To date, 2022 has been a challenging year for investors. The stock market just finished the worst first half of a year in decades, and inflation is at the highest level since 1981. Interest rates are rising as the Federal Reserve tries to combat inflation. Even so, investing is still the key for most people in building wealth and achieving goals like a comfortable retirement.
Against this background, some of the best investment options to consider for 2022 are discussed below. What are actually the best investments for you will vary based on your own financial goals and risk tolerance.
Why should you invest?
Investing is the best means for most people to accumulate money to meet various financial goals such as retirement, saving for college educations for your children, saving for the purchase of a home among others.
A properly allocated and diversified investment portfolio with risk control is one of the best ways to invest for your financial goals through all types of macroeconomic environments. If you already have a brokerage account, you can take some of these steps right away. If you prefer letting a data-driven investment professional handle the strategy, look into a roboadvisor like Betterment. Some of the options listed below require you to visit the U.S. Treasury website.
Read on to see the best investment options for 2022 and beyond.
Stocks are a core component in most investors' portfolios in 2022 and for the long-term. While the stock market has been volatile this year, stocks offer the opportunity for investors to stay ahead of inflation over time. There are a number of ways for individual investors to invest in stocks.
Mutual funds and ETFs
Mutual funds and ETFs pool the money of many investors into a fund that invests in stocks, bonds, money market instruments or a combination of these or other types of investments. Mutual funds are a core holding for many investors. They are often the main or only type of investment option offered in employer retirement plans like a 401(k).
Exchange traded funds are similar to mutual funds, except that they are traded on a stock exchange during normal trading hours. ETFs track a wide range of investment types including stocks, bonds, alternative investments and a host of others.
Many mutual funds and ETFs are also index funds. Index funds stick with the index they are designed to follow, which reduces the “style drift” that can occur with actively managed mutual funds and ETFs. Index funds also tend to have lower expense ratios than their actively managed counterparts. ETFs take cost efficiency even farther with relatively low expense ratios. They also tend to be more tax-efficient than mutual funds due to their structure.
Actively managed mutual funds and ETFs offer the opportunity for investors to have their money invested by a professional investment manager. Actively managed funds that invest in a theme or style have an investment thesis, and their managers buy and sell securities as they become relevant or irrelevant to the thesis. An ETF that invests in clean energy, for example, could include miners that produce the raw materials for batteries.
As with any of the investments discussed here, it is important to understand what the mutual fund or ETF invests in, how it invests (is it actively or passively managed?) and what the fund’s expenses are. Investors should also review how the fund has performed. Morningstar and other services will rank mutual funds relative to their peers.
Individual stocks offer investors the opportunity to invest directly in shares of companies they feel offer the potential for growth. Being a successful investor in individual stocks takes a lot of work and upfront analysis. For every success story, there are investors who have lost money in individual stocks as well. It’s important to do your research on any stock you are considering and to have a plan as to what would cause you to sell some or all of the shares.
Stocks that pay dividends offer an ongoing source of cash flow in addition to any potential for price appreciation in the price of the stock. Often these stocks tend to fare better than pure growth-oriented stocks during periods of market declines and market volatility.
Companies that have a solid record of increasing their dividend payouts over time are generally considered to be well-managed companies with solid cash flow. Beyond the income provided by the dividends, the ability to continue to pay them at an increasing rate is generally a positive sign for investors.
Series I Savings Bonds
I bonds have come into the limelight due to the level of inflation, which hit a 40-year high in the first half of 2022. Series I savings bonds are risk free investment vehicles offered by the United States Treasury. They are a type of savings bond and are purchased directly from the U.S. Treasury.
The rate of interest is tied to inflation. Currently, the interest rate is 9.6% for bonds purchased through the end of October of 2022. They can be purchased electronically or by using your federal income tax refund.
For those looking for a high yielding, safe fixed income investment, I bonds are an alternative worth looking at. For those who don’t need immediate access to the money invested, I bonds can offer a solid return.
Interest is added monthly and is paid when the bond is redeemed. The bonds must be held for at least one year. They can be held as long as 30 years.
Some things to keep in mind when considering I bonds:
- They cannot be purchased in a brokerage account or held in an IRA.
- There is a $10,000 annual limit on the amount of these bonds that can be purchased per person.
- If the bonds are redeemed prior to being held for five years, you would forfeit the interest earned from the prior three months. After five years there is no penalty.
- The bonds are exempt from state income taxes.
- Interest is federally taxable, but the interest can be excluded from federal income taxes to the extent the bonds are used for educational expenses.
