It’s the dawn of a new year and you’ve finally got some money to invest. Maybe you’ve just had a raise. Or, maybe the end-of-year bonus would burn a hole in your pocket. Either way, you need to be smart about investing if you want these extra dollars to be counted.
The problem is, you don’t have any idea where to invest your money. The sheer number of possibilities is daunting while you are aware of the myriad investment options available.
This is called “paralysis by analysis” in the investment world. You spend so much time researching the options that you wind up putting it off and not investing at all. And finally, bills or unexpected expenses absorb the extra cash you set aside. In other words, life is going on.
If you want to make sure that your extra cash isn’t lost, you need to spend it immediately. If it helps you find the right investment options for your objectives, a certain amount of analysis is good, but you still have to act quickly.
With that in mind, I wanted to share what I think is the three best ways of investing your excess funds in 2020.
#1 The Stock Market
While “investing in the stock market” is one of the most basic advice you’ll ever read on this one, please hear me out. While everyone knows that investing in the stock market has traditionally paid off, there are far too many people who do not trust the financial markets and choose to stay entirely on the sidelines.
Then there are people who think that right now the stock market is so overvalued that they’d be nuts to jump in. But, here’s the thing: no one asks you to dump into stocks every extra cent you have. Instead, I suggest you use a method called “dollar cost average” to invest small amounts of money over time.
The average cost of the dollar allows us to spend our money over any length of time. It might be for twelve months. It’s going to be 18 months. Heck, it might have been five years.
Wealth’s Colorado financial advisor David Henderson goes further to explain how
the average cost of the dollar works: “When the market is high, you buy
fewer shares and you buy more shares when the market is low,” he says.
This means that you will use this approach to have a lower average stock price
over time. Obviously, it’s easy to see how beneficial this would be.
Now that we talked about the importance of investing in the stock market, let’s talk about exactly where your money should be invested. What are the right vehicles and equipment we can use?
This is yet another case in which the possibilities are immense. Now, I usually recommend for mutual funds and ETFs that people get their feet wet.
If you have a financial advisor working for you, they may be able to get rid of the well-performing, actively managed mutual funds from those that don’t do that great. Otherwise, you can invest in index funds that are not managed actively but have a long history of solid returns.
If you already have a brokerage account, you might want to stick to it. Otherwise, to help you invest your funds, you will need to find a new place. Betterment is one company that I always suggest. With Betterment, you can invest your money in ETFs and they don’t charge you a fee to manage them. In addition, they actually choose the ETFs in which you invest based on your risk appetite, investment goals, and other factors.
What does it mean? This means you can invest your hard-earned money, sit back and enjoy the returns, and let them do the hard work.
#2 Peer-to-Peer Lending
In peer-to-peer lending platforms such as Lending Club and Prosper, a second-place to stash some of your excess cash this year. With these companies, in small increments, you could lend money to individuals as if you were the lender. The best part is that you can earn a fairly decent return rate–usually above 6 per cent or more.
You are trusting in other people and their ambitions as an investor in peer-to-peer lending. It’s comforting to know that you don’t lend large sums of money to people you don’t know. Rather, the money you spend is split into amounts that are as low as $25 over hundreds or even thousands of loans.
While it may seem surprising to hear a financial advisor suggesting that people invest in peer-to-peer loans, I’m not the only one that sees the value in these channels. For a few reasons, many financial advisors are supporting peer-to-peer loans as an alternative to the stock market. Second, they make it easy for these businesses to sign up and start. Second, the return rate for safer loans and even riskier loans could vary from 5% to 7%. Last but not least, with as little as $1,000, you can usually open a new account.
_ This option, however, is currently limited to a few African countries.
#3 Real Estate
A third investment strategy to consider, in addition to the stock market and peer-to-peer lending platforms, is real estate. The thing is, I don’t suggest that everyone run out and buy a property for investment. Not everybody is cut out to be a landlord after all.
Of course, I’m not. Seven years ago, I tried to invest in physical property and almost lost my shirt. From my foray into becoming a landlord, I learned a lot of lessons, the biggest of which was that I don’t need such stress in my life.
Fortunately, there are many ways to invest in the land without having to deal with physical property. Investing in real estate notes is one option to consider. I started investing in real estate notes because it was crushed by a really good friend of mine with real estate and offered his friends the opportunity to invest.
He would buy a pool of real estate, and investors like me would invest money in his project. He would manage the properties from there and pay me out of that money a dividend or interest. This was an attractive way for me to invest money without being a landlord or dealing with tenants.
Obviously, in a situation like this, there is a ton of risk. You need to have a lot of confidence to invest in an individual’s offered real estate notes.
The good news is that there are other ways out of real estate notes to invest in real estate. A company called Fundrise is one option I’m really excited about. Fundraise offers a similar investment scenario. They buy commercial properties and allow small amounts of money to be invested by investors. This is another hands-off investment, of course. You may own part of a commercial property project, but you don’t even see the property itself or deal with it.
Unlike Lending Club, to get going, Fundraise needs an initial amount of about $1,000. However, when you invest, Fundraise mainly helps you to “put it and forget it.” Even better, through this platform, you can get a pretty high rate of return. On the company website, Fundraise reports that over the past five years, its returns have ranged from 8.76% to 12.42%. Not too slow.
Obviously, there is also a risk of investing in such a platform. First of all, the company is new so it doesn’t have to share data for decades. Second, you allow a third party to choose on your behalf buildings and investments, which means you have given up all control.
Nevertheless, I think it’s pretty cool that technology has enabled investors to access commercial properties in a way that we haven’t been able to access in the past.
Author: Jeff Rose