Advantages & Disadvantages of Investing

Advantages and Disadvantages of Investing
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When it comes to managing your money, there are both advantages and disadvantages of investment. The U.S. Securities and Exchange Commission (SEC) advises that you figure out your goals and your risk tolerance as a first step. Although there are no guarantees, smart planning – either on your own or with the help of a professional financial adviser – can help you build financial security.

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Types of Investment Options

The Financial Industry Regulatory Authority (FINRA) lists many types of investment options, including the following:

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  • alternative and complex products
  • annuities
  • bank products
  • bonds
  • commodities
  • cryptocurrencies
  • education savings plans
  • initial coin offerings
  • mutual funds and exchange-traded funds (ETFs)
  • retirement funds
  • security futures
  • stocks

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Choosing the right types of investment options depends on your circumstances, including your age and the amount of money you have to invest. The Minnesota State Retirement System offers a free online investor profile quiz that can help you determine your investment personality, and whether you're conservative, moderate or aggressive when it comes to types of investment options.

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Consider also:The Best Way to Invest Money

The Pros of Investing

According to Time Magazine, the average savings account paid ​0.06 percent​ as of October 2021. If you put ​$1,000​ in a savings account and did not add to it, you would have ​$1,001​ a year later – and that includes interest compounded monthly. Chief among the pros of investing is the opportunity to earn a much greater return on your money.

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BMO Global Management cites these pros of investing:

Ability to customize to your needs:​ As you go through life, your financial needs can change with new goals and priorities. The types of investment options can be tailored to fit your circumstances, including considerations of growth potential and risk.

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Outpace inflation:​ When savings account interest rates are lower than the rate of inflation, your savings can't grow in real terms over time. The U.S. Inflation Calculator lets you look at current and historical rates. For the 12 months ending August 2021, the U.S. inflation rate was 5.3 percent. An investment that pays a higher return will help you outpace inflation.

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Provide a regular income:​ Types of investment options that can give you a regular income include property, equities, annuities and bonds. If you're retired or nearing retirement age, you may want to consider an investment that can help you with day-to-day costs of living.

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Cons of Investing

Remember Black Monday 1987, the bursting of the dot-com bubble in 2000 or the 2008 financial crisis? Those who lost big money in stock market crashes certainly do. A stock market crash is an occasion in which major stock market indices lose more than 10 percent of their value over a short time period. The flip side of making money through investments is the possibility of losing money. Higher potential gains often mean higher potential risk. Consider both the advantages and disadvantages of investment as you decide what's right for you.

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Low-Risk Investments

If you're looking for low-risk investments, here are a few options:

  • common stocks that pay dividends
  • corporate bonds
  • fixed annuities
  • index funds
  • money market mutual funds
  • preferred stocks
  • Treasury notes, bonds and bills

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Striking a Balance

Annuity.org provides a powerful reminder of the importance of finding the right balance between saving and investing. Savings provide a financial safety net for retirement and for emergencies. Investments offer opportunities for greater returns, but also greater risk. Talking with a financial adviser can help you find the balance between saving and investing by looking at the advantages and disadvantages of investment as applicable to your financial circumstances.

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