The stock market has received a lot of attention in recent weeks as names like GameStop have skyrocketed. However, are stocks really the best place to invest your money in 2021? It all depends on your goals and what your risk tolerance looks like.
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The stock market
The most popular way to invest money these days is in the stock market. Despite the challenges posed by 2020, stocks rose throughout the year, providing many opportunities for those who chose carefully.
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Then 2021 arrived, and investors on the Reddit forum WallStreetBets drove massive price increases for certain stocks, including GameStop and AMC. However, much of those gains have been wiped out, so those who didn’t exit while the stocks were high lost a lot of money.
If you decide to pick stocks yourself and use a trading platform like Robinhood or Interactive Brokers, it is important to tread carefully and do your research. Exchange-traded funds offer a similar experience because they are traded on the exchange, but they provide exposure to a portfolio rather than a handful selected by you. ETFs can also be safer, as many of them track major indices like the S&P 500.
The foreign exchange market (Forex)
If you want to take on more risk and take advantage of faster price movements, you might consider the foreign exchange market. The forex market is the largest financial market in the world, representing $5 trillion in daily trading activity. It allows investors to trade and speculate on currencies and how they will be valued against each other.
One of the advantages of the forex market is that it operates 24 hours a day during the week, while stock markets close overnight. Prices in the forex market are also extremely volatile, which means plenty of opportunities for profits and losses. In the forex market, currencies are traded in pairs, and investors speculate that one currency will increase or decrease in value relative to the one it is paired with.
U.S. Forex brokers also offer futures and options on currencies, allowing investors to place bets on whether prices will fall over a given period. Some ETFs and exchange-traded notes provide exposure to forex markets. So it’s an easy way to use them if you don’t want to trade currencies directly.
Retirement savings accounts
If retirement is your main investment goal, then there are many other options available. The best place to start is with a 401(k) sponsored by your employer if they offer one. Many employers will match your contributions up to a certain amount, turning 401(k) accounts into money-saving machines.
Whether or not you have an employer-sponsored 401(k), you can still invest in an individual retirement account (IRA). Traditional IRAs allow you to save money on taxes because cash infusions are made before taxes are paid on your paycheck.
However, you will pay taxes on the money when you withdraw it from the IRA in retirement. On the other hand, Roth IRAs require you to pay taxes on the cash upfront, but they provide tax-free income in retirement.
If you are self-employed, you have other options for retirement accounts. You can set up a 401(k) plan or a simplified employee pension. A SEP allows you to contribute up to 25% of your net earnings from self-employment. A solo 401(k) is very similar to a standard 401(k), except you are the only member.
Another option is a savings incentive match plan for employees or a SIMPLE IRA plan. You can contribute all your net earnings from self-employment up to $13,500 in 2021, plus $3,000 if you are at least 50 years old. SIMPLE IRA plans also allow for an additional fixed contribution of 2% or a 3% match.
Consider your goals and risk tolerance
When choosing where to invest, it’s important to align your investment method with your savings goals and risk tolerance. Some investors may be comfortable with the risks associated with the forex market or certain stocks. In contrast, others may prefer the stability of index-tracking ETFs or stocks that have a recent history of rising most of the time.
Retirement accounts offer the least risk and are set up for the long term. It’s a good idea to talk to a financial advisor to determine where to invest your money, especially if you are likely to have a more complicated portfolio.
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