky ways to invest in stocks, because it’s made up of the
market’s top companies. Of course, it still includes stocks, so it’s going to be more volatile than bonds or
any bank products. It’s also not insured by the government, so you can lose money based upon
fluctuations in value. However, the index has done quite well over time.

Liquidity: An S&P 500 index fund is highly liquid, and investors will be able to buy or sell them on any day
the market is open.

8. Dividend stock funds

Even your stock market investments can become a little safer with stocks that pay dividends.

Dividends are portions of a company’s profit that can be paid out to shareholders, usually on a quarterly
basis. With a dividend stock, not only can you earn on your investment through long-term market
appreciation, you’ll also earn cash in the short term.

Buying individual stocks, whether they pay dividends or not, is better-suited for intermediate and
advanced investors. But you can buy a group of them in a dividend stock fund and reduce your risk.

Risk: As with any stock investments, dividend stocks come with risk. They’re generally considered safer
than growth stocks or other non-dividend stocks, but you should choose your portfolio carefully. Make
sure you invest in companies with a solid history of dividend increases rather than selecting those with
the highest current yield. That could be a sign of upcoming trouble. However, even well-regarded
companies can be hit by a crisis, so a good reputation is finally not a protection against the company
slashing its dividend or eliminating it entirely.

Liquidity: You can buy and sell your fund on any day the market is open, and quarterly payouts,
especially if the dividends are paid in cash, are liquid. Still, in order to see the highest performance on
your dividend stock investment, a long-term investment is key. You should look to reinvest your
dividends for the best possible returns.

9. Nasdaq 100 index funds

An index fund based on the Nasdaq 100 is a great choice for investors who want to have exposure to
some of the biggest and best tech companies without having to pick the winners and losers or having to
analyze specific companies.

The fund is based on the Nasdaq’s 100 largest companies, meaning they’re among the most successful
and stable. Such companies include Apple and Amazon, each of which comprises a large portion of the
total index. Microsoft is another prominent member company.

A Nasdaq 100 index fund offers you immediate diversification, so that your portfolio is not exposed to
the failure of any single company. The best Nasdaq index funds charge a very low expense ratio, and
they’re a cheap way to own all of the companies in the index.

Risk: Like any publicly traded stock, this collection of stocks can move down, too. While the Nasdaq 100
has some of the strongest tech companies, these companies also are usually some of the most highly
valued. That high valuation means that they’re likely prone to falling quickly in a downturn, though they
may rise again during an economic recovery.

Liquidity: Like other publicly traded index funds, a Nasdaq index fund is readily convertible to cash on
any day the market is open.

10. Rental housing

Rental housing can be a great investment if you have the willingness to manage your own properties.
And with mortgage rates hitting all-time lows recently, it could be a great time to finance the purchase
of a new property.
To pursue this route, you’ll have to select the right property, finance it or buy it outright, maintain it and
deal with tenants. You can do very well if you make smart purchases.

However, you won’t enjoy the ease of buying and selling your assets in the stock market with a click of
the mouse. Worse, you might have to endure the occasional 3:00 a.m. call about a broken pipe.

But if you hold your assets over time, gradually pay down debt, and grow your rents, you’ll have a
powerful cash flow when it comes time to retire.

Risk: As with any asset, you can overpay for housing, as investors in the mid-2000s quickly found out.
Also, the lack of liquidity might be a problem if you ever needed to access cash quickly.

Liquidity: Housing is among the least liquid investments around, so if you need cash in a hurry, investing
in rental properties may not be for you. On top of this, a broker may take as much as a 6 percent cut off
the top of the sales price as a commission.

11. Municipal bond funds

Municipal bond funds invest in a number of different municipal bonds, or munis, issued by state and
local governments.

Earned interest is generally free of federal income taxes and may also be exempt from state and local
taxes.

According to the Financial Industry Regulatory Authority (FINRA), muni bonds may be bought
individually, through a mutual fund or an exchange-traded fund (ETF). You can consult with a financial
adviser to find the right investment type for you, but you may want to stick with those in your state or
locality for additional tax advantages.

Municipal bond funds are great for beginning investors because they provide diversified exposure
without the investor having to analyze individual bonds. They’re also good for investors looking for cash
flow.
Risk: Individual bonds carry default risk, meaning the issuer becomes unable to make further income or
principal payments. Cities and states don’t go bankrupt often, but it can happen. Bonds may also be
callable, meaning the issuer returns principal and retires the bond before the bond’s maturity date. This
results in a loss of future interest payments to the investor.

Choosing a bond fund allows you to spread out potential default and prepayment risks by owning a large
number of bonds, thus cushioning the blow of negative surprises from a small part of the portfolio.

Liquidity: You can buy or sell your fund shares every business day. In addition, you can typically reinvest
income dividends or make additional investments at any time.

Bottom line

Investing can be a great way to build your wealth over time, and investors have a range of investment
options – from safe lower-return assets to riskier, higher-return ones. So that range means you’ll need
to understand the pros and cons of each investment option to make an informed decision. While it
seems daunting at first, many investors manage their own assets.

But the first step to investing is actually easy – opening a brokerage account. Investing can be
surprisingly affordable even if you don’t have a lot of money. (Here are some of the best brokers to
choose from if you’re just getting started.)