Investors may be reeling after a period of high inflation and the Federal Reserve rapidly raising interest rates in 2022. Stocks have spent most of the year in decline, even entering a bear market, and with a recession looming, investors may believe there is no good place to invest. However, if you extend your investment horizon, 2023 could set you up for good returns later on.
So, what are the smartest investments to make this year? The list below begins with safer investments and progresses to those that should deliver higher returns but may be more volatile, providing you with a healthy mix of growth and safety in what appears to be a difficult market environment.
Why should you invest?
Investing can supplement your income, fund your retirement, or even get you out of a financial bind. Above all, investing increases your wealth by assisting you in meeting your financial objectives and increasing your purchasing power over time. Perhaps you recently sold your home or received a windfall. Allowing your money to work for you is a wise decision.
While investing can help you build wealth, you must balance potential gains with the risks involved. And you’ll want to be in a financial position to do so, which means you’ll need manageable debt, an adequate emergency fund, and the ability to ride out market ups and downs without having to access your money.
There are so many ways to invest, ranging from very safe options like CDs and money market accounts to medium-risk options like corporate bonds and even higher-risk picks like stock index funds. That’s great news because it means you can find investments that provide a range of returns while also fitting your risk tolerance. It also implies that you can mix and match investments to create a well-rounded and diverse — and thus safer — portfolio.
1. High Yields Savings accounts
An online savings account with a high yield pays you interest on your cash balance. And, like a savings account earning pennies at your local bank, high-yield online savings accounts are easily accessible vehicles for your money.
What are they useful for? A savings account is a good option for those who will need cash in the near future. A high-yield savings account is also suitable for risk-averse investors who want to avoid the risk of losing their money.
Risks: The banks that offer these accounts are FDIC-insured, so you won’t lose your deposit.
While high-yield savings accounts, like CDs, are considered safe investments, you risk losing purchasing power over time due to inflation if rates are too low.
Online banks typically offer much higher interest rates due to lower overhead costs.
Furthermore, you can usually get your money by quickly transferring it to your primary bank or by using an ATM.
Where to find them: For the best rates, check out Bankrate’s list of the best high-yield savings accounts. Otherwise, banks and credit unions offer savings accounts, though the interest rate may not be the best.
2. Short-Term Certificates of Deposit
CDs, or certificates of deposit, are issued by banks and typically pay a higher interest rate than savings accounts. Short-term CDs may also be better options if you anticipate rising interest rates, allowing you to reinvest at higher rates when the CD matures.
What are they useful for? CDs can be a good choice for retirees who don’t need immediate income and can lock up their money for a short period of time due to their safety and higher payouts. A CD is ideal for risk-averse investors, particularly those who need money quickly and are willing to tie up their cash in exchange for a higher yield than they would find in a savings account.
CDs are considered risk-free investments. They do, however, carry reinvestment risk, which means that when interest rates fall, investors will earn less when reinvesting principal and interest in new CDs with lower rates, as we saw in 2020 and 2021.
The opposite risk is that interest rates will rise and investors will be unable to profit because their funds have already been locked into a CD. With interest rates expected to rise even further in 2023, it may make sense to stick to short-term CDs in order to reinvest at higher rates in the near future.
It is critical to remember that inflation and taxes can significantly reduce the purchasing power of your investment.
The financial institution pays you interest on a CD at regular intervals. When it matures, you will receive your original principal plus any accrued interest.
It pays to shop around for the best deals online.
Where to get them: Bankrate’s list of the best CD rates will help you find the best rate across the country, rather than just what’s available in your area.
Banks and credit unions also typically offer CDs, though you’re unlikely to find the best rate locally.
3. Bonds I Series
Overview: The United States Treasury issues savings bonds for individual investors, with the Series I bond becoming increasingly popular. This bond contributes to inflation protection. It pays a base interest rate and then adds an inflation-adjusted component. As a result, as inflation rises, so will the payout. However, the opposite is true: if inflation falls, so will interest rates. Every six months, the inflation adjustment is reset.
What are they useful for? Series I bonds, like other government-issued debt, are appealing to risk-averse investors who do not want to risk default. These bonds are also a good option for investors who want to hedge against inflation. However, investors are limited to purchasing $10,000 in a single calendar year, though you can use up to $5,000 of your annual tax refund to purchase Series I bonds as well.
Risks: The Series I bond protects your investment from inflation, which is a major disadvantage of most bonds. These bonds, like other government-issued debt, are regarded as among the safest in the world in terms of default risk.
Rewards: Series I bonds earn interest for 30 years if not redeemed for cash, but the rate varies with the current rate of inflation.
Where to get them: You can purchase Series I bonds directly from the United States. Treasury can be found at treasurydirect.gov. The government will not charge you a fee for this service.
4. Corporate bond funds for the short term
Overview: Corporations may raise funds by issuing bonds to investors, which can then be packaged into bond funds that own bonds issued by hundreds of corporations.
Short-term bonds typically have maturities ranging from one to five years, making them less susceptible to interest rate fluctuations than intermediate- or long-term bonds.
What are they useful for? Corporate bond funds can be an excellent choice for investors seeking cash flow, such as retirees, or those seeking to reduce overall portfolio risk while still earning a return. Short-term corporate bond funds may be appealing to risk-averse investors seeking a higher yield than government bond funds.
Risks: Short-term corporate bond funds, like other bond funds, are not FDIC-insured.
There is always the possibility that a company’s credit rating will be downgraded or that it will run into financial difficulties and default on the bonds. To mitigate this risk, ensure that your fund is comprised of high-quality corporate bonds.
Investment-grade short-term bond funds frequently provide higher returns to investors than government and municipal bond funds. However, greater rewards come with increased risk.
Where to get them: You can buy and sell corporate bond funds through any broker who offers ETFs or mutual funds.
Most brokers allow you to trade ETFs without paying a commission, whereas many brokers may charge a commission or require a minimum purchase to purchase a mutual fund.
5. Dividend stock mutual funds
Dividends are portions of a company’s profit that can be distributed to shareholders on a quarterly basis. So, dividend stocks are those that pay out cash dividends — not all stocks do — whereas a fund combines only dividend stocks into a single, easy-to-purchase unit.
What are they useful for? Individual stock purchases, whether dividends are paid or not, are better suited for intermediate and advanced investors. However, you can reduce your risk by purchasing a group of them in a stock fund. Dividend stock funds are a good choice for almost any type of stock investor, but they may be better for those looking for income. Those who require income and can commit to long-term investments may find these appealing.
Risks: Dividend stocks, like any other stock investment, carry some risk. They’re considered safer than growth stocks or other non-dividend stocks, but you should pick them carefully.
Invest in companies with a track record of increasing dividends rather than those with the highest current yield. That could be an indication of impending trouble. However, even well-regarded companies can be hit by a crisis, so a good reputation is no longer a guarantee that the company will cut or eliminate its dividend.
However, by purchasing a dividend stock fund with a diverse collection of assets, you can eliminate many of these risks and reduce your reliance on any single company.
Dividend-paying stocks can make your stock market investments a little more secure.
A dividend stock will not only provide you with long-term market appreciation, but it will also provide you with cash in the short term.
Where to get them: Dividend stock funds can be purchased as ETFs or mutual funds from any broker who deals in them. ETFs may be more advantageous because they typically have no minimum purchase amount and are commission-free.
Mutual funds, on the other hand, may have a minimum purchase requirement and, depending on the broker, may be subject to a commission.