The start of a new year is always one of the best times to review your investment strategy. We know what happened last year, but 2020 is a chapter waiting to be written.
One thing we can count on is that 2020 won’t be exactly like 2019. And let’s also not forget that not only will 2020 be a new year, but it’s also the start of a new decade. That means thinking longer term than usual.
How can we know what the best investments to make in 2020 will be? Well, we can’t, at least not exactly. But we can look at the trends, add in some time-honored wisdom, and make some bankable plans.
Here is my list of the seven best investments to make in 2020:
1: Stay the Course with Stocks – But Tweak Your Portfolio
2019 was another year for the record books in the stock market. As measured by the S&P 500 index, the market was up an incredible 29% for the year. It’s hard to argue against that kind of success, particularly with the current leg of the bull market coming up on its eleventh year.
You’ll certainly want to keep a significant portion of your portfolio in the market, particularly in an index fund tied the S&P 500. No bull market goes on forever, but this one is showing no signs of running out of steam.
Still, a one-year increase that large – this late in a bull market – could be a sign it’s time to get a bit cautious. That doesn’t mean reducing your stock holdings. Instead, you may want to become more selective by focusing on sectors outside the S&P 500 alone. Even if the general market does slow down, certain sectors continue to hold strong potential for continued growth.
Healthcare tends to be a durable sector, even when the general market is misbehaving. Though the healthcare field in general trailed the S&P 500 in 2019, the SPDR S&P Biotech ETF (XBI) turned in a one-year return of close to 30%. It may represent an opportunity to continue generating double-digit returns even in a less cooperative market.
“Although the S&P 500 Health Care sector has estimated 2020 earnings growth of +12%, it trades at a discount to its growth rate at a 17x price-earnings multiple,” notes Forbes contributor, Randy Watts. “The total S&P 500’s 2020 earnings growth estimate is +9% and it trades at a 17x price-earnings multiple. We suspect, given the current muted world economy, that S&P 500 earnings growth is likely to disappoint next year, whereas Health Care earnings should be steady.”
If you have an appetite for risk, the energy sector may be worth a good look. Not only has the sector underperformed the general market for the past several years, but the geopolitical situation in the oil-rich Middle East seems to be heating up, particularly between the US and Iran. Any significant disruption in oil flowing from that region can cause energy to spike across-the-board.
One way to play energy is through the Vanguard Energy ETF (VDE). Though the fund returned less than 10% in 2019, it could be an excellent way to play energy volatility.
Also in the energy sector, it’s undeniable that climate change is fast becoming a hot political issue. That might make now an excellent time to get on board with clean energy. A fund specializing in that subsector is iShares Global Clean Energy ETF (ICLN). It wasn’t much of a laggard either. For the 12 months ending November 30, 2019, the fund had a return of 25.41%. Clean energy may turn out to one of the big plays for the entire decade.
2: Real Estate Investment Trusts (REITs)
Real estate has proven to be one of the best investments of all time, with returns comparable to the S&P 500 over the long term. But owning properties can be as much of an occupation as it is an investment. What’s more, buying individual properties is capital-intensive, and can leave you open to tenants not paying rent, and months of missed income between rentals.
If you want to invest in real estate, but don’t want to put up your life savings or get your hands dirty, one of the best ways is to invest through real estate investment trusts.
Anthony Montenegro, founder of The Blackmont Group, cites Warren Buffet’s famous two rules to investing: Rule number one – don’t lose money. Rule number two – remember rule number one. “While potential opportunity for growth in 2020 abounds, it’s also a good idea to maintain a hedge strategy in light of equally growing market uncertainty,” advises Montenegro. “With mounting geo-political tension and an unresolved trade war, two relatively stable sectors to overweight for 2020 are utilities and especially real estate. You can own real estate through REITs. These holdings continue to reward with a steady dividend yield while maintaining low volatility compared to the S&P. They’re also not susceptible to the trade tariffs because real estate isn’t dependent on imports.”
