“In investing, what is comfortable is rarely profitable,” says Robert Arnott.
Finance 101 says that risk is compensated for with greater returns. Investors that are unwilling to take risk will need to settle for lower returns. This may work out fine for someone who wants to create long-term wealth. However, some investors out there are saving to realize their dream of starting a business.
For those investors, time is critical. They need to invest in securities that can provide ample growth in a relatively shorter time frame. Of course, this doesn’t warrant investing in an asset class without considering the associated risks.
Such investors could, however, invest in a specific set of asset classes that are available online. Again, it’s best to analyze the associated risks before investing money in any asset class. Ignoring this fact can prove to be disastrous.
5 Ways to Invest Money Online and Save for Your Dream Business
Almost all asset classes are available online for investment. All it takes is a few clicks to execute a transaction. Of course, some online investments require setting up an account beforehand. For instance, a Demat account involves a verification process that could take a couple of days.
1. Invest in USDC
USDC is a cryptocurrency. Don’t be spooked, though. Cryptocurrencies are infamous for their diabolical volatility and a certain portion of investors vow to not take such risks. This isn’t unjustified. Taking on more risk than one can tolerate is a sure-fire recipe for sleepless nights.
However, low-risk investors can gain cryptocurrency exposure through stablecoins.
Stablecoins are cryptocurrencies pegged to the value of an underlying asset, usually a fiat currency. USDC and USDT are the two most popular stablecoins. Both are easily available on Moonpay, but USDC is a relatively better choice. Let’s talk about why.
USDC is pegged to the value of USD and its value always hovers around $1. Now, this may make investors wonder how their money will grow if USDC’s value always hovers around $1.
Fair point, the money won’t grow. To be more specific, USDC is unlikely to generate any capital gains for investors. However, it can generate interest income for investors. DeFi platforms offer a generous interest on USDC deposits.
The rates vary from 4%–8% or more, which are far better than what time deposits yield. Some platforms like Youholder offer APRs as high as 12% on USDC. At 12% compound interest, the investment value will double in approximately six years.
2. Buy quality stocks
Almost every investor wants to invest in stocks. Why shouldn’t they? It offers excellent growth. Equity investments have produced the likes of Benjamin Graham and Warren Buffet. Undeniably, there’s something inherently appealing about equities.
The S&P 500 has been in an upward trend for several decades now, and everybody wants to get in on the action.
Equity investments can multiply wealth, but not always. Investors who believe that they will grow wealth just by investing in stocks with a “green upward arrow” beside its ticker, or based on a message forwarded by a friend, are headed for disappointment.
Traders and investors need a different approach to buying stocks. Here, the discussion will focus on investors.
Investors need to put in time and effort when picking stocks. When an investor buys a company’s stock, they are effectively buying a part of the business.
This makes it imperative that the investor understands the business and its fundamentals well. A business’s fundamentals include the top management’s executing capability, competitive advantage, financial resilience, and the like.
Some of these factors are quantifiable while others aren’t. Therefore, investors will require some research to gauge the viability of their investment options. However, investors that aren’t keen on researching stocks have an alternative option, too.
Such investors could opt to invest in equities via a mutual fund or an index fund. Mutual funds are actively managed funds that pool money from investors. A mutual fund employs a qualified fund manager that takes investment calls to deploy investors’ money and generate market-beating returns.
However, the efficient market hypothesis has changed investor perception regarding mutual funds. Investors now believe that index funds could be a better alternative. This isn’t without justification, though. Mutual funds are finding it harder and harder to generate alpha for their investors.
Meanwhile, index funds are performing quite well. In fact, the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) is currently the biggest fund in the U.S. with total net assets of $1.3 trillion as of this writing.
3. Buy corporate or government debt
Debt offers lower returns than equities. However, it’s important to add debt to the portfolio because it offers the benefit of diversification. Diversification helps reduce a portfolio’s overall standard deviation (i.e., risk).
Moreover, bonds also work as a hedge. When the sentiment in the equity markets turns sour, investors flock to debt. Therefore, it works as a cushion for the portfolio’s equity exposure.
The yield on debt is proportional to its duration. For instance, a bond with a maturity of 10 years yields more than a bond with a maturity of 3 years. The reason? The farther the maturity, the more time there is for the interest rates to fluctuate and bond prices to change.
The price of a bond and interest rate are inversely proportional. Say Company X issues a bond with a $100 face value and a 5% coupon rate. The bond continues to pay $5 as interest per annum until maturity regardless of other factors.
However, if the interest rate increases to 6%, investors will be willing to pay less for the bond since new bonds that will be issued in the market will offer a 6% yield. While it’s not possible to ask Company X to pay more than $5 to bondholders, the markets can adjust the bond’s price according to the interest rate.
In this case, the investors will demand a 6% yield, and they’d be willing to pay $83.33 since $83.33 x 6% = $5. Notice how Company X still pays $5 but new investors get a 6% yield.
Conversely, if the interest rate falls to 4%, the bond prices will increase to $125 to match the prevailing yield in the market ($125 x 4% = $5).
As is apparent, investors can use bonds to earn interest as well as capital gains. However, the opportunities to generate capital gains are relatively less as compared to equities because the debt markets tend to be less volatile. That being said, they do generate a fixed income that compounds over the years.
4. Real Estate Investment Trusts (REITs)
Traditional wisdom considers real estate as one of the best investment options. While this may not be true for all investors, it’s certainly worth considering. Real estate generates a fixed income in the form of rent as well as capital gains.
There are three big issues with real estate. First, real estate prices can often be out of reach of small investors. Second, real estate requires the owner to actively manage and maintain the properties. Finally, the biggest problem with real estate is its illiquidity. However, there is a better alternative that addresses all three issues.
REITs work similarly to mutual funds. They pool money from investors and invest it (mostly) in commercial real estate. REITs are legally required to pay out 90% of their earnings (i.e., rental earnings reduced by administrative and other costs) to the investors. This provides investors a steady income stream.
What’s more, REITs also benefit from price appreciation in the prices of the owned properties. Plus, REITs can be actively traded in the secondary market. Therefore, they provide ample liquidity to investors. Investors can sell their holding as and when they deem fit.
5. High-yield savings accounts and CDs
It’s always prudent to set some money aside for emergencies. Even when saving for a dream business, there is always a possibility that something could go wrong. For this reason, investors must have a portion of their portfolio allocated to liquid assets.
The problem with liquid assets is that they don’t offer good yields. While there is no liquid asset that would yield as much as other riskier asset classes, investors should consider opening an online high-yield savings account. The money remains accessible to investors at all times and earns a relatively better rate of interest than what a brick-and-mortar bank offers.
Investors may transfer this money or make withdrawals from an ATM. These accounts are FDIC-insured so investors don’t need to worry about losing their money.
CDs are another option that offers better interest rates than savings accounts. However, they cannot be prematurely withdrawn without paying a penalty. CDs, nevertheless, are a good option to park money that investors know they’ll need only after a certain while.
Invest the Smart Way
Money takes time to grow. Investors that expect to build wealth within two years should re-evaluate their plan. It’s also important to be mindful of risks. Taking on too much risk for chasing returns can often erode capital and prove to be counterproductive.
Investors no longer need to go through a pile of paperwork to invest. Almost all asset classes are available for investment online. Careful analysis of asset classes, their historic performance, future prospects, and associated risks are key to managing a portfolio. A smart investment strategy helps investors achieve their goals much faster.