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Investment Basics: Options for Veterans and Military Members

Joe Wallace

There are a variety of options to explore when you’re learning how to invest. And while there are no risk-free investments, some are more suitable for the beginning investor than others.

You should research your stock options carefully; the DoD cannot help servicemembers, military families, or veterans who lose money on the stock market. Investing carries a risk of loss; know your investment options well before you commit. What follows is not investment advice.

That said, the DoD does provide investment education resources you can explore before committing.

Types of Investments

Your investment options include, but may not be limited to, the following:

• Stocks
• Bonds
• Municipal Bonds
• Mutual Funds
• Exchange-Traded Funds (ETFs)
• Annuities
• Certificates of Deposit (CDs)
• Money Market Funds
• Commodities
• Hedge Funds
• Real Estate Investment Trusts (REITs)

Stocks

Stocks are among the most commonly known investment types. Investing in stock means buying a share of a publicly traded company.

Those who own the stock can buy more stock or sell what they have on public trading exchanges, with the price of individual stocks rising or falling based on a variety of influences, including investor enthusiasm, company growth or lack of it, and current economic headlines.

In the past, you always needed a stock broker to execute trades on your behalf. With the rise of online trading, this has changed significantly over the decades; now, you can perform trades yourself or take advantage of automated stock trading.

Bonds

Governments and private companies alike may issue bonds as a fundraising tactic. A bond is, as the Office of Financial Readiness official site says, an IOU with a promise to pay you interest over the life of the bond and pay the principal on an agreed-upon maturity date. Bonds pay interest each year (much depends on the schedule); some bonds may even provide tax breaks to those holding them.

Bonds can be safer investments, but even these carry some risk. If a company issuing the bond goes bankrupt, for example, it may either default on the bonds it has issued or try to buy them back at face value, which cancels the bond altogether after paying off the principal.

There are corporate bonds not backed by the government, which may carry higher yields and elevated risks. States, cities, counties and local governments often issue municipal bonds for schools, highways, and other projects.

Related: Military Retirement Pay Explained

High-Yield Savings Accounts, Cash Management Accounts

Some view these savings accounts as investments. Whether or not that is true, at least some who use these accounts are attracted to the higher rates of return compared to a traditional savings or checking account.

Some sources describe cash management accounts as “a savings account-checking account hybrid,” paying interest rates similar to a savings account but with the ability to write checks or use a debit card with the account.

Mutual Funds

Investopedia describes Mutual Funds as a type of investing where many investors have their funds pooled and managed by a third party. “The professional manager for the fund invests the money in different types of assets including stocks, bonds, commodities, and even real estate.”

When you invest in a mutual fund, you buy shares which “represent an ownership interest in a portion of the assets owned by the fund.”

Mutual funds are considered a more conservative option (depending on the fund, some funds take more risks than others) because they are not meant to be traded often and the fees for doing so may discourage you from making changes to your fund often.

Exchange-Traded Funds (ETFs)

The Office of Financial Readiness describes ETFs as similar to mutual funds in some ways; ETFs let investors “pool their money when investing in stocks, bonds or other assets.”

But unlike mutual funds, ETFs are bought and sold on the national stock exchange at market prices. Investopedia notes, “ETFs will track a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can.”

You can use ETFs to track “anything from the price of an individual commodity to a large and diverse collection of securities.” Investing in an ETF may require more research by the investor; you’ll want to read the prospectus and related information for any company you wish to invest in before committing funds.

Annuities

Annuities are described as “insurance contracts that offer the annuitant—the person who owns the annuity—a set amount of income paid at regular intervals until a specified period has ended or an event (such as the annuitant’s death) has occurred.”

• Investopedia offers that description on their official site, adding that “insurance companies or financial institutions offer fixed annuities for a lump-sum payment (usually most of the annuitant’s cash and cash-equivalent savings), or they can be paid for on a periodic basis while the annuitant is still working.”
• The money you invest is meant to earn a rate of return during the saving phase, and when it’s time to collect annuity payouts, (and depending on the terms of your annuity), the balance may continue to grow.
• Annuities may carry a disadvantage compared to other types of investing in that when the beneficiary dies, the annuity cannot be passed to the estate or heirs.

The funds typically revert back to the company that issued the annuity. According to Investopedia, “Whether the annuitant chooses to try to avoid this outcome depends on the kind of policy purchased.”

Certificates of Deposit (CDs)

A CD is a more short-term investment (one to five-year CDs are common) and can be used to help save for an event like a wedding or vacation. You commit your money to a Certificate of Deposit with a fixed interest rate (there is often a minimum) for a fixed period of time.

The interest applied to the account grows over time, and you may have the opportunity to renew the CD when it matures. However, if you want to remove your fund before the allotted time, you may be penalized. CDs are best for cash you won’t need in the near future.

Commodities

This type of investing is complex, high-risk, and should not be attempted by beginners without a guide. There are many ways to lose money in commodities trading that have nothing at all to do with the value of what’s bought and sold; there are pitfalls to avoid that experienced commodities traders know that you do not.

All that said, there are multiple ways to enter the commodities market. You can invest in physical goods or by purchasing ETFs tracking commodity indexes. You can also invest in the stock of commodity businesses like mines, oil production, etc.

One of the inherent risks of commodities trading is something known as the margin call; an oversimplified explanation of the margin call is this:

A commodities trader may have the ability to “leverage” her account and short-term borrow more money to invest that day than she actually has in the bank. If an investment pays off, the borrower repays the money and the deal is done.

But if you have leveraged your account and the commodity performs poorly, you can’t simply hang on to the debt overnight; the firm you borrowed from can execute a margin call and have your debt collected immediately. That could result in the investments you held on to being liquidated to pay the debt.

Investopedia puts it like this: “Brokers may force a trader to sell assets, regardless of the market price, to meet the margin call if the trader doesn’t deposit funds.” That principle is true of any day trading type investment options you may encounter. Know the risks before you pay.

Hedge Funds

Another type of investing decidedly NOT for beginners operating alone and without a guide. The Securities and Exchange Commission describes hedge funds this way:

“Hedge funds pool investors’ money and invest the money in an effort to make a positive return. Hedge funds typically have more flexible investment strategies than, for example, mutual funds.”

Hedge funds are riskier because they put money into higher-risk, shorter-term options and use more speculative trading practices than some mutual funds. According to SEC.gov, “You generally must be an accredited investor, which means having a minimum level of income or assets, to invest in hedge funds.”

What is considered a typical hedge fund investor? They may include “institutional investors, such as pension funds and insurance companies, and wealthy individuals.”

Real Estate Investment Trusts (REITs)

Investor.gov defines REITs as “a way for individual investors to earn a share of the income produced through commercial real estate ownership – without actually having to go out and buy commercial real estate.”

These options are a way to add real estate options to your investment portfolio, and they may pay more than some other investments. The trade-off is that there are some pitfalls to avoid. One is a lack of liquidity, so if you need to get money fast you won’t be satisfied with your options under REITs.

Investor.gov warns, “Unlike publicly-traded REITs, however, non-traded REITs frequently pay distributions in excess of their funds from operations. To do so, they may use offering proceeds and borrowings.” That may result in lower share values. It’s best to avoid this option as a newcomer unless you have an experienced investor helping you out along the way.

Related: Military Retirement Saving and Investing Options