Investment Explained: Where and How to Invest Your Money

Investing your hard-earned money can feel like a daunting task. Investing is risky, after all, and it becomes even more so if you don’t take the time to do it properly.

But you don’t need to dread investing nor feel like you’re placing your money on a roulette wheel. It’s not just about picking stocks and getting lucky. It’s about making smart decisions based on your investing preferences.

Once you’ve taken the first steps on starting to invest, follow these ones to help figure out where to invest your money.

Start with a Broker

All investments start with choosing a broker with which you can buy any of the investment options that you choose.

Brokers are typically classified as either full-service brokers or discount brokers. Full-service brokers will give you stock recommendations, but you’ll pay much higher fees.

Discount brokers won’t offer advice, but making trades is much more affordable. For average investors, especially those who are just getting started investing, picking a discount broker typically makes the most sense.

There are many discount brokers to choose from, with the main difference being the fees charged to trade, research tools, customer service, and special investment products the broker caries. Virtually all discount brokers offer online trading. Shop around to find one that works for you.

For more information, check out the Motley Fool’s guide to picking a broker.

Using Retirement Plans

Anyone can open a plain investment account with a broker. But choosing to open specialized retirement plans to invest your money means that you can take advantage of tax benefits or perks from your job. Some of the popular options include:

Roth IRA — With this option, you invest your money after it’s taxed. But the real advantage is that you don’t pay tax when you withdraw money in retirement, which makes it the recommended first option of many. This essentially allows your investment to grow tax-free until age 59 1/2 when you can start withdrawing everything you’ve earned.

IRA — This standard version is like the opposite of the Roth. You’re initial contribution goes in tax-free as a deduction, but you will be taxed on withdrawals as if they are income. While investment proceeds are typically taxed as capital gains, which are currently taxed at 15%, you  income tax rate may or may not be higher depending on if you’re working when you start withdrawing funds.

401(k)/403(b) — This option is offered by employers, which may make contributions to your 401(k) or 403(b) accounts as part of your workplace benefits. Employers may either match your deposits into this account or contribute a certain portion of your salary each year, essentially offering you free money to add to your retirement investment.

There may be other options applicable to you, so make sure you examine all the choices.

Investment Options

There are many places you can invest your money and earn a great return. It doesn’t have to be complicated, but it can be if you’re willing to put in the time and effort.

Here’s a list of investment options, roughly arranged from easiest to most difficult to manage, along with why you should or shouldn’t invest in each.

Lifecycle Funds

• Why invest here: Perhaps the perfect balance of ease, cost, and value. There’s little to manage after depositing your money since your portfolio is rebalanced automatically. These funds typically include a target retirement date, so your investment is reallocated periodically to match up with an appropriate amount of risk you desire as you draw closer to retirement.
• Why you shouldn’t: You’ll have less control over how agressive or conservative your portfolio mix is. It may not fit your investment needs as well as creating a balanced portfolio on your own.

Index Funds

• Why invest here: These funds are often the cheapest to own since they’re managed by computers instead of investment professionals. Better yet, they often outperform mutual funds, too.
• Why you shouldn’t: Unlike lifecycle funds, your portfolio won’t rebalance automatically, so you’ll have to do it yourself about once a year. You also won’t have any control of the mix of stocks that are included in your index fund.

Mutual Funds

• Why invest here: You may be interested in investing a specific type of stocks or within different sectors. You’re potentially willing to pay a bit more in fees because of this.
• Why you shouldn’t: Mutual funds can get bogged down with fees, so you’ll need to watch expenses. However, studies have shown that most mutual funds fail to provide better returns than index funds.

Bonds

• Why invest here: Bonds are typically less risky than buying stocks or funds. Since they’re typically a less risky investment, they’re great to balance out a portfolio where the other holdings are more risky.
• Why you shouldn’t: Due to the low risk, returns won’t be as high on bonds. While you’ll want to include some, it’s often not recommended that your portfolio contain a high portion of bonds if you’re younger and can be more agressive with your holdings.

Individual Stocks

• Why invest here: There are specific companies you’re interested in investing in. You’re okay with the potentially higher risk of picking stocks as well as with spending more time researching and managing your portfolio.
• Why you shouldn’t: There’s really no messing around when it comes to investing in individual stocks. If you’re going to put a large chunk of change into these areas, you better do your research first. And by research I don’t mean getting hot stock tips from your buddy.

Even if you’re up and ready for the challenge of managing stocks, don’t assume you’re going to earn a greater return on investment just because you put in more time or research. Some of the easier options can beat the return of an average or better than average stock investor.

For more in-depth explanations of these options, as well as even more ways to invest, see this Motley Fool post on investment options.

Everyone will have their own preferences with how to invest. It’s up to you to research and decide how you’ll invest the precious money you’ve saved for retirement.