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We always hear that building wealth is a marathon not a sprint, but it’s easy to get bogged down when you’re not sure where to start.Thanks to technology and the Internet, almost and also There’s a lot to absorb about personal finance and investing these days. Not only can you talk to a financial advisor, invest with a robo-advisor, or manage your investments entirely on your own, but you can also trade individual stocks, invest in index or mutual funds, or buy odd shares of companies you like.
Then there is the world of cryptocurrencies, non-fungible tokens (NFTs) and digital assets, which some experts promote as the best way to increase your net worth. All of this begs an important question: What’s the best way to build long-term wealth?
At the end of the day, there are many ways to build a solid portfolio using stocks, bonds, mutual funds, real estate, and more. However, the right strategy for you really depends on how much extra cash you have, your tolerance for risk and when you might need to use your funds in the future.
Investing is the act of buying financial assets with the intention of increasing your wealth through the appreciation in value of those assets and, in some cases, the payment of interest or dividends. While you can invest through a financial advisor or with the help of a brokerage firm, you can also set up your own investment account and invest in alternative options outside of traditional securities.
According to financial advisor Tyler Schulte, host of the Staying Rich in Retirement podcast, one of the biggest factors to consider before getting started is your investing time horizon. “While 10 years may feel like a long time to some, in the investment world, 10 years is nothing,” Schulte said. “Anything can happen in ten years.”
Schulte used the period from January 2000 to December 2009 as an example, during which the S&P 500 actually fell by 0.95%. If you have a 10-year investment horizon, diversification is important and it may be difficult to be all-in on one risky asset class, the adviser said. In turn, this means you may have to expect lower returns.
Another factor to consider is your tolerance for risk. For example, the U.S. stock market and Bitcoin are both widely known as long-term investments, yet they have very different risk profiles. Knowing how much risk you can take without panicking and selling is a very useful factor in choosing smart long-term investments, Schulte said.
Building wealth requires diversification, proper asset allocation, and plenty of time. Here are some of the best investments that will allow you to build lasting wealth.
Stock ETFs and Mutual Funds
Exchange-traded funds (ETFs) and mutual funds are funds that consist of a collection of similar assets, such as stocks, bonds, commodities, or other types of assets. ETFs can be bought and sold through stock exchanges, while mutual funds are usually purchased directly from the company that manages the fund.
Over time, exposure to the broad stock market through ETFs and mutual funds is one of the surest ways to build long-term wealth, says Brian Bruggeman, director of financial planning at Baker Boyer.
However, when you choose a strategy like this, be sure to stick with it. Investors are often their own worst enemies, and adapting to market ups and downs is critical to staying the course and compounding your money, says Bruggeman.
Bruggeman added that as investors become more comfortable with their portfolios, they can begin to take a more focused approach to strategies that have a reason to outperform the market over time. This includes increasing concentrated ETFs and mutual funds, which hold a smaller number of stocks but have higher exposure to each.
However, this investment option is not for everyone and definitely not for the faint of heart. “The value and momentum factors have outperformed the broader market at different times, but it takes a level of conviction to remain invested in the strategy, which has sometimes underperformed the market,” Bruggeman said.
Index funds are typically funds that charge minimal fees and track a benchmark index, such as the S&P 500 Index. Schulte said his favorite long-term investment is a basket of low-cost index funds that invest in global stocks.
Jeff Stark, senior portfolio manager and financial advisor at MAI Capital Management, says investors who want to build wealth over the long-term should consider investing in index mutual funds (or even ETFs) that use indexes like the S&P 500 or S&P 1500. “These can be the backbone of your stock portfolio,” he said.
Schulte also pointed to real estate as another important long-term investment. But because investing in primary homes typically yields subdued returns after accounting for costs and inflation, he leans toward investing in publicly traded real estate investment trusts (REITs) for exposure to such assets.
REITs comprise a collection of income-generating properties that allow individuals to invest in real estate without actually owning a particular property. Best of all, REITs allow you to invest in real estate using a taxable account or your retirement account without the hassle and stress of being a landlord.
“REITs provide easy access to income-generating real estate around the world, and they have historically provided investors with strong returns over an extended period of time,” Schulte said.
While REITs are available through any major brokerage, you can also try investing in real estate with a platform like Fundrise. The firm offers its own private equity REIT with low fees and low account minimums.
In addition to long-term investments, there are many short-term investments that can help you keep your money safe while taking advantage of compound interest.
Remember that “get rich quick” schemes are ubiquitous in the investing world, so it’s crucial to do your due diligence before investing your hard-earned money. “Consumers should be aware of misleading claims,” Schulte said. “Nobody has a crystal ball, and no low-risk, high-reward investment.”
Here are some short-term investments to consider in your financial portfolio.
Michael Mezheritskiy, a financial advisor at Milestone Asset Management Group, said individuals who may need cash for several years should avoid investing those basic funds in the stock market due to stock market volatility. Instead, he recommends checking out high-yield money market funds.
Money market funds are funds that invest in short-term assets that are easily liquidated, usually purchased through investment fund companies. “They usually pay a higher interest rate than cash at the bank and have full liquidity and FDIC insurance,” Mezheritskiy said, referring to the Federal Deposit Insurance Corporation (FDIC), a government agency that insures certain investments.
You can also look for bank accounts that you can open online if you know you will need the money in the short term. High-yield online savings accounts can help keep your money safe in the short term, despite the low expected returns in today’s interest rate environment, says financial advisor Dallin Cutler with EP Wealth Advisors. ”
Online savings accounts tend to be competitive in interest paid because they don’t have the overhead of brick-and-mortar bank branches,” he said. “Plus, most online savings are FDIC-insured up to $250,000. ”
Maggi Keating, a financial planner at FBB Capital Partners, noted that T-bills are a solid short-term investment because they are backed by the U.S. government. “These investments have a face value of just $1,000 and have maturities of 4, 8, 13, 26 and 52 weeks,” she said. Not only that, but the interest earned on your investments is also exempt from state taxes.
Finally, consider certificates of deposit (CDs) for your short-term savings, or for savings you may need to draw on for years to come. CDs typically offer higher interest rates than savings accounts because you lock the money in for a specified period of three months to five years, Keating said.
CDs can usually be purchased from your local bank, and in some cases, online, and are also FDIC insured, so you don’t have to worry about losing your money.
Building wealth isn’t just a numbers game; it’s a game against yourself that requires consistency and dedication. While there are many ways to build a portfolio that will stand the test of time, you need to consider your investment time horizon and risk tolerance before you commit.
But since time is one of the most important factors in building wealth, it’s important to start as soon as possible. So if your money is neither invested in short-term nor long-term assets, take the time to consider your options to make sure your money is working for you.
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