Welcome to the Knowledge Center
What Are the Different Investing Types?
There are plenty of investment types worth your attention, but which ones should you genuinely consider? In this guide we’re exploring the different types of investments and how a life insurance policy could be one of the safest bets when it comes to looking after your future.
Searching for that pot of gold
From a young age we’re told to look after our financial future by making safe investments. Yet, it can be a little daunting thinking about your later years in life and the best ways to build wealth. Do you invest in stocks and bonds, open a retirement account, buy real estate, or explore cryptocurrency options? Or maybe all four!
Don't let the options available scare you, as it's good to have a wide variety of choices for investing. The key is to have a good grasp of what each one entails and how they work to provide you with a solid financial return.
Everyone’s financial situation is unique, so it’s about having all the information to hand so you can make the right decisions. You can invest no matter how much–or how little–money you have available.
Here are four primary investment types and how they can help you build wealth, along with how life insurance can act as an investment vehicle.
What is a brokerage account?
The stock market is the number one way that Americans build wealth and save over the long term. With a brokerage account, you can deposit cash and purchase both stocks and bonds. It also allows you to deposit mutual funds, ETFs, and loads of other investment assets.
A brokerage account can be used equally for short-term profits and long-term investing. You can get a brokerage account from a variety of firms, including full-service brokers, automated Robo-advisors, and online brokers. A few examples include Charles Schwab, E*Trade, Robinhood, or Wealthfront.
In general, brokerage accounts are popular with people who are looking at the long term but aren’t thinking ahead to retirement. All cash and securities in a brokerage account are insured by the Securities Investor Protection Corporation (SIPC).
Pros of a brokerage account
Brokerage accounts are more flexible than 401(k) and Roth IRAs, as they don’t apply income or contribution limits. They provide a variety of investment options, which can lead to market growth. There is also no limit on the amount of brokerage account you can have, and investors can withdraw money at any time.
Cons of a brokerage account
There are no tax benefits with a brokerage account, so you need to pay taxes when you sell assets or stock you’ve invested. That means you could be liable to pay capital gains taxes, dividends tax, and other taxes on your holdings.
IRA (Individual Retirement Account)
An individual retirement account, otherwise known as IRA, is an investment account for individuals who are saving for when they retire. There are several types of IRAs: traditional, Roth, SEP, and SIMPLE.
Some of these come with tax benefits, with withdrawals either tax-deductible in a traditional IRA or completely tax-free in a Roth IRA. Most people use an IRA as a top-up to their 401(k), as the 401 might not provide enough for retirement. You can get them from banks, Robo-advisors, and brokers.
They work by investing money, stocks, bonds, and other assets into them. Your account then grows its balance over time and, depending on how much you invest and contribute, you can withdraw the money when you retire. With an IRA, you're essentially investing more upfront than you would with a typical brokerage account.
Pros of IRA
IRAs are super easy to set up, and you just need to earn taxable income to be eligible to open and contribute. They also come with tax breaks, meaning you won’t need to pay taxes on your untaxed earnings or contributions until you’re required to take distributions at age 72.
Cons of IRA
IRAs are intended for retirement, and there are often penalties involved if you withdraw your money before you reach retirement age. Traditional and Roth IRAs come with a 10 percent penalty on top of taxes owed if you withdraw before the age of 60. Additionally, you can only contribute up to $6,000 a year into an IRA, or $7,000 if you’re over the age of 50. Last but not least, your ability to contribute to an IRA starts phasing out if you make too much money ($125,000 for single income or $198,000 for total household income).
Real estate investing
Investing in real estate is certainly a long game, but it can be rewarding–plus, unlike stocks and bonds or cryptocurrency, it gives you a tangible asset. By renting out the properties, you can receive a regular income while the property enjoys capital growth over time.
At least, that’s the plan. Like all investing, however, there are some risks involved–especially if you’re investing with a mortgage. Should the property fall into negative equity, you would owe more on the mortgage than the house’s worth.
Market volatility can also see dips in the real estate sector. Therefore, you want to aim to invest in areas where there is growth potential, either through regeneration or neighborhoods with good travel infrastructure and local amenities.
Pros of real estate
If you're buying a property to rent it out, then you can enjoy regular cash flow through the rent while your house accumulates value over time. Alternatively, you can buy somewhere and flip it, generating a profit on your initial purchase price. Additionally, you can deduct some property and real estate taxes on your primary and secondary homes.
Cons of real estate
Investing in real estate can be a costly venture. You will need to pay the monthly mortgage, as well as maintenance costs, should you decide to rent it out. Other expenses include utilities and insurance costs. If you buy a property and struggle to rent it out, you will have to cover all of these costs while it sits empty, otherwise known as a void period. Also, you will be liable for property taxes, income taxes on investment properties, and wear and tear costs for the house.
Cryptocurrency has spent a lot of time in the news lately, thanks to a certain Elon Musk and his Dogecoin. While many are only now just discovering forms of cryptocurrency, it has long been one of the most popular investment types for those in the know.
Investing in cryptocurrency lets you buy goods and services or trade them for a profit. It's a digital currency that uses an online ledger with strong cryptography to secure online transactions.
Bitcoin is the most popular form of cryptocurrency (there are more than 10,000 types), and it tends to peak and dip in value rather dramatically. For example, it peaked at $65,000 before plummeting by almost half of its value. Many people see cryptocurrency as the currency of the future and are trying to buy up as much as possible.
Pros of cryptocurrency
You can invest in cryptocurrency anonymously and have a certain level of autonomy. Bitcoin is also peer-to-peer, so users can send and receive payments to or from anyone on the network without approval from any external source of authority. You also don't need to worry about banking fees, plus there are low transaction fees on international payments, and you can use your mobile to pay for coins.
Cons of cryptocurrency
The largest concern around cryptocurrency is its scalability. When compared to VISA, for example, the number of transactions processed every day is nowhere near as much as the financial giant. There are also cybersecurity issues with cryptocurrency. It's a digital technology, which means it can be susceptible to security breaches and even fall into the hands of hackers.
Using life insurance as an investment vehicle
One of the investment types we haven't spoken much about yet is life insurance. Now, we know what you're thinking: "isn't that related to a payout when I die. What's it got to do with investing?" And look, we get it–most people think of life insurance as financial protection for their family after death.
But if you get permanent life insurance, you can also use it as an investment vehicle while you're still alive. That's because it has a cash value element that grows tax-free over time and can be accessed later on in life.
You can either withdraw the money or take it out as a zero-interest loan against your policy. And don't be put off by the word "loan." Your savings with permanent life insurance grow on top of your original coverage amount–if you withdraw early, you essentially take out the loan against your savings. In other words, you're borrowing from yourself.
Then, when you pass away, the amount loaned is cleared with your death benefit (which has increased since you first got coverage), with the rest going to your beneficiaries. Even though it's called a loan, it's not like you're taking it out from the bank with a high APR rate. It's interest and tax-free, and you never have to pay it back.
Permanent life insurance might not have the same coverage in the media as cryptocurrency, and it’s not a legacy investment method like IRAs, but it can safeguard your future and guarantee returns.
Therefore, it's one of the investment types you should give plenty of thought to when you're thinking about the best way to grow your wealth. Especially as it's tax-free and you still get a death benefit for your loved ones.
In conclusion: picking the right investment types for your future
Having options is never a bad thing, and you certainly have lots to consider when it comes to thinking about growing your wealth in the future. While stocks and bonds, and IRAs can be great ways to invest, it's also worth considering permanent life insurance. As far as safe bets go, it's one of the most robust, and it can set you up nicely for retirement, so you have a little nest egg waiting for you.