Investment Vehicles for Veterans
Investment vehicles are assets or accounts used for investing and building wealth. Most people think of stocks when they think of investment vehicles. There are several other investment vehicles available to investors looking to grow their nest egg. Some are riskier than others, so it’s important to know the difference between them when deciding where to put your money. In this article, we’ve put together an overview of the different types of investment vehicles that are commonly used by investment advisors and brokers to help you be a more informed investor.
Investment vehicles are assets or accounts used for investing and building wealth. Most people think of stocks when they think of investment vehicles. There are several other investment vehicles available to investors looking to grow their nest egg. Some are riskier than others, so it’s important to know the difference between them when deciding where to put your money.
In this article, we’ve put together an overview of the different types of investment vehicles that are commonly used by investment advisors and brokers to help you be a more informed investor.
Money Market Accounts are common investment vehicles that operate like a traditional savings account at a bank or credit union. Although they pay a higher rate of interest than a savings account, the rates are still typically low and are not ideal for those that are trying to grow wealth. Banks pay higher interest rates because they are allowed to use the funds they hold in money markets for their own investments. However, the investor or owner of the account does not share in any gains the bank may receive from using the funds, only the set interest rate. These accounts keep funds “liquid,” meaning a certain number of withdrawals (usually 6 per month) are allowed without penalty and are easy to complete.
Certificates of Deposit (CDs) are offered by banks and credit unions and could be thought of as a “contract” between you and the financial institution. You agree to leave your money in an account for a set amount of time, and they agree to pay a certain amount of interest over that set timeframe. CDs are considered low risk since the returns are guaranteed. However, although interest rates have recently been increasing, historically, CD returns are lower than other investment vehicles and withdrawing funds early will result in a penalty and possible forfeiture of some or all interest.
Annuities are contracts offered by insurance companies with a goal of providing steady income at some time, typically during retirement. Funds grow on a tax deferred basis like a 401K and are subject to a penalty if withdrawn before the age of 59 ½. There are three main types of annuities: fixed, variable, and indexed. Each has different potential for payout and risk. Fixed annuities typically pay lower rates of interest than many other investment vehicles, but rates are often higher than your average CD from a bank or credit union. Fixed annuities are either deferred, meaning it will pay a fixed amount of interest out to the investor at a later date, or immediate and will start paying right away. Variable annuities offer the potential for a higher rate of return, but come with greater risk because funds are invested. Indexed annuities are a mix of fixed and variable, offering a guaranteed minimum payout, but a portion is also invested. Both variable and indexed annuities can provide greater earnings, but can be complex and hard to understand and may come with fees and early withdrawal penalties.
Bonds are issued by corporations and governments when they want to raise money. Buying a bond is like lending funds to help a corporation or municipality complete a project like new buildings or improving a county’s infrastructure. Like a CD, the investor agrees to loan the funds and the organization agrees to pay them back the value of the loan on a set date while paying interest along the way, typically twice per year. It’s important to note that the market value of bonds can change over time and some bonds are considered higher quality than others (more likely to be repaid). These higher rated bonds and those with a short maturity term usually pay lower interest rates.
Mutual Funds are investment vehicles that allow you to pool your money with other investors to buy stocks, bonds, and other investments as a way to diversify and reduce risk. They are run by professional money managers who determine when and which stocks, bonds, etc. are bought and sold inside the fund. Investors share in the gains and losses of the fund. Mutual funds are divided into different categories based upon the investment fund’s return goals. These include stock funds, money market funds, bond funds, and target date funds. Mutual funds charge fees and are subject to commissions, which could affect the overall rate of return.
Ready to start investing? Take the Veteran Saves Pledge today and choose investment savings as your goal. We’ll be your partner along the way and will send you texts and emails full of tips and resources that will keep you motivated and on the right track to meet your investment goals!