Investing is an important skill set to build wealth and protect your money from inflation. But it can be an overwhelming and confusing task for beginners. If you’re wondering where to invest money to get good returns, this article will explain how to start investing and what investments to consider. You’ll discover some of the best investments right now. Investments that are expected to keep up with high inflation.
Until recently, the 60-40 portfolio was the most common investing strategy. As part of this portfolio, investors allocated 60% to bonds and 40% to stocks.
Bonds are less risky than stocks. Especially government bonds are risk-free investments.
When you buy government bonds, they are backed by the faith and creditworthiness of the government that issued them. Like with all bonds, you receive interest payments. And at maturity you get back your principal.
The government can then use the money you lent it for government spending.
Governments of countries that have their own central bank are unlikely to default on their debt. This is why government bonds are considered risk-free investments.
Government bonds and other fixed-income investments only make sense when interest rates are higher than inflation.
At the time of writing this article, inflation hit a 40-year high in the United States and peaked at 7.9%. If you invest in bonds or other fixed-income investments that have low yields, you are effectively losing money.
Although you receive interest and get back your principal, the purchasing power of your money decreases. You aren’t able to outpace inflation.
High-yield savings accounts or regular savings accounts that pay interest below the inflation rate don’t provide a good return either.
Even if your savings account pays 1% interest, with inflation at 7.9% in the United States you are effectively losing 6.9% a year.
Most savings accounts pay less than 1% interest. In Europe there are even negative interest rates. This means, you are paying the bank instead of the bank paying you.
If you’re wondering where to invest money to get good returns, bonds, high-yield savings accounts and certificates of deposit aren’t your best choice.
Although more risky, stocks, cryptocurrency and real estate are some of the best investments to make money and protect your purchasing power in a high-inflation environment.
As long as inflation remains higher than interest rates, investors are continuously pushed out further on the risk curve.
In order to outpace inflation, they have to put more capital at risk and speculate more. If you are risk averse and don’t mind losing purchasing power due to inflation, keeping your money in a high-yield savings account or government bonds is perfectly fine.
Keeping money in banks isn’t always safe. The idea of a completely risk-free investment is an illusion. Even high-yield savings accounts and bonds come with counter-party risk. Bank failures, withdrawal limits and government defaults, while unlikely in most developed countries, are possible.
In times of high inflation, you have to find investments that keep pace with inflation or outpace it.
This isn’t always easy and requires taking on more risk. Some investments are better suited to outpace inflation than others.
In general, the less risky an investment is, the lower its return. Keeping your money in a savings account or in government bonds is relatively safe, but your returns might lead to an inflation-adjusted loss.
The riskier an investment is, the greater the potential for big returns. In this sense, risk and reward are opposites.
The goal of a good investor should be to find investments that have a good risk and reward profile. This is why investors are always hunting for investments with big upside potential and minimal risk.
Read more: Investing In Stocks for Beginners
Investments that meet this criteria have asymmetric risk and reward profiles. The perfect investment would be one that has unlimited upside potential with zero downside risk.
In reality, this doesn’t exist. But investors should always look for ways to maximize returns while minimizing risks.
Where to invest money to get good returns? Let’s take a look at the best investments right now.
Rather than buying individual stocks, you can invest in an index fund. This can help mitigate some risks. If you invest in a single stock, you have to be very sure about the stock. This involves doing research and truly understanding what you’re investing in.
ETFs on the other hand allow you to invest in the top companies in a certain sector, industry or country. For example, the S&P 500 tracks the top 500 companies in the United States.
There are different ETFs that track the performance of the S&P 500, such as SPY.
Historically, the S&P 500 has returned around 8-10% per year. This means, if the consumer price index can be trusted, you are keeping pace with inflation or slightly outpacing it.
Despite this, it is important to understand that ETFs can be volatile. During a market drawdown it’s possible that stocks drop 20-80% in a matter of months.
The Nasdaq for example, which tracks the top technology companies in the United States, dropped over 70% during the Dotcom Bubble.
However, over a longer period of time both the S&P 500 and Nasdaq have recovered all losses and resulted in large gains for investors that were patient and held their shares during stock market crashes.
One of the downsides of the stock market is the volatility that comes with it. You need to develop the mindset of an investor and learn to invest without emotion.
Read more: Dollar Cost Averaging Vs. Lump Sum Investing
While ETFs that track the Nasdaq are riskier, they also provided higher returns in the past. One of the ETFs that tracks the Nasdaq is QQQ.
In case you prefer individual stocks over an ETF, you can also research individual stocks of technology companies you believe in.
Amazon and Tesla have been among the most popular technology stocks. Before investing in anything, it’s important to do your own research and assess your risk appetite.
