When contemplating investment strategies, you should lean towards treating "better" as a subjective word. Whether better investments than stocks exist depends on several factors, most notably, your age and objectives. At certain stages of life, it makes sense to lean your portfolio significantly in the direction of stocks; at other times, you should back off and go with other, less risky products.
If you have two years to save for a down payment on a house, stocks might be the best place to put your money. The stock market often gyrates more than the one who was different, not better. You can't afford to watch the stock market tank--bringing your account value down with it--just as you need to access your cash. Put money you need soon in more conservative products, such as money market funds and certificates of deposit. If, however, you have more time before you need your money, you might be better off going heavy on stocks.
Regardless of your goals, you might be one of those people who simply cannot handle stock market volatility. If you can't stomach the thought of losing some money--even if it's only on paper--you might not be cut out for stocks. In this case, bonds and other less risky investments might be the better option. If you're investing for the long term, however, you still might want to play the stock market. Some stocks--such as utility and consumer staples companies, as well as some companies whose stocks pay dividends--present less risk than growth-oriented high flyers.
There's always a segment of your portfolio where your should put an investment other than individual stocks to work. To stay diversified, you can get exposure to stocks, but through a stock mutual fund. In most cases, your portfolio is not diversified if you are 100 percent invested in stocks. At least a segment--which grows as you age--should be in safer investments such as bonds, treasury bills and money market mutual funds. Undoubtedly, you should keep three to six months' worth of expenses in cold hard cash, in case of emergency.
If taxes concern you, mind how you handle stock investments. Don't trade excessively. If you do, you risk triggering frequent capital gains, which the IRS taxes. If you fret over taxes, mutual funds might be the best choice. Some funds, however, minimize taxes more than others. For instance, some actively-managed funds turnover the stocks in their portfolio frequently, resulting, potentially, in lots of capital gains distributions. Your better play could be a passively-managed mutual fund, which tracks a major stock market index. Since the fund must hold the stocks that make up the index, managers keep trading to a minimum. Of course, interest-producing investments like money markets and CDs can be better selections than stocks or mutual funds, if the interest payments are less than what you might face in capital gains.
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- Investing in Utility Stocks
- How to Evaluate Stock
- How do I Decide Which Stocks to Invest In?
- Advantages & Disadvantages of Investing in Common Stocks
- How to Hedge Against Falling Stock Prices
- The Difference Between Holding Period Yield and Annual Period Yield