A REIT is like a mutual fund that holds individual properties. They typically specialize in certain sectors, like office buildings, retail space, or warehouse and storage facilities. But perhaps the best pick of all for 2020 and beyond will be apartment REITs. With house prices rising beyond the range of affordability in many of the markets with the best jobs, renting is becoming the housing mode of choice.
A prominent example of an apartment REIT is the Equity Residential Properties Trust (EQR). The trust owns or invests in more than 300 properties located in upscale markets, like New York City, Washington DC, Boston, Southern California, San Francisco, Seattle, and Denver. With housing prices rising steadily in those markets, apartments should continue to be in high demand for the foreseeable future. EQR has produced a total return of more than 25% in the past year.
Apartment REITs can prove to be a strong alternative to an all-stock portfolio, providing positive returns even if the stock market stalls out.
3: Invest in Yourself
There are two ways you can make this investment work in your favor:
1. Acquire skills and/or certifications that will help you advance in your current career, or
2. Acquire skills and/or certifications that will help you launch a new career.
One of the major reasons for career stagnation is a lack of qualifications. That can be either an important certification in your career field, or a certain skill set that would enable you to advance.
You can usually obtain these qualifications by taking college courses, online courses, or even participating in programs offered in your industry. And you can often acquire additional skills by similarly taking courses, or by ordering online programs specializing in whatever skill you need. You may even be able to learn new skills on YouTube.
Whatever direction you take, it will require an investment of time, effort, and yes, a certain amount of money. But if it will increase your earnings at work, or get you a promotion, it’ll be one of the best investments you can make.
It may also be that you see no serious future in your current job or occupation. If so, investing in yourself will be even more important. You may need to take the time and make the monetary investment to acquire the skills and certifications you’ll need either to get a new job, or to enter a completely new field.
The job market in the 21st century is in a constant state of flux. The only way to remain relevant in your occupation is to keep yourself and your skills on the cutting edge. And sometimes it’s even necessary to make a career change. By investing in yourself, you’ll be prepared for either outcome.
4: Invest in a Side Business
According to a 2018 survey conducted by insurance giant, The Hartford, 25%of Americans have a side business. Numbers like that show that not only is it becoming a common practice, but the field is large enough for you to launch your own site ventures.
One of the advantages to starting a side business today is that there are so many ways to do it that don’t require a large upfront investment. At most, you may need to invest a few hundred dollars, or no more than a few thousand dollars. But the extra income it will generate can pay you back many times over.
There are a lot of reasons why people start side businesses, with generating extra revenue being only the most obvious. But with so many people feeling stuck in their regular jobs, a side business also offers an opportunity to spread your wings, often into doing the kind of work you enjoy.
“More people do not feel emotionally or financially fulfilled with their present job today than just about ever,” suggests Tom Diem of Diem Wealth Management in Fort Wayne, Indiana. “Starting up a business on the side can be something to fill those voids. This is the time for reading up on production methods to get ideas on how to get your business running out of the gate. It will take long hours added onto your existing job, but for many it eventually becomes the primary source of income and wealth.”
One of the biggest hurdles to starting a side business is deciding exactly what venture to go into. Gig work, like becoming a rideshare driver, has become quite popular. But you can also focus on any specific skills or talents you have. Think about the tasks you do on your job every day, as well as any non-business skills you have. Is there a way you can sell your services directly to consumers or to small businesses?
(If you’re looking for a side business to start, Forbes’ 15 Easy Side Hustles You Can Start This Weekend will show you there’s a business idea that will be a glove fit for just about anyone.)
In addition to the fact that the upfront investment in a side business is probably lower than ever, it’s also a very low risk way to launch a business. Since you’ll still be earning a steady paycheck from your full-time job, you’ll have more time to get your side business up and running. And if the venture doesn’t make money right away, you won’t end up in the poor house.
If you’ve been feeling stuck in your current position, or you just want to generate extra revenue, starting a side business is one of the very best investments you can make in 2020.
5: Payoff Debt
Paying off debt may not seem like an investment, but it actually provides returns that are generally better than what you can get on most asset classes.
