Your investment portfolio can include all kinds of securities (aka, investments you can buy or sell). Stocks and bonds are usually the first things to come to mind, but there are actually dozens of different investment types out there. Understanding how they work can allow you to be more intentional with your investment strategy — and help you diversify your portfolio along the way. Let’s jump in.
When you purchase stocks, you’re buying into the companies that issued them. Each share gives you a fractional ownership position. Public companies do this as a way of raising capital to support the business.
If stock values rise, and you sell your shares for more than you paid, you’ll pocket whatever profits are left after paying capital gains tax. If stock prices go down, you could lose money. Stocks, also called equities, are sold through the stock market. Stock investing is inherently risky, but there are ways to mitigate investment risk. The end goal is to grow your wealth over the long haul.
While stocks are on the higher end of the risk spectrum, bonds are considered lower-risk investments. That’s why stocks and bonds are seen as the dynamic duo of investing. When you buy a bond, your money acts as a loan to whatever organization issued it. You’re then repaid over a period of time, with interest. Bonds come in the following forms:
Corporate bonds: Issued by companies. They tend to have the highest risk and greatest returns.
Treasuries: Issued by the U.S. government. They’re usually the safest bet, but have the lowest returns.
Municipal bonds: Issued by states and municipalities. In terms of risk and reward, these are somewhere in between corporate bonds and Treasuries.
Apart from buying individual stocks, you can purchase a mix of different securities through an exchange-traded fund (ETF). It’s a basket of investments that trades like a stock. ETFs usually track a sector, commodity, or an index, like the S&P 500, with the hope of mimicking its performance. Costs are on the lower side, plus ETFs can provide built-in diversification. This typically makes them less risky than picking individual stocks. They’re also pretty accessible. You can start investing in an ETF portfolio through Acorns for just $5.
Mutual funds are kind of like ETFs, except most are actively managed. In an actively managed fund, a team of professionals chooses which securities are included in the fund, monitors their performance, and decides when to make trades. These folks are tasked with evaluating market conditions and strategically selecting investments. The whole idea behind mutual funds is to beat the market.
Fees are usually higher when compared to ETFs and index funds. They’re also less tax efficient because they tend to sell assets more frequently — triggering capital gains tax more often. There’s also no guarantee that a mutual fund will net better returns. In 2021, 85% of actively managed large-cap funds trailed behind the S&P 500.
Index funds are a type of ETF or mutual fund that aims to match the performance of the index they track. Investors put money in the fund, which is then used to purchase shares to mimic a specific index.
They hold a mix of investments — providing some automatic diversification. And while actively managed funds tend to underperform, the 10-year average return for the S&P 500 is close to 10%. That reflects how much the value of the stocks in the index has increased.
Index funds are known for their low costs and buy-and-hold approach to investing.
The S&P 500 is a well-known stock market index. It measures the stocks of 500 of the largest publicly traded U.S. companies. Many look to the S&P 500 as an indicator of how the stock market at large is doing. You can’t invest in it directly, but you can put money in an S&P 500 investment fund. That includes ETFs and index funds. The S&P 500 is a market-cap-weighted index — market capitalization refers to the total dollar market value of all company stock held by shareholders.
The Dow Jones Industrial Average — or the Dow, for short — is another huge stock market index. It includes the 30 most expensive stocks at any given time. It’s a price-weighted index, which means that it’s impacted the most when valuable stocks go up and down in price. Like the S&P 500, the Dow is thought to reflect current economic conditions. It finishes each trading day up or down by a certain number of points. That number is the average change in stock prices for that day.
A CD is a special kind of savings account that rewards you for leaving your money parked in the account for a set period of time. Leaving your money for longer terms usually has the best rates.
If something comes up and you need to withdraw your money early, you’ll likely be hit with a penalty. The average interest rate on a 60-month CD is currently 0.98%.
These investment accounts are specifically designed to hold your retirement savings. Each one has its own tax advantages.
Contributions you make to a traditional IRA are tax-deductible, which lowers your taxable income today. You will be taxed on distributions you take in retirement, and you’ll have to start taking required minimum distributions (RMDs) when you turn 73. That said, a traditional IRA can be a great way to build your nest egg. Just know that if you dip into your account before age 59½, you will likely pay a 10% early withdrawal penalty on top of taxes.
A Roth IRA is funded with money you’ve already paid taxes on. That means you can withdraw your contributions whenever you want, tax-free. But, there are different rules for the gains your investments made. If you tap your earnings before age 59½, you could face a tax bill and a 10% penalty. Roth IRAs can provide a pool of tax-free money in retirement. One drawback is that you have to meet certain income requirements to contribute. In 2023, you can kick in up to $6,500 across all your IRAs. Those who are 50 and over can contribute an extra $1,000.
A 401(k) is an employer-sponsored retirement plan that may offer an employer 401(k) match. If you switch employers, a 401(k) rollover makes it easy to take your funds with you. You can contribute up to $22,500 in 2023 ($30,000 if you’re 50 and over). Funds grow on a tax-deferred basis, which means you won’t pay taxes until you make withdrawals in retirement.
A 10% early withdrawal penalty may apply if you dip into your account before 59½. You’ll also have to start taking required minimum distributions, or RMDs, at age 73.
Crypto is a super volatile investment — read: risky. Values tend to swing up and down pretty wildly. Bitcoin is a great example. It doubled its value in 2021 and was worth an eye-popping $67,553 toward the end of that year. But it dropped by over 45% a couple of months later. Bitcoin and other virtual currencies are not regulated by a government entity or financial institution.
Transactions are recorded using blockchain technology. Investors looking for some exposure to crypto might consider a Bitcoin-linked ETF. It invests in Bitcoin futures. Instead of buying actual Bitcoin, you’re investing in its potential value.
Investors can also explore options contracts. These are agreements that give you the option to buy or sell securities at a predetermined price by a certain date. It’s a complex game and generally not advised for novice investors.
REITs allow you to get in on real estate investing without having to buy property. Instead of playing landlord, you put money into a REIT that owns, operates, or funds income-producing real estate. The IRS requires them to return at least 90% of taxable income to shareholders each year. That could result in a nice dividend yield.
Commodities include raw materials like food, oil, and precious metals. There are a few different ways to invest in these assets. One option is to buy into an ETF that tracks a commodity index. These funds trade like stocks. Investors can also buy stock shares of companies that are in the commodities business. That can include shares of an oil company or coffee producer, for example. Futures contracts come into play too. This is when you agree to trade a commodity at a set price in the future.
Real estate investing can unlock a stream of passive income. That might mean buying, renovating, and flipping properties. Other investors might prefer to buy and hold rental properties. The latter involves being a landlord. You’ll have to maintain the property, pay for homeowners insurance and property taxes, and find tenants. But that could be worth it if the monthly rent provides a surplus of cash each month. Either way, real estate investing usually requires a good amount of upfront capital.
Acorns can simplify investing and put things on autopilot. No research or prior knowledge is necessary — answer a few simple questions about your personal situation and set up your account.
From there, Acorns can invest your spare change into a recommended portfolio of highly rated ETFs. ETF portfolios provide diversification among a variety of underlying assets. It's completely hands off when you turn on the automatic Round-Ups® feature or recurring investments. Diversification is the name of the game. We’ll even rebalance your portfolio and reinvest your dividends automatically.
This material has been presented for informational purposes only. The content is generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses. Acorns is not engaged in rendering tax, legal or accounting advice. Please consult a qualified professional for this type of service.