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It’s the dawning of a new year and you finally have some money to invest. Perhaps you just got a raise. Or, maybe an end-of-year bonus is burning a hole in your pocket. Either way, you need to be smart about investing if you want those extra dollars to count.
The problem is, you have no clue where to invest your cash. While you’re aware of the myriad investing options available, the sheer number of possibilities is overwhelming.
In the investing world, this is called “paralysis by analysis.” You spend so much time analyzing your options that you wind up putting it off and never investing at all. And eventually, the extra cash you set aside gets consumed by bills or unexpected expenses. In other words, life happens.
If you want to make sure your extra cash doesn’t disappear, you need to invest it right away. A certain amount of analysis is fine if it helps you find the right investment options for your goals, but you still need to act fast.
With that in mind, I wanted to share what I believe are the four best ways to invest your excess funds in 2018.
While “invest in the stock market” is some of the most basic advice you’ll ever read, please hear me out on this one. While everyone knows that investing in the stock markethas historically paid off, there are far too many people who don’t trust the financial markets and choose to sit on the sidelines altogether.
Then there are people who think the stock market is so overvalued right now that they would be crazy to jump in. But, here’s the thing: Nobody is telling you to pour every extra cent you have into stocks. Instead, I’m suggesting you invest small sums of money over time using a method called “dollar cost averaging.”
Dollar cost averaging requires us to trickle our money into investments over any length of time. It could be 12 months. It would be 18 months. Heck, it could be five years.
Colorado financial advisor David Henderson of Jenkins Wealth goes further to explain how dollar cost averaging works: “When the market is high, you buy fewer shares and when the market is low you buy more shares,” he says. This means that, over time, you will have a lower average share price using this method. Obviously, it’s easy to see why this would be beneficial.
Now that we’ve talked about the importance of investing in the stock market, let’s talk about exactly where to invest your money. What are the best tools and vehicles we can use?
This is yet another situation where the options are overwhelming. Still, I typically suggest people get their feet wet with mutual funds or ETFs.
If you have a financial advisor working on your behalf, they may be able to weed out the well-performing actively managed mutual funds from the ones that aren’t doing so great. Otherwise, you can invest in index funds, which are not actively managed but have a long history of solid returns.
If you have a brokerage account already, then you may want to stick with it. Otherwise, you’ll need to find a new place to help you invest your funds. One company I always suggest is Betterment. With Betterment, your money can be invested in ETFs and they don’t charge a fee for managing these for you. Plus, they actually pick the ETFs you invest in based on your appetite for risk, investing goals, and other factors.
What does that mean? That means that you can invest your hard-earned money, then sit back and enjoy the returns and let them do the hard work.
If you want to have more control on your investments, online brokerage firms like Ally Financial, TD Ameritrade and E-Trade make it easy to stay in charge with low fees and easy-to-use platforms. Plus, there are a multitude of other "robo-advisors" to choose from.
As a final note, there’s one more simple way to invest in the stock market with even less effort – boosting how much you contribute to your work-sponsored retirement account. Arizona financial planner Charles C. Scott says this may be your best option yet – especially if you’re not contributing enough to get a match from your employer.
“Every dollar you contribute could get a dollar match,” says Scott. “That’s a 100% return on your investment.”
If you’re not making the most of your 401(k) or contributing enough to get a match, then you’re probably best starting there.
A second place to stash some of your excess cash this year is in peer-to-peer lending platforms like Lending Club and Prosper. With these companies, you’re able to loan money to individuals in small increments as if you were the bank. The best part is, you get to earn a pretty decent rate of return – usually upward of 6% or more.
As an investor in peer-to-peer lending, you’re investing in other people and their goals. It's comforting knowing you aren’t lending people you don’t know large sums of money. Instead, the money you invest is split up into increments as small as $25 over hundreds or even thousands of loans.
While it may seem strange to hear a financial advisor suggest people invest in peer-to-peer lending, I’m not the only one who sees the value in these platforms. Kansas City Financial Advisor Clint Haynes told me he supports peer-to-peer lending as an alternative to the stock market for a few reasons. First, these companies make it easy to sign up and get started. Second, your rate of return can range from 5 – 7 percent for safer loans and even more for riskier loans. Last but not least, you can typically open a new account with as little as $1,000.
In addition to the stock market and peer-to-peer lending websites, a third investment strategy to consider this year is real estate. The thing is, I’m not suggesting everyone run out and buy an investment property. After all, not everyone is cut out to be a landlord.
I’m certainly not. I tried investing in physical real estate seven years ago and almost lost my shirt. I learned a lot of lessons from my foray into becoming a landlord, the biggest of which was that I don’t need that kind of stress in my life.
Fortunately, there are plenty of ways to invest in real estate without dealing with a physical property. One option to consider is investing in real estate notes. I got started investing into real estate notes because a really good friend of mine was crushing it with real estate and offering his friends the chance to invest.
He would buy a pool of real estate properties, and then investors like myself would invest money into his project. From there, he would manage the properties and pay me a dividend or interest off that money. For me, this has been an attractive way to invest money without having to be a landlord or deal with tenants.
Obviously, there is a ton of risk in a situation like this. You have to have a lot of trust to invest in real estate notes offered by an individual.
The good news is, there are other ways to invest in real estate outside of real estate notes. One option I’m really excited about is a company called Fundrise. Fundrise offers an investing scenario similar to the one above. They buy commercial properties and allow investors to invest small sums of money. Obviously, this is yet another hands-off investment. You may own part of a commercial real estate project, but you don’t even see or deal with the property itself.
Like Lending Club, Fundrise requires an upfront sum of around $1,000 to get started. Once you invest, however, Fundrise mostly lets you “set it and forget it.” Even better, you may receive a pretty hefty rate of return through this platform. On the company website, Fundrise claims its returns have averaged between 8.76% up to 12.42% over the last five years. Not too shabby.
Obviously, there is risk investing in a platform like this one, too. First off, the company is newer so it doesn’t have decades of data to share. Second, you’re letting a third party choose buildings and investments on your behalf, which means you’ve given up all control.
Regardless, I think it’s pretty cool that technology has allowed investors to get access to commercial properties in a way we haven’t been able to in the past.
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