Financial advisors have a wide range of investment options to recommend, but they often focus on a few common strategies based on your goals, risk tolerance, and market conditions. They will likely recommend assets like Roth accounts, index funds, diversification, annuities, mutual funds and exchange-traded funds (ETFs). Each of these assets can play a key role in helping you build a balanced portfolio for your specific goals and needs. Here’s a roundup of five investment options for your needs.
A financial advisor can help you analyze investments and manage risks for your portfolio.
1. Use Roth Accounts
Financial advisors often recommend Roth accounts, including Roth IRAs and Roth 401(k)s, due to their tax advantages. Unlike traditional retirement accounts, savers contribute to Roth accounts with after-tax dollars. That means they pay taxes on the money before it goes into the account.
The benefit is that both the growth of investments and withdrawals made during retirement are tax-free, provided certain conditions are met. This can be particularly advantageous for savers who anticipate being in a higher tax bracket in retirement, as it allows them to lock in the current tax rate and avoid paying higher taxes on withdrawals later.
Roth accounts also offer added flexibility compared to traditional IRAs. Roths are not subject to required minimum distribution (RMD) rules, so they provide more control over retirement funds. This feature can be especially beneficial for estate planning, as it enables passing on tax-free income to heirs.
2. Invest in Index Funds
Investing in index funds is a popular strategy among financial advisors due to its simplicity, cost-effectiveness and potential for long-term growth. Index funds seek to mirror the performance of a specific market index, such as the S&P 500, by holding a diversified portfolio of stocks that make up that index. This passive investment approach typically results in lower fees when compared with actively managed funds. And the broad market exposure helps mitigate risk associated with investing in individual stocks.
Index funds have a history of delivering consistent returns. While no investment is without risk, index funds have generally outperformed many actively managed funds, especially over the long term. Additionally, index funds offer transparency, as their holdings are publicly available and closely tied to the index they track.
3. Diversify Your Portfolio
Diversification is a fundamental strategy financial advisors often recommend to mitigate risk and enhance returns. By spreading investments across various asset classes, such as stocks, bonds and real estate, investors can reduce the impact of a poor-performing asset on their overall portfolio.
This approach helps balance risk while tapping into the growth potential of various sectors. Diversification is especially useful in volatile markets, providing a buffer against major losses and helping keep your financial goals on track.
When diversifying, advisors consider clients’ risk tolerance, investment horizon and financial objectives. A well-balanced portfolio typically includes a mix of domestic and international investments, as well as a blend of growth and income-generating assets. Regularly reviewing and rebalancing the portfolio is necessary to maintain the desired level of diversification as market conditions and personal circumstances change.
4. Consider Annuities
Annuities may be recommended by financial advisors to individuals seeking reliable retirement income. These are contracts with insurance companies calling for the client to make a lump-sum payment or series of payments in exchange for small, regular future disbursements. Annuities can provide steady, guaranteed income for life, which can make them a good fit for retirees looking to supplement Social Security benefits or pension plans.
When considering annuities, advisors weigh benefits against potential drawbacks. One advantage is the opportunity for tax-deferred growth. This allows the investment to compound over time without immediate tax implications. This can be particularly advantageous for individuals in higher tax brackets. However, annuities are complex and often come with fees and surrender charges, which can impact overall returns.
5. Invest in ETFs or Mutual Funds
Exchange-traded funds (ETFs) and mutual funds are often recommended by financial advisors to diversify portfolios and manage risk. These funds pool money from multiple investors to purchase a diversified portfolio of stocks, bonds or other securities.
Financial advisors typically suggest mutual funds and ETFs for their ability to provide broad market exposure, which can be particularly beneficial for those new to investing or looking to balance their risk. Beyond those broad similarities, each type offers significantly different features.
ETFs trade on stock exchanges and are subject to price fluctuations like individual stocks. Mutual funds are bought and sold at the end of the trading day at their net asset value.
ETFs and mutual funds also have very different management styles and fee structures. ETFs are generally passively managed, which often results in lower fees when compared with actively managed mutual funds. Mutual funds may be passively managed, but many fund managers actively make investment decisions in an attempt to outperform the market. Active management can produce higher returns, but reliably costs more in fees.
Bottom Line
Knowing the investment strategies that financial advisors may recommend can give you a better idea of what to expect during a consultation. These strategies typically involve a mix of asset classes like stocks, bonds and real estate to match your risk tolerance and financial goals. Common recommendations include mutual funds, ETFs, index funds, Roth accounts and annuities.
Tips for Investment Planning
-
A financial advisor can help you create and manage an investment portfolio that is based on your specific needs and goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
-
If you want to know how much an investment could grow over time, SmartAsset’s free investment calculator could help you get an estimate.
Photo credit: ©iStock.com/katleho Seisa, ©iStock.com/yasindmrblk, ©iStock.com/Goodboy Picture Company
The post 5 Investment Strategies Financial Advisors May Recommend appeared first on SmartReads by SmartAsset.
