The Best Low-Risk Investments For Long-Term Growth
It's never been easier to invest in stocks, but it's hard to know where to begin. Investing in the stock market is a great way to generate passive income, set yourself up for retirement, and build generational wealth.
Get started with the following tips:
Learn the Basics of Investing
When you invest in stocks, you buy small shares of ownership in a public company. The math is simple: When a company profits, the value of your stock may increase. On the other hand, you risk sharing in the company's losses. You can also profit when a company pays you dividends — a payment that occurs when a corporation distributes earnings among shareholders.
When investing in stocks, timing and diversification are everything. You know how the adage goes: Buy low, sell high. If you buy when the stock market has taken a downturn and sell on an upswing, other investors will buy your shares, and you'll make a profit. But the game can be risky and stressful: There’s no way to know what the market will do. That’s why diversification is important — it helps lower your risk. In other words, one bad investment won’t make or break your returns.
Our rule of thumb is to invest for long-term growth: Put most of your money in stock mutual funds, exchange-traded funds (ETFs), and bond funds.
What Kind of Investor Are You?
There Are Three Basic Ways to Invest in Stocks:
You can hire a financial advisor. They'll help you manage your finances, including your stock portfolio.
You can sign up with a Robo-advisor. Robo-advisors can help you make a financial plan and diversify your portfolio — including savings, stocks and bonds, retirement accounts, and more.
You can also manage your portfolio and choose which stocks you'd like to buy and when to sell. If you decide to be more hands-on and DIY, you'll need to open a brokerage account.
Leverage Expert Advice
Regardless of how you get started, we recommend seeking expert advice and educating yourself. If you decide to manage your portfolio, it can be helpful to pay one-time fees for consulting to take advantage of expert advice — a small investment at the beginning of your journey can reap big rewards.
Begin With a Plan
Financial advisors and Robo-advisors will guide you through a series of questions to help you make a plan. And they'll manage your investments for you based on your answers.
Whether you work with an advisor or head out on your own, you'll want to identify the following:
Which types of companies would you like to support?
What's your risk tolerance? How much are you willing to lose?
Which types of investments support your risk tolerance?
How much can you safely invest right now?
How quickly do you hope to make a profit?
Your timeline: How quickly will you need to cash in on your investments? And what's your retirement plan?
Start With Tax-Advantaged Retirement Accounts: Invest in a 401(k) or IRA.
If you're looking to dip your toes into the world of investing, start with a 401(k) or IRA — it's an excellent opportunity to grow your investments tax-free. Plus, you'll learn about how you deal with the ups and downs of the market. Generally speaking, traditional 401(k)s or 403(b)s (retirement accounts for nonprofits or government employees) are invested in a fixed number of stock mutual funds and bond funds, so there are limited investing options. If you're self-employed, you can invest in a Solo 401(k) or an individual retirement account (IRA) — and choose more liberally how and where to invest your money.
Here are some of the most common retirement accounts, simplified:
Corporate 401(k)s:
If you have access to a corporate 401(k), you can contribute a specific amount of your pre-tax earnings from your paycheck each month. Some employers will match your contribution. For example, for every $1 you put in, your employer may contribute an additional $0.50. Setting up a traditional 401(k) will reduce your taxable income — but you'll pay taxes on the money you take out once you retire.
Read More: Everything You Need to Know About 401(k)s
Solo 401(k)s:
If you're self-employed, you can invest in a Solo 401(k) and arrange to contribute the same amount each month. You can also invest a lump sum whenever the money is available. As a self-employed person, you can act as an employee and an employer — and match your contributions — essentially contributing double. Just like the traditional 401(k), your contributions are tax-deductible.
IRAs:
While 401(k)s are set up by your employer (unless you run your own business), IRAs are the main tax-advantaged retirement account available to the general public. And they are the only tax-advantaged retirement accounts for employees who don't have access to employer-sponsored 401(k)s. Easy to set up and manage, contributions to traditional IRAs — as well as SIMPLE IRAs and SEP IRAs (options for small businesses and sole proprietors) — are tax-deductible and tax-deferred. Your money will grow tax-free, but you'll pay income taxes when you take money out during retirement. While the contribution limits for traditional IRAs are significantly lower than 401(k)s — $6,000 if you're under 50 and an extra $1,000 catch-up contribution for people over 50 — they’re a great way to save for retirement, especially if you start investing while young. On the other hand, SIMPLE IRAs and SEP IRAs have higher contribution limits.
Roth 401(k)s, Solo Roth 401(k)s, or Roth IRAs:
Roth accounts are available with different tax rules: You pay income taxes up front, but the money you take out during retirement isn't taxable.
Make Passive Investments: Invest in Stock Mutual Funds and ETFs
Once you've saved for emergencies and maxed out your retirement accounts (or contributed your desired allocations), you can invest a portion of your savings in taxable investment accounts. Warren Buffett famously advised Americans to invest in a low-cost S&P 500 index fund — a type of mutual fund or exchange-traded fund that’s invested in S&P 500 securities.
Stock Mutual Funds
Mutual funds are inherently diversified — and relatively low-risk. Consider investing most of your money in index funds or other stock mutual funds (80-90%) — and the rest in bond funds (10-20%).
Exchange-Traded Funds
Exchange-traded funds (ETFs) — baskets of investment securities traded on an exchange like stocks — are another great option. The benefits of ETFs are low cost, tax efficiency, and flexibility (they can be bought and sold anytime). Consider investing 90% of your long-term savings in low-cost ETFs.
Money Mindset: Invest For Long-term Growth
People have the most success with the stock market when they allow their investments to rise and fall with the market over an extended period. The stock market continually faces ups and downs, but the trend over several years — or even decades — tends to lend itself to an increase in your portfolio's value.