The Best Ways to Invest Your Money in 2021, According to the Experts

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Investing can be a great way to set yourself up with a retirement fund, down payment fund, or college tuition savings. The longer the time your money has to grow, the less you have to invest. 

It’s best to start investing as soon as possible – even today if you can. Start by making sure your high-interest debt is under control and you have an adequate emergency fund (cash you can access quickly if you lose your job or face an unexpected event). 

Historically, investments easily outpace inflation — even with the normal ups and downs of the market. You just have to know how to spread out your risk and choose the right methods to help your money grow.

We asked the experts, and here are the best investments to get your money growing today.

Why and When to Invest?

First, let’s first look at when you should start investing.

“Your money makes money over time when you invest. That’s how you accumulate wealth,” says Katharine Perry, certified financial planner and advisor at Fort Pitt Capital Group, an investment management firm in Pennsylvania.

Pro Tip

Before investing, it’s important to understand your risk tolerance, timeline, and which account to use. For many people, that could mean low-cost index funds in a Roth IRA account until retirement.

Make sure you have your emergency fund situated before you start investing. That way, you have access to cash should any problem arise. A good place to store an emergency fund is in a high-yield savings account

Once you’ve got some cash reserves and your high-interest debt is under control, there’s no time like the present to start investing.

“The old adage says it’s time in the market, not timing the market. Invest as soon as possible,” Perry says.   

Here are the best places to start. 

The Best Investments in 2021

Index Funds (ETFs or Mutual Funds)

Experts recommend low-cost, diversified index funds. These are funds with low expense ratios, or fees, that are great for all investors. An S&P 500 index fund is a great place to start. It  tracks the top 500 companies on the stock market. Index funds are a safer investment than trying to choose individual stocks because they broaden your investments over hundreds of companies. This process works well if you don’t have time or interest in picking individual stocks. Plus, over time this strategy tends to generate higher returns. 

There are several index funds to choose from, including those based on a specific industry, timeline, or sector of the market. You can buy an index fund that is an exchange-traded fund (ETF), which behaves like a traditional stock with market fluctuations throughout the day, or a mutual fund that closes at the end of the market day. Despite their small differences, either one could be a good choice. Just take note of the fees and investment minimums. EFTs tend to be an easier entry point for beginners due to lower costs and minimums.  

Other Types of Investment Strategies

As an investor, you may decide to add other types of investments to your portfolio. Types of securities you can add might be higher risk, but can compliment your index funds. Whatever other securities you decide to add, make sure you align them with your investment goals and do some research before to make sure you know what you’re investing in.

Small Cap Stocks

A small cap stock is one from a company with market capitalization under $2 billion. These stocks can be a way to invest in companies that are poised for long-term growth and fast gains. 

Adding small cap stocks to your portfolio through an index fund is a good way to incorporate small cap stocks to your investment strategy. A popular small cap index fund is the Russell 2000 index which tracks 2,000 small cap companies across a variety of industries. Of course, there’s no guarantee that a small company will survive, and initial performance isn’t a guarantee it will continue. 

Blue Chip Stocks

Blue chip stocks are shares of large, well-known companies that are household names – think Disney, Amazon, and Johnson & Johnson. These stocks are thought of as being reliable, safe, and able to weather economic downturns over the long-term. 

To identify blue chip stocks, take a look at the Dow Jones Industrial Average. Because they have a proven track record, having blue chip stocks can add stability and reliability to your portfolio. If you have an S&P 500 or total market index fund, chances are you have good exposure to these stocks already. A blue chip index fund or ETF is a good way to start investing in these. The SPDR Dow Jones Industrial Average ETF Trust is one of the most popular blue chip funds because of its low fees. You can also purchase shares directly through your brokerage. 

Real Estate and/or REITs

Buying a property often requires upfront costs like down payment and fees for closing, on top of any renovations you choose to make. There are also ongoing (and perhaps unexpected) costs, like maintenance, repairs, dealing with tenants, and vacancies if you decide to rent out the property. 

If homeownership isn’t for you, you can still invest in real estate through real estate investment trusts (REITs). REITs allow you to buy shares of a real estate portfolio with properties located across the country. They’re publicly traded and have the potential for high dividends and long-term gains. 

“REITs have done superbly well this year. They don’t usually do well with a pandemic, but surprisingly, they have,” says Luis Strohmeier, certified financial planner, partner, and advisor at Octavia Wealth Advisors. Part of the reason is you get access to properties, such as commercial real estate and multi-family apartment complexes, that could be out-of-reach for an individual investor.  

On the flip side, dividend payments earned through REITs are taxed as ordinary income instead of qualified dividends, which may cause you to have a higher tax bill if you invest through a taxable brokerage account. When you invest in a REIT, you’re also inherently trusting the management company to scout income-producing properties and manage them correctly. You don’t get a say in which properties the REIT chooses to purchase. But with that said, you don’t have to deal with tenants, repairs, or find a big down payment to start investing. And if you can invest through a tax-advantaged account, the dividends could grow tax-free. 

Where to Invest In 2021

Choosing what to invest in is one thing. You also have to choose what type of account to place your investments in. 

IRAs are recommended by financial experts because they help shield investors from taxes when saving for retirement or other long-term goals. There are a few different types of IRAs, also known as Individual Retirement Arrangements.

Roth IRA

A Roth IRA is a great savings vehicle for retirement. Whatever you put in, you can take out, and whatever money grows is tax-free when you take it out at 59 ½.  Each year, you can contribute $6,000 to your Roth if you’re under age 50 and $7,000 if you’re over 50, as long as your income doesn’t exceed $140,000 if you file single or $208,000 if filing jointly. 

It’s a particularly excellent strategy when you’re young or in a low tax bracket. You pay taxes on your contributions now, and then let them grow tax-free for as long as you can. “That’s a huge benefit, because you don’t have to pay tax on it again. That’s like free money,” says Perry.   

Traditional IRA

A traditional IRA allows you to claim a tax deduction on your contributions, but you’ll pay taxes when you withdraw at age 59 ½. It’s a good choice if you expect your future tax rate to be lower than it is now, or if you’d rather get a tax break now than in the future. 

Contribution limits are the same as a Roth IRA. 

SEP IRA

Simplified Employee Pension (SEP) IRAs are retirement accounts for small businesses or self-employed individuals. If you work for yourself or own a small business, it’s a way to put away savings for retirement, with higher limits than a traditional 401(k) or IRA. With a SEP IRA, you can contribute up to $58,000 per year. That could provide a big savings opportunity for small business owners. 

What to Consider Before Investing and Why Long Term Investing is Key

As you begin your investing journey, consider first where you’d like to hold your investments. That could be a taxable brokerage account, an employer’s 401(k), or a tax-advantaged IRA. If you want to invest in real estate, decide if physical properties or REITs match your investment style. 

Then, assess your risk tolerance and how long you want to invest. Keep in mind that, due to compound interest, investing long-term (10+ years) is the most assured way to grow your money. 

It’s perfectly fine to invest entirely in low-cost, diversified index funds. “Adequately diversified investments with a long track record of growth is the key to building wealth,” says Stohmeier. That way, you’re also able to withstand market dips while giving your cash the best chance to grow.