15 Ways to Invest in 2015
Last week, I talked about saving more in 2015. Once you have the money saved, you need to start thinking about investing. I broke my 15 ways to invest in 2015 into three different categories, types of accounts, types of investments and means of investing. I hope you find some of these helpful and commit to investing more in 2015, as I shared on Monday, it’s one of the best ways to get money for nothing.
Types of Accounts
The first step in investing is to determine which type of account you are going to utilize to invest, and it all depends on when you plan to use the money. If you don’t plan to use some money for a long time, then retirement accounts make sense; however, if you need it in the near term, a brokerage account or HSA may be a better fit for your money.
This type of account is predominantly available through your employer. You will see the 401k option for most employers; however, if you work for a government or non-profit entity, then the investment option is the 403B. They both work the same, though, where your employer allows you to take pre-tax dollars and invest them into various options. If you are lucky, your employer will also match some of your contributions. In 2015, you are allowed to save up to $18,000 in this type of account.
2) Roth IRA
A Roth IRA is a retirement savings account that is available to individuals who make less than an IRS determined income level. For the 2015 tax year, for married couples, the income range is $183,000 to $193,000 and for single tax payers the range is $116,000 to $131,000. In a Roth IRA account, you invest post tax money; however, it stays tax protected in the account as your investments grow and when you start to take withdrawals (once you have passed the age restrictions) your income will not be taxed.
3) Traditional IRA
For both types of IRA, in 2015, the contribution limit is $5,500 if you are under 50. If you are over 50, for both the IRA and the 401k, there are catch up allowances where you can contribute more. The regular IRA is different from the Roth IRA in that you could possibly qualify for a tax deduction on your contribution if your gross income is within certain limits (in 2015 it’s $61,000 for individuals and $98,000 from married couples filing jointly). Just like the Roth IRA, your account is tax protected while it is growing; however, once you take a withdrawal (after you have passed the age restrictions), your withdrawal is taxed as income at your current income tax rate.
4) Brokerage Account
A brokerage account is an investment account you can establish that does not have tax protection like retirement accounts. I typically encourage my clients to set one of these up, especially if they have too much money in bank savings accounts earning little or next to no income. Any gains or losses you realize in this account will have to be reported to the IRS, unlike with the retirement accounts; however, you can typically work with an accountant to strategically manage these tax situations.
5) HSA – Healthcare Savings Account
The HSA is an account that’s available to you if you have a high deductible insurance policy, where you can contribute funds pre-tax and use them for qualified healthcare expenditures. Any funds that you have remaining in the account at the end of the year, will be rolled over and if you should leave your employer, the HSA is portable. While the money is held within the HSA, you have the ability to invest it. In 2015, the contribution limit for an individual is $3,350 and for a family it’s $6,650. My friend DC at Young Adult Money recently wrote a post on why he loves the HSA for investing.
Types of Investments
Once you know where your money is going to go, the next step is determining what you want to invest it in. Typically I encourage clients to determine how long they plan to invest the money and based on this timeframe, we pick the appropriate asset allocation (i.e. what percentage of stocks, bonds, etc. is in the account) and then we manage the asset allocation. Most research shows that 90% of your returns comes from your asset allocation and not the specific type investment you use.
6) ETFs – Exchange Traded Funds
An ETF is essentially a pool of a number of different stocks or bonds that typically represents an Index like the S&P 500. The ETF market has grown over the last 5 years, though, and now you can buy an ETF for just about anything; for example there are Tech ETFs which are comprised of many technology companies or European ETFs which are comprised of European companies or companies with a European presence.
The nice thing about an ETF is that with one investment, you will own numerous underlying investments, for example, the Vanguard total market ETF is made up of 3804 stocks, so you don’t have to worry about whether or not you should buy Apple or McDonald’s, the chances are that you already own them just by owning the ETF.
Depending on your ETF provider, you will get numerous options, and it can seem overwhelming; however, if you just want to keep it simple, for your stock options, you can search an S&P 500 ETF or a total stock market ETF, and for your bonds, you can search a total bond market option.
7) Mutual Funds
Mutual Funds are similar to ETFs except that they are managed more actively by a team of portfolio managers, research analysts and traders; because of this, the fees to own mutual funds may cost more than an ETF. The nice thing about owning a mutual fund, though, vs. an ETF is that you know that everyday, a team of people are literally watching and analyzing your investments for you.
You can search for mutual funds similar to ETFs and many times you can find asset allocation funds or target date funds, which determine and manage your asset allocation for you. These take the guesswork out of asset allocation for you.
8) Individual Stocks
Although investing in individual stocks is not a great way to get diversification, if you really believe in a company and support it, the chances are over the long run it would not be a bad option. My eight-year-old son is starting to invest some of his savings this year and we are starting with individual stocks.
Sometimes the best way to truly understand an investment is to just invest in it. Once you become an owner, it’s kind of like fantasy football where you start to take a special interest in a player; you start to take a special interest in a company. I had a client who decided to invest in Apple and I got better updates from him on Apple’s technology releases and management because he followed everything he could about Apple once he became a shareholder.
Just like you can buy individual stocks, you can buy individual bonds. When you hear bonds, you should think fixed income, and all a bond represents is a loan between a borrower, which could be a company, a government or a non-profit, and you the investor. The borrower promises to pay you interest along the way and as long as they are still around at the end of the loan period, they will pay you back the full amount they borrowed from you.
10) Real Estate
There are a number of ways you can invest in real estate, you could buy stocks or bonds that are backed by real estate or you can actually purchase real estate directly. My friend Kim at Eyes on the Dollar, owns a few properties and is working on managing them in 2015.
Means of Investing
Now that you know what accounts you need to invest and what type of assets you may buy, here are some places where you can put these thoughts to work.
11) Online Brokerage Firms
There are a number that you can choose from, but I always tell clients to keep it simple and if possible, keep all of their investments in one place. If your 401k or 403b is at Fidelity or Vanguard, then you should probably just keep other accounts there like a Roth IRA or brokerage account. If you don’t have any preexisting relationship, then shop around and find the right site for you, and the best site is the one that’s the easiest to navigate and provides information and tools that you need.
Acorns is a company that allows you to round up your spending and invest the difference in a diversified portfolio. I have a client who is utilizing this and if you want to find out more about them, you can check out their website or check out the CIO on the Stacking Benjamins podcast.
13) Drive Wealth
I was connected with this company a few months ago, and I think it’s a great and easy platform to start investing or learn about investing. They even allow you to create a practice account before you actually decide to move forward with an account. (Just an FYI, there are no affiliate links on any sites I shared. I am not getting compensated to recommend them. I just like what they have to offer).
14) Investing Challenge
Just like I said that saving is more fun with a friend, investing is also fun to do with a friend. A few blog friends of mine are currently taking part in an investing challenge through Motif Investing, but you could create your own with a few friends and see who gets the best results.
15) Invest in Yourself
Sometimes the best investment you could make is not in the stock market, but it’s in yourself. If you are thinking about trying to change careers or make more money, perhaps you need to invest in some education or training to help you make that leap. If you are confident that it will allow you to make more money down the road, then it’s probably one of the best investments you will make all year.
I made a conscious decision to utilize a portion of my savings to invest in my company. As I have told others, I think I am the best investment I could make in the long run, so it was important for me to make that decision.