With the current high level of interest rates, I bonds may offer a solid option for the fixed income portion of many investors' portfolios.
High-yield savings accounts
With higher interest rates, investors should look for the best rates on savings accounts for cash holdings. Generally online savings accounts and cash management accounts will provide higher yields than those offered by traditional brick and mortar financial institutions. These accounts are covered by FDIC insurance up to the amounts in place at any given time.
These accounts are a good option for risk-averse investors and for the cash portion of an investor’s portfolio. High-yield savings accounts can offer a bit higher interest than most other interest bearing accounts. This can be a good spot for cash reserves that the investor needs to be able to access quickly.
In choosing a high yield savings or cash management account be sure to fully understand if there are any restrictions on your ability to access your cash. For example, are monthly withdrawals limited to a set number or amount? As with any interest bearing account, you will want to be sure that the interest rate is competitive so as to not lose too much ground to inflation in terms of spending power.
Short-term certificates of deposit
A certificate of deposit is an interest bearing account opened at a bank, savings and loan or a credit union. CDs must generally be held until maturity in order to earn the full amount of interest and to avoid any interest penalties for an early withdrawal. CDs are FDIC insured.
CDs can have maturities that range from a month to several years. In our current environment it can make sense to ladder several shorter-term CDs that mature at set intervals. This might be three months, six months and a year for example. As each CD matures, you can invest in another CD if interest rates are still favorable or take the proceeds and invest the money elsewhere.
CDs are low risk in terms of losing your principal, but there is a degree of reinvestment risk. In a period of declining interest rates it may be tough to reinvest the proceeds at the rate that was being earned on the maturing CD. In a period of rapidly rising rates, investors may have locked in a rate and not be able to take those funds and invest in higher rate CDs. The latter is a good reason to stagger maturities on several CDs.
Investors may find the best CD rates at online banks versus traditional brick and mortar locations.
Treasury Inflation-Protected Securities or TIPS are Treasury fixed income securities with an interest rate that adjusts for inflation. As Treasury securities, TIPS are considered to be risk-free assets.
TIPS are issued in a wide range of maturities. The interest rate is adjusted up or down periodically based on changes in the Consumer Price Index (CPI). In a period of high inflation as we are currently experiencing this offers investors in TIPS protection against a loss in purchasing power.
Individual TIPS can be purchased as new issues directly from the Treasury Department. Individual TIPS can also be purchased on the secondary market through a broker or brokerage firm.
Beyond holding individual TIPS, there are a number of ETFs and mutual funds that invest in TIPS. Some of these funds invest in shorter-term TIPS, others invest in intermediate or longer-term TIPS. These mutual funds offer investors the opportunity to own a portfolio of various TIPS under a single fund umbrella.
Just like other bonds, TIPS are subject to price fluctuations due to the direction of interest rates. For holders of individual TIPS who hold the securities until maturity, this is not a risk. For those who look to sell their bonds in the secondary market, they could be worth more or less than what they paid for the bonds. This is also a risk for holders of ETFs and mutual funds investing in TIPS. Like all types of bond funds, the funds themselves never “mature.”
Alternative investments is a broad category of investments that don’t fall under the traditional umbrella of stocks, bonds or cash. Examples of alternatives include:
- Gold and other precious metals
- Art and collectibles
- Bitcoin and cryptocurrencies
- Private equity
- Hedge funds
One of the benefits of alternative investments is that they usually have a low correlation to stocks, bonds and cash. As such they can act as an excellent portfolio diversifier. For example gold is often considered to be a hedge against inflation. It has traditionally been a store of value during periods of economic upheaval.
Technology has led to new and innovative ways to invest in the alternative space. One example is the Masterworks platform. Masterworks allows smaller investors to invest in a portfolio of artwork by purchasing fractional shares in the fund for an initial investment as low as $1,000. Shares of Masterworks can also be bought and sold on the secondary market.
Masterworks allows smaller investors to use the buying power of the Masterworks platform to participate in this alternative asset class. As with any investments, potential investors should understand the platform’s fees before investing.
Beyond direct investment in commodities and precious metals like gold, investors can invest via mutual funds and ETFs. For example, there is a gold ETF that is backed by the physical commodity that trades like any other ETF. The price tends to track the price of the underlying commodity.
Alternative investments come in many formats and types. As with any type of investment, you should always understand what you are investing in and why this particular investment option is beneficial for your portfolio. Also understand any and all expenses associated with the investment and any trading restrictions.