Why you should invest in bonds
Over the long term, growing wealth is the most important step. But once you’ve built that wealth and get closer to your financial goal, bonds, which are loans to a company or government, can help you keep it.
There are three main kinds of bonds:
Corporate bonds, issued by companies.
Municipal bonds, issued by state and local governments.
Treasury notes, bonds, and bills, issued by the government.
Here is a recent example of how bonds can be useful investments, using the Vanguard Total Bond Market ETF (NYSEMKT:BND), which owns short- and long-term bonds, and the iShares 1-3 Year Treasury Bond ETF (NASDAQ:SHY), which owns the most stable treasury bonds, compared to the SPDR S&P 500 ETF Trust:
As the chart shows, while stocks were crashing hard and fast, bonds held up much better, because a bond’s worth — the face value, plus interest promised — is easy to calculate, thus far less volatile.
As you get closer to your financial goals, owning bonds that match up with your timeline will protect assets you’ll be counting on in the short term.
Why and how to invest in real estate
Real estate investing might seem out of reach for most people. And if you mean buying an entire commercial property, that’s true. However, there are ways for people at almost every financial level to invest in and make money from real estate.
Moreover, just like owning great companies, owning high-quality, productive real estate can be a wonderful way to build wealth, and in most recessionary periods throughout history, commercial real estate is counter-cyclical to recessions. It’s often viewed as a safer, more stable investment than stocks.
Publicly traded REITs, or real estate investment trusts, are the most accessible way to invest in real estate. REITs trade on stock market exchanges just like other public companies. Here are some examples:
American Tower (NYSE:AMT) owns and manages communications sites, primarily cell phone towers.
Public Storage (NYSE:PSA) owns almost 3,000 self-storage properties in the U.S. and Europe.
AvalonBay Communities (NYSE:AVB) is one of the largest apartment and multifamily residential property owners.
REITs are excellent investments for income, since they don’t pay corporate taxes, as long as they pay out at least 90% of net income in dividends.
It’s actually easier to invest in commercial real estate development projects now than ever. In recent years, legislation made it legal for real estate developers to crowdfund capital for real estate projects. As a result, billions of dollars of capital has been raised from individual investors looking to participate in real estate development.
It takes more capital to invest in crowdfunded real estate, and unlike public REITs where you can easily buy or sell shares, once you make your investment you may not be able to touch your capital until the project is completed. Moreover, there’s risk that the developer doesn’t execute, and you can lose money. But the potential returns and income from real estate are compelling, and have been inaccessible to most people until recently. Crowdfunding is changing that.
Invest in brokerage accounts that reduce taxes
Just as owning the right investments will help you reach your financial goals, where you invest is just as important. The reality is, people don’t consider the tax consequences of their investments, which can leave you short of your financial goals.
Simply put, a little bit of tax planning can go a long way. Here are some examples of different kinds of accounts you may want to use on your investing journey. In each of these accounts—except for a taxable brokerage—your investments grow tax free..
The biggest takeaway here is that you should choose the appropriate kind of account based on what you’re investing for. For instance:
401(k) – For employed retirement savers
SEP IRA/Solo 401(k) – For self-employed retirement savers
Traditional IRA – For retirement savers
Roth IRA – For retirement savers
Taxable brokerage – For savers with additional cash to invest beyond retirement/college savings account needs or limits
Coverdell ESA – For college savers
529 College Savings – For college savers
Here are some more points to keep in mind, based on why you are investing:
Maximize employer-based 401(k) plans, at least up to the maximum amount your employer will match, is a no-brainer.
If your earnings allow you to contribute to a Roth IRA, building up tax-free income in retirement is an excellent way to help secure your financial future.
Use the Roth-like benefits of the Coverdell and 529 college savings plans removes the tax burden, resulting in more cash to pay for education.
A taxable brokerage account is an excellent tool for other investing goals, or extra cash above retirement account limits.
The bottom line is that everyone’s situation is different. You must consider your investment time horizon, desired return, and risk tolerance to make the best investment decision to reach your financial goals.