Since most credit cards charge interest of somewhere between 15% and 25% per year, paying off a card will get you a higher effective return than the 10% average annual return provided by the S&P 500.
For example, let’s say you owe $10,000 in credit card debt at an average interest rate of 20%. Once you pay the balance off, you’ll save $2,000 per year in interest. There are two major advantages to this strategy, when compared to conventional investments:
1. The “return” you’ll earn on the debt payoff – the $2,000 per year in interest you won’t be paying – won’t be taxable, and
2. The return on your money – the 20% interest rate that will disappear – is virtually guaranteed.
Neither is a quality that any other investment can provide. If you have a lot of debt, particularly high-interest credit card debt, paying it off might very well be the best single investment you can make. And once you pay off the debt, you’ll have that much more cash flow to put into some of the other investments on this list.
6: Starting or Supercharging Retirement Savings
This investment may seem like stating the obvious, but there are some dismal statistics on retirement savings that make it worth emphasizing. According to a 2019 report by the Federal Reserve, 26% of Americans have no retirement savings at all, including 13% of those 60 and older. Meanwhile, a 2019 survey by GoBankingRates revealed that 64% of Americans will retire with $10,000 or less. This despite the warnings from the financial media about the importance of saving for retirement.
“According to the Economic Policy Institute, the average retirement savings of all working-age families (32-61) is $95,776 – the median is just $5,000,” reports Russ Thornton, CDFA at Atlanta-based Wealthcare for Women. “This data, along with my experience delivering retirement planning for women and their families, tells me that the average American is woefully underprepared for retirement. While this is an obvious challenge, it also creates an opportunity for folks to take control of their financial future by creating a personal retirement planning strategy. Starting today. This is one of the best investments you can make in yourself, your future, and that of your family in 2020.”
At a minimum, you should enroll in your employer-sponsored retirement plan, if one is offered. You should contribute at least enough to get the maximum employer matching contribution.
For example, if your employer provides a 50% matching contribution up to 3% of your income, you should contribute at least 6%. That will give you a combined contribution of 9% of your income. And remember, your 6% contribution will be tax-deductible. That means at least part of the contribution will be funded by the government.
If you’re not covered by an employer-sponsored retirement plan, you can simply open an IRA. For 2020, you can contribute up to $6,000, or $7,000 if you’re 50 or older. Similar to an employer-sponsored plan, your contributions to a traditional IRA will be tax-deductible.
If you choose to open an IRA, you can consider investing in the stock funds and REIT recommended earlier. But if you don’t want to do your own investing, you can have your account managed by a robo-advisor, like Betterment. They’ll provide complete investment management for you, including creating your portfolio, rebalancing your allocations, and reinvesting dividends. And they’ll do it all for a very low annual fee.
Retirement may seem far off in the future, but it has a way of sneaking up on you. Starting to fund a plan now – with whatever money you have – is one of the very best investments you can make.
7: Spending Time with Family
When the topic is investing, the human element often gets lost. That includes spending time with family. If you get too caught up in the process of making money, a few things get pushed to the back burner. Whether that’s your spouse, your children, or your extended family, those bonds weaken while you’re busy pursuing other goals.
Don’t let it happen.
While other investing activities are mostly about money, spending time with family is all about the time factor. And unlike money, when time is lost, you can’t get it back.
Part of the reason for making any type of investment should be so that you’ll have more financial resources and stress-free time to spend with family and friends. If that’s not your primary objective, then the process of investing can turn into a pure money chase. Once it reaches that point, you’ve lost sight of what it’s all about.
Despite being a busy entrepreneur, and always on the hunt for new money-making opportunities, I use it all as a way to create more time with my wife and four children. I want to enjoy my kids now while they’re young, because I know there’s no “later” in the equation.
And along the way, I also want to invest time teaching my kids what I’ve learned about money and investing. My kids won’t learn those lessons in school, and neither will yours.
So while you’re busy looking for ways to invest and make more money, be sure to invest time in your family. That will reap the kind of lifetime benefits money can’t buy.