With so many investment options available, it can be difficult for new investors to know where to start.
But investing is a critical leveling-up compared to just saving. While inflation devalues your savings over time, investing grows your money to increase your net worth and help you achieve financial freedom.
So, in this article, we’re exploring the five best investment opportunities for new investors. We’ll show you how to get started and how to grow your investment portfolio as you gain more experience as an investor.
Best Investment Opportunities for New Investors
In no particular order, here are the five best investment opportunities for new investors.
Certificates of Deposit (CDs)
Best for: New investors who want guaranteed returns.
CDs are timed accounts with set rates of return. You invest a specific amount of money for a specific duration, knowing exactly how much you’ll walk away with at the end of the term (called the “maturity date”). For example, you might commit $600 to buy a 12-month CD with a 4% return rate. This means that you can cash out $624 at the end of the 12 months. $24 might not sound like much, but it’s money you earned for doing nothing (except leaving that money alone).
Rates are always changing with market conditions. And different financial institutions offer different rates, so it’s worth shopping around to find the best deals.
At the end of the term, you can cash out or reinvest that money. Using the example above, if you reinvest your $624 under the same terms, you’d end year two with $649. Notice that you’re leveraging the interest earned in the first year to earn even more in the second year. This is called compounding, and it is the secret to exponential growth over time!
Key Pros and Cons of CDs
Pros:
- Low risk. CDs are insured by the FDIC (up to $250K), so you can’t lose your money.
- Fixed returns. You know exactly how much you’ll walk away with upfront.
- Simplicity. There are no market fluctuations or complicated rules for new investors to worry about.
- Safe point of entry. You can learn more about how investing works while building confidence as a new investor.
Cons:
- Low returns. The certainty of CD returns is offset by their comparatively low yields. CDs might outpace inflation, but they typically don’t offer high enough returns to build wealth.
- Returns are capped. Even if the market performs unexpectedly well, there is no way to earn more than the agreed-upon rate.
- Limited liquidity. There are usually penalties for withdrawing your funds before the maturity date.
Retirement Accounts (401(k)s and/or IRAs)
Best for: New investors who want to earn tax breaks for investing for retirement.
Every American adult should have a retirement account, even if you’re in your 20s or 30s. It’s never too early to start saving for retirement. Investing early gives your money more time to grow, allowing you to maximize your compounding returns over time. Retirement accounts provide tax breaks while locking your money away to grow while you wait until retirement age (typically at least 59.5 years old) to withdraw your funds.
As a new investor, start with the simplest option available. If your employer offers a 401(k), enroll as soon as possible. You can tell your employer how much you want to contribute (like 6% of your income, for example), and they will automatically withhold that money from your paycheck, effectively automating your retirement savings. Your contributions are pre-tax, so you don’t pay income tax on contributions now. Instead, that money grows tax-free and is taxed as income when you start withdrawing it during retirement. Even better, some employers offer contribution matching, where they contribute when you do. This is basically free money!
If an employer-sponsored 401(k) isn’t available, open an IRA through any financial institution or online brokerage that offers the service. Traditional IRAs work just like 401(k)s, but they have lower limits on how much you can contribute per year. Roth IRAs use after-tax contributions, so the money has already been taxed when it enters your account and won’t be taxed when you withdraw it during retirement.
Important note: You’ll need to choose stocks, bonds, and other securities to hold in your retirement account.
- If you have an employer-sponsored account, they might give you a list to choose from. Your HR department might offer general guidance, but you might also consider meeting with a financial advisor to discuss your investment strategy.
- If you open an account with an online brokerage (like Fidelity or E*trade), you have full control to choose the stocks, bonds, and funds you want from their offerings. This can be a great learning experience, especially since these platforms offer lots of educational resources to help you.
- If you open an account with a robo-advisor (like Betterment or Wealthfront), your investments will be automated based on factors like age, contribution amounts, and risk tolerance.
Key Pros and Cons of Retirement Accounts
Pros:
- Tax benefits. Your contributions and/or earnings grow tax-free or tax-deferred.
- Compound growth. The long investment horizon gives your money time to earn compounding returns.
- Limited access reduces the temptation to withdraw funds. Since there are heavy penalties for withdrawing funds before retirement, you're more likely to leave that money to grow until you retire.
- Possible contribution matching from your employer. If offered, this is free money to help you grow your retirement account.
Cons:
- Withdrawal restrictions. Most withdrawals before retirement age are heavily penalized (with a few exceptions).
- Limited investment choices (some plans). Employer-sponsored plans may have fewer investment options. However, this limitation can actually make it easier for new investors to choose investments.
- Complex rules. The rules around contribution limits and tax implications can be difficult for new investors to understand.
Index Funds
Best for: New investors who want long-term growth in the stock market with lower fees.
Index funds are pre-packaged bundles of stocks tied to a specific market index (like the S&P 500 or the Dow Jones, for example). Instead of trying to pick winning stocks, index funds passively track the index by investing in all (or a representative sample) of the companies in that index.
This means you get exposure to the stock market without having to manually pick individual companies to invest in (or hire a fund manager to hand-select them for you).
By containing shares in stocks from multiple companies, each share of an index fund is automatically diversified. So, if one of those companies underperforms, the remaining companies can bolster your portfolio. There is still a risk that you could potentially lose money in the short term if the economy declines as a whole. However, over the long term, index funds have performed well, even providing better returns than actively managed funds! Plus, you can buy and sell whenever you want, making this option highly liquid.
