5 best ways to invest money

There is no one-size-fits-all when choosing the best way to invest your money. Instead, it all comes down to your risk tolerance, goals and how long you plan to hold your investments.

Best investments

I compared multiple investment options and chose the five best ways to invest your money based on the return rate, liquidity, how much activity and knowledge you need to have to invest and whether you are investing for retirement or not.

1. Best investment for hands-off investors: robo-advisors

Robo-advisors are automated trading systems that invest your funds on your behalf. All you have to do is set up guidelines, such as your risk tolerance and preferred investment types, and the algorithm will allocate your funds and rebalance your portfolio accordingly.

• Where to open: Brokers and financial companies like Vanguard, SoFi®, Betterment® and Acorns
• Risk level: Low — but this largely depends on your settings
• Liquidity: High
• Minimum: Starting from $0 — depending on the robo-advisor
• Fees: From $0 to 1% — depending on the robo-advisor

What Matt thinks about robo-advisors

No-cost, algorithm-driven portfolios are a no-brainer for cost-conscious investors who want to outsource portfolio management. Many robo-advisors construct portfolios using low-cost ETFs, and this offers a simple solution to build a diversified portfolio without requiring much legwork on your part. You just need to focus on regularly investing.

— Matt Miczulski, Editor, Investments.

2. Best investment for conservative investors: government bonds

Investing in US government bonds is one of the safest investments you can make. That’s because the chances of the US government failing to pay off its debts are low — which is why this investment option comes with relatively low return compared to other options like stocks and ETFs.

• Where to buy: The US Treasury website and brokers like Interactive Brokers.
• Risk level: Low
• Liquidity: High
• Minimum: No investment minimums with bond ETFs, but a $100 minimum investment if you buy bonds directly
• Fees: From $0 to 0.1% — depending whether you buy bond ETFs or bonds directly

3. Best investment for risk takers: cryptocurrencies

Being a relatively new investment option among mainstream investors and institutions, cryptocurrencies are a high-risk, high-reward investment. What’s more, there are always new coins coming out or older ones getting the spotlight every now and then. Because of that, the rate of return could be way higher than investing in stocks. But since cryptos aren’t currently regulated, you could lose your entire investment.

• Where to buy: Brokers and crypto exchanges
• Risk level: High
• Liquidity: High
• Minimum: No investment minimums
• Fees: Starting from 0% depending on the broker and the exchange

4. Best investment for retirement: index funds

Index funds offer one of the best risk/reward ratios for long-term investing. That’s because major indices have consistently gone up in the past 90 years. For example, S&P 500 has averaged a 10% annual return during this time. If you invested $500 each month for the past 30 years, you would now have about $1 million to retire on.

• Where to buy: Buy index ETFs on brokers like Robinhood and SoFi
• Risk level: Medium — depends on which funds you invest in
• Liquidity: High
• Minimum: No investment minimums
• Fees: Annual fee of about 1% depending on the fund

5. Best investment for active investors and traders: stocks

Stocks have the greatest variety of trading options because you can choose startup companies that are yet to explode, companies that pay dividends, companies that change the world and more. This way, you can directly control your risk and reap the benefits if you choose the right stock.

• Where to buy: Brokers
• Risk level: Medium — depends on which stocks you invest in
• Liquidity: High
• Minimum: No investment minimums
• Fees: Starting from $0 depending on the broker

5 steps to start investing

Now that you have a rough idea of the best ways to invest your money, here’s how to start.

1. Identify your goals, time frame and risk tolerance

Before you commit your funds, consider how long you want to keep your investment. If you’re nearing retirement, typically a low-risk investment, such as bonds, is the way to go. You would earn less, but the risk is minimal compared to index funds, stocks or crypto.
If you’re in your 20s and 30s, however, you have a long way to go before retirement. Setting aside some funds for riskier investment options like crypto is worth considering.

2. Decide how much help you need

Investors who are just starting out or those who never had the chance to manage their portfolio should consider using a robo-advisor or consulting an expert. Investors who want to try their luck can always start by themselves, but in this case, make sure you use money that won’t impact your life if you lose it.

3. Choose your account type

Depending on your goals and investment time frame, you can choose several types of accounts:

• 401(k). This is a retirement account offered by your employer. The cool thing about this type of retirement account is that sometimes your employer matches your monthly contributions, which doubles your monthly deposit right away. You can typically invest in stocks and bond mutual funds through your 401(k).
• Individual retirement accounts (IRAs). An IRA is another type of retirement account anyone can open regardless of their employment status. IRAs let you contribute less than a 401(k) each year, but they offer a greater variety of investment opinions, like stocks and ETFs. What’s more, you can combine the two retirement accounts without any issues.
• Individual non-retirement accounts. This is the most common type of account you can open with any broker and start investing your money as soon as your funds land. The main difference between this type and the retirement account is that some retirement accounts can grow your investments tax-free, while investments in non-retirement accounts are taxed as soon as you sell your assets.

4. Open your investment account

Depending on who manages your account, there are two types of investments accounts to choose from:

• Standard account with an online broker. This is the most common option for those who want to manually place trades and choose their investments.
• Robo-advisor. This option is for those who want an algorithm to manage their account based on parameters set by the investor.

5. Invest

Once you open and fund your account, it’s time to put your money to work. Make sure to choose the best way to invest, depending on your financial situation and goals.

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