As a general rule of thumb, it’s always a good idea not to invest more money than you are willing to lose. Don’t invest any money that you need in the next 5-10 years. Managing your position sizes and keeping cash are equally important risk management strategies.
Where you invest money to get good returns depends on your net worth, risk tolerance and goals. Another popular but low-return investment is dividend stocks.
Some companies pay out a dividend to their shareholders. A dividend is a portion of a company’s profit that goes to investors.
Usually, only large and established companies are able to pay dividends. Small companies tend to invest all profits back into the company to grow faster.
Dividends are fixed payments that are made yearly, quarterly or monthly. Popular dividend-paying companies are AT&T and Coca Cola.
The dividend yield is calculated based on the stock’s share price. If a stock trades at $100 and comes with a $3 dividend, the dividend yield is 3%.
The nice thing about dividend stocks is that you get paid fixed income regardless of the share price. Even if shares plummet to $50, you would still get your $3 dividend.
Since the share price lost half its value, the dividend yield increased to 6%. At this point you could continue holding the shares and receiving the dividend until share prices have recovered.
Keep in mind though that high-dividend yields are often an indicator of plummeting share prices. Don’t get lured in by high dividend yields. Companies that pay a high dividend yield often have volatile stock prices.
Companies can also decide not to pay dividends in case of a major crisis or for other reasons. While dividend stocks are attractive due to their ability to generate income, they aren’t necessarily safe.
Also keep in mind that a dividend yield of 3% doesn’t outpace inflation. With inflation at 7.9% in the United States, only dividend yields of 8% would be able to keep up with inflation. Even with such high dividend yields, there is no guarantee that the stock price doesn’t drop and you end up losing money to inflation.
If you’re asking yourself where to invest money to get good returns, bitcoin definitely deserves a mention. It has been the best performing asset in the last decade, with yearly compound return rates of over 100%.
Bitcoin isn’t a bond, ETF or stock but a cryptocurrency. It’s easiest to think of bitcoin as digital gold. There will only ever be 21 million bitcoin. But it’s possible to buy fractions of a bitcoin.
Each bitcoin is divided into 100,000,000 units. This means you can buy a hundred millionth of a bitcoin.
In case you’re interested in learning more about the value proposition of bitcoin, you can read our article: The Intrinsic Value Fallacy or Why Bitcoin Is Not a Bubble.
Historically, bitcoin has been able to outpace inflation by a large margin. But keep in mind that it is extremely volatile. Since it’s a relatively young asset class, it’s important to do your own research and manage your position size accordingly.
Traditional savings accounts, even ones that are marketed as high-yield savings accounts, aren’t able to outpace inflation.
There is an alternative to high-yield savings accounts though. Certain companies like BlockFi, Nexo and Celsius allow you to create interest accounts for cryptocurrencies.
For example, instead of holding bitcoin in a hardware wallet, you could deposit it with a company like BlockFi and earn interest.
The same can be done with other cryptocurrencies. Stablecoins are among the highest-yielding cryptocurrencies. These cryptocurrencies are pegged to the value of a currency like the US dollar or a commodity like gold.
Some cryptocurrency interest accounts pay up to 9% or more interest on stablecoins. They do this by lending out your coins and charging interest. In return, they are able to pay you interest. They make profit with the spread.
There are certain risks associated with cryptocurrency interest accounts. One of them is the increased regulatory scrutiny that stablecoins and cryptocurrencies are facing. For example, BlockFi interest accounts aren’t available to US customers anymore.
Whenever you are holding bitcoin or other cryptocurrencies on an exchange or in an interest-bearing account, you are subject to counter-party risk.
The company holding your cryptocurrency is in control of it. If they go bankrupt, if they overextend their loans and people default, or if regulators decide that your funds should be frozen, you could lose access to your coins.
In the bitcoin and cryptocurrency space there is a saying: “Not your keys, not your bitcoin”. While the yields on cryptocurrency interest accounts are attractive, you need to carefully weigh the benefits against the risks.
The more funds you deposit at a company like BlockFi, the lower your yield usually gets. So unless you’re planning to hold small amounts in a cryptocurrency interest account, you are unlikely to outpace inflation at the current rates.
As you can see, safe investments with high returns don’t exist. The more returns you want, the more risk you have to take on. This is unfortunate but the new reality in a high-inflation environment.
The examples above hopefully gave you some ideas of where to invest money to get good returns. But it’s important to do your own research and learn about risk management.
Some ways to manage risk include position size and diversification. Don’t invest more money than you’re willing to lose. Or in other words, choose position sizes that allow you to sleep well at night. Figure out what investments resonate most with you, assess your risk tolerance and develop the mindset of a long-term investor.