You can open a brokerage account online and invest in index funds with very little money. In fact, some platforms don’t have any minimum investment amount.
Key Pros and Cons of Index Funds
Pros:
- Diversification. You can easily spread your investment capital across hundreds or even thousands of companies.
- Low fees. Fees vary by platform but have a reputation for being low, especially compared to actively managed funds.
- Proven performance. The S&P 500 Index, for example, has averaged around 10% per year over the last 30 years.
- Way to ease into the stock market. Index funds are an easy entry point into stock market investing.
- Low investment minimums. Some brokerages don’t have any minimum investment amount, so even if you can only invest $50 per month, you can still get started.
Cons:
- Market risk. While long-term returns are strong, you can still lose money in temporary market downturns.
- No active management. No fund manager is making strategic portfolio adjustments for you (although, contrary to popular belief, this doesn’t seem to hurt the performance of index funds much, if at all).
- Better returns are available elsewhere. While 10% per year is strong in the stock market, some alternative investments (like real estate, for example) offer better returns.
Real Estate Investment Trusts (REITs)
Best for: New investors who want access to the real estate market in general.
Real Estate Investment Trusts (REITs) are companies that invest in income-producing real estate. And investors can buy shares of REITs to share in those profits.
REITs are a wide category, so you may need to do a little research to find a REIT that works for you. When choosing a REIT, consider the following:
- Investment minimums. You might invest in a REIT for $100 or less, while other REITs have $50,000 minimums.
- Tradability. Some REITs can be bought and sold just like stocks, while others must be transferred through a private broker, making them less liquid.
- Public or private. Public REITs are offered to the general public and are generally overseen by the Securities and Exchange Commission (SEC). Private REITs are not.
- Niche. Some REITs specialize in a single property type or geographic location, so you’ll want to make sure their niche lines up with your investment goals.
Key Pros and Cons of REITs
Pros:
- Passive real estate exposure. You can get in on the real estate market without the high upfront expense or complications of purchasing a property.
- High dividends. REITs are typically required to pay out 90% of their profits to investors as dividends. These dividends can be passive income or reinvested for more growth.
- Diversification potential. Most REITs own multiple properties, so your investment is automatically diversified among those assets.
Cons:
- No tax breaks. Investors don’t get tax breaks from this form of real estate investment, and dividends are taxed as ordinary income instead of at favorable capital gains tax rates.
- Lack of control. You don’t get to choose which properties are included in a portfolio, and the REIT can buy or sell properties without your consent.
- Market volatility. Returns are not guaranteed. If the real estate market temporarily declines, you could potentially lose money. Generally, REITs that invest in commercial real estate are more vulnerable to market conditions than those that invest in residential real estate.
Real Estate Crowdfunding and/or Syndication
Best for: New investors who want to invest in specific real estate deals without being legally or financially responsible for the properties.
Some real estate investments offer higher return potential and more control than REITs. And you still don’t have to buy property or manage it yourself. Enter crowdfunding and syndication.
Real estate crowdfunding and syndication are very similar models. Both pool money from multiple investors to fund specific real estate projects (like a new multi-family development or a single-family house flip, for example). The project is professionally managed by a real estate sponsor who chooses the property, directs the project, oversees construction, and disburses profits back to investors.
There are a few differences between crowdfunding and syndication, most notably in the ownership structure. Syndication offers a more stable legal ownership structure, with all investors becoming partners in the entity that owns the property.
Key Pros and Cons of Crowdfunding and Syndication
Pros:
- Access to unique deals. Crowdfunding and syndication platforms offer high-value projects, like multi-family rentals, that aren’t typically accessible to the average individual investor.
- Reasonable investment minimums. Compared to the $100K+ needed to buy and renovate a property yourself, the $25K minimums of some syndication platforms are much more manageable. Some crowdfunding platforms may offer minimums as low as $500.
- Passive returns. You get the benefit of high-return potential real estate investing without any of the effort or time typically required of real estate investors.
- Flexibility. Crowdfunding and syndication can work with almost any real estate project type, so there is a range of types with different investment timelines to choose from.
- Deal-by-deal control. Most platforms allow you to choose the specific project(s) you want to invest in.
- Tax benefits. Depending on the platform, you may be entitled to tax benefits like income tax deductions on the project’s expenses or favorable capital gains tax rates on your proceeds.
- Leveraging the experience and connections of the experts. Since the deal is professionally managed, you don’t have to have any knowledge, experience, or industry connections. You can lean on your project sponsor to reduce risk and maximize return potential.
Cons:
- Lack of direct control. While you do get to choose the property, you don’t get to make individual decisions regarding details like design or marketing.
- Limited exit strategies. Your funds are typically tied up for the duration of the project.
- Accredited investor requirements. Some platforms require investors to be accredited by meeting the SEC’s income or asset minimums. Better deals are often reserved for accredited investors, so if you don’t qualify yet, start investing as a non-accredited investor until you have enough income or assets to earn accreditation.
Start Investing in Real Estate with Gatsby Investment
Gatsby Investment is a Los Angeles-based real estate syndication company that specializes in high-return potential deals in the LA residential market.
Our innovative investment strategy has resulted in average annualized returns of 22% for our investors since the company was founded!
New investors who qualify as accredited investors are welcome to explore our real estate investment opportunities and choose a project today!
If you don’t qualify as an accredited investor yet, you can still create a free account with Gatsby to receive our educational real estate investment newsletters and be notified of new projects. We’ll be here when you’re ready to maximize your investment return potential!