5 of the Best Ways to Invest Money

The term “best” means different things to different people. The best movie for date night probably isn’t the best movie to take your 6-year-old to. The best restaurant for sushi is only the best restaurant if, in fact, you like sushi. Similarly, the best way to invest for one person isn’t going to be the best way to invest for another. Investing is personal, depending on factors like your age, how much money you can save, your tolerance for risk, and so on. But there are some factors that are important to all investors to some degree, including diversification and costs.

With that in mind, here are five of the best ways to invest money. This is by no means an exhaustive list, and just like any other “best” list, a good investment for one person may be a poor fit for another. Think of this list as a starting point, representing strategies you can adapt or build upon based on your circumstances and taste.

5 of the Best Ways to Invest Money

Here are five common strategies that investors use to save for retirement that Morningstar thinks have merit.

1. Balanced funds
2. Target-date funds
3. Total market index funds
4. A three-fund portfolio
5. A custom-fit portfolio

Those struggling with the question of “how to invest money” may find their answer with one of these approaches. Here’s a little bit about each strategy.

Balanced Funds: One of the Best Ways to Invest Money in 2024

Balanced funds invest in a blend of stocks and bonds. Often referred to as 60/40 portfolios, these funds generally invest 60% of their portfolio in US stocks and the remaining 40% in US bonds, though some balanced funds invest in non-US securities, and others may deviate slightly from the 60/40 mix. “The 60/40 portfolio strategy may not be perfect, but its simplicity and proven long-term resilience make it a much better starting point than most other approaches to portfolio construction,” concludes Morningstar portfolio strategist Amy Arnott.

What makes balanced funds good investments for those who don’t know how to invest? For one, they’re simple all-in-one solutions for investors who might not want, for whatever reason, to invest exclusively in stocks. Of course, balanced funds can’t offer the same returns over time that stock funds do; stocks outperform bonds over most time periods, as a reward for their additional volatility. But the 60/40 portfolio generally has done a good job over time of producing solid risk-adjusted returns.

Other benefits of the 60/40 portfolio: Balanced funds also rebalance to a 60% stocks/40% bonds allocation (or to whatever the fund’s particular allocation bands are), essentially rebalancing for the investor. No additional work required!

What are the negatives of investing in balanced funds? Given their bond components and ongoing rebalancing, balanced funds aren’t great choices for taxable accounts; they’re best used in tax-deferred accounts like 401(k)s and traditional IRAs. And most financial professionals would say that balanced funds aren’t good investments for those investors who have long runways to retirement; the pros would advise that if your retirement is decades away, you should have more exposure to stocks than a balanced fund provides.

Even so, balanced funds can be a good first step for many investors; it’s the type of fund that investors can build a more diversified portfolio around when the time is right.

Three of the best balanced funds that earn the highest Morningstar Medalist Rating of Gold with 100% analyst coverage are:

1. American Funds Moderate Growth and Income BLPEX
2. T. Rowe Price Balanced RBAIX
3. Vanguard Wellington VWELX

Target-Date Funds: Good Investments for Hands-Off Investors

Like balanced funds, target-date funds invest in both stocks and bonds, and they rebalance back to their target allocation on an ongoing basis, thereby rebalancing on the investor’s behalf.

The main difference between the two fund types is that target-date funds invest in an age-appropriate asset mix, gradually becoming more conservative as an investor gets closer to retirement, thanks to what’s called their glide paths.

“The genius of target-date funds is that they harness that natural tendency toward inertia, but they do so for the good,” observes Morningstar director of personal finance and retirement planning Christine Benz.

For many, target-date funds are preferable to balanced funds when saving for retirement—that’s just one reason that target-date funds have become the default option in so many 401(k) plans. Why? Because target-date funds will adjust your allocation along with your life stage; you’re not locked into that 60/40 balanced fund allocation, meaning that your asset mix is neither too conservative nor too aggressive relative to when you plan to tap into the money.

What are the cons? As with balanced funds, target-date funds aren’t terribly tax-efficient because of ongoing rebalancing and the shift into bonds as the target date gets closer; keep them in your tax-deferred accounts. And unlike with balanced funds, it can be more difficult to supplement target-date funds with other funds, because doing so may push what’s considered to be the “right” asset allocation for retirement out of whack. (In contrast, because balanced funds don’t consider life stage and don’t have glide paths, supplementing them with other funds would be, for many investors, a good thing to do).

Three of the best target-date series that earn Medalist Ratings of Gold with 100% analyst coverage are:

1. American Funds Target-Date Retirement
2. T. Rowe Price Retirement
3. Fidelity Freedom Index

Total Market Index Funds: How to Invest for More Hands-On Investors

As their name suggests, total market index funds are passive investments that track very broad indexes of stocks or bonds, either in the United States or around the globe.

Such funds hold appeal for some investors who don’t know where to invest money, for a few reasons. For starters, index funds tend to be low-cost; they also don’t carry any key-person risk because index fund managers aren’t actively picking stocks or bonds. And by investing very broadly, total market funds offer significant diversification in just one fund.

Total market index funds can be good investments for investors as stand-alone holdings or in combination. A young investor with decades to retirement might choose to invest solely in a total US stock or a total world stock fund. And as retirement draws closer, that same investor could add a total bond market fund to the mix.

Three of the best total market index exchange-traded funds and mutual funds that earn Medalist Ratings of Gold with 100% analyst coverage are:

1. Fidelity Total Market Index FSKAX
2. iShares Core S&P Total U.S. Stock Market ETF ITOT
3. Vanguard Total Stock Market ETF VTI

Where to Invest for Those Willing to Do Some Work: The Three-Fund Portfolio

The three-fund portfolio is one that, as its name suggests, consists of three funds representing what most consider to be the three major asset classes: US stocks, non-US stocks, and bonds. It’s a sound strategy for investors who are a bit further down their investment path and who therefore own bonds or for investors with longer runways who nevertheless want to own bonds to damp overall portfolio volatility.

Unlike other options here, this strategy requires a bit more work on the part of the investor—notably, a willingness to rebalance and adjust the overall asset mix as retirement draws nearer. (Not sure what your asset mix should look like based on your life stage? Morningstar’s Lifetime Allocation Indexes can provide some context.)

Most advocate using total market index funds to build three-fund portfolios for the reasons outlined above: They’re low-cost, they’re well diversified, and they’re low-maintenance.

“It is a terrific starting point for novice investors and a perfectly sensible ending point for the experienced,” says Morningstar director of research John Rekenthaler about the three-fund portfolio. “Of course, there will always be those who seek more. For such investors, the three-fund portfolio would be a suitable core position from which they could explore additional purchases.”

The Most Hands-On Way to Invest Money? A Custom-Fit Portfolio

The final strategy on our list of the best ways to invest is the most complex: building a custom-fit portfolio for you. What that means is entirely up to you. For some, it might mean adding inflation-protected securities into the mix. For others, it might mean allowing for tilts in the portfolio to subasset classes that you’d like exposure to, such as small-company or emerging-markets stocks or perhaps lower-quality corporate or international bonds. Or it may mean constructing a portfolio that reflects your values and therefore leans into environmental, social, and governance-focused funds.

Although some people certainly build custom-fit portfolios early in their investing lives, many others start investing using one of the other strategies on this list and eventually grow into a custom-fit portfolio because they’ve become more interested in being hands-on with their investments, they’ve accumulated more assets (through appreciation, inheritance, and so on), they’ve learned how to invest, or they’re nearing retirement, among other reasons.