Types of Investments: Explained, Simplified

You have a lot of options and choices to choose from once you enter the world of investing. As a beginner, you must know which is which and how these investments are different from each other. There are many types of investments at hand.

Aside from that, there are also a lot of various investment styles.

We know, it’s difficult to understand all of them at once. The sheer quantity will wrench your mind if you choose to swallow them up at once. But that doesn’t mean you can’t try to understand their basic differences and similarities.

Read on to know more about the different types of investments you can take advantage of.

Types of Investments Infographic

Ownership Investments

Buying an ownership investment means that you own that asset. It’s yours. Of course, you expect these investments to increase in value over time. You should be able to sell it at a price way higher than how much you paid for it. In fact, that’s the primary goal of the buy-and-hold strategy: buy low and sell high.

See also: The Legends in the Financial World and What You Can Learn From Them

Stocks

Stocks are the most sought-after investments nowadays. This is partly because the stock market’s trajectory is generally upwards. That’s also true even if the stock market has already experienced multiple market crashes over time.

Even if the market falls down at one time, it generally recovers and bounces back over time. This is why a lot of investors hold stocks for a long time.

When you buy stocks, you’re also buying a part of the ownership of a company. If that company performs well and grows, the stock will also grow in value. That’s where you get some profits.

As a rule, stocks make up a huge proportion of investors’ portfolios.

Read further 3 Stock Market Strategies – Investing, Speculation, and Trading

Real Estate

Real estate investments consist of properties that you buy and then resell or rent to other investors.

There are many ways that make real estate investing popular. For instance, it can be used as a hedge against the stock market. In many decades, real estate has become a very popular investment vehicle.

On the flip side, investing in real estate is still more complicated that investing in shares or bonds. Another downfall is that you can end up with a bad tenant who brings damages to your properties. Also, you can wreck your investment by having no tenant at all.

Related: Questions to Ask Before Hiring a Real Estate Agent

Business

One big kind of investment that many people often overlook is a business. This is practically one of the best and biggest investments you could ever make.

A business is any kind of product or service that you provide to your clients. Your main goal is to earn from the payments you get from rendering services of selling products.

However, many people, possibly including you, are scared of having their own business. Putting up a business entails lots of work. You won’t only have to invest money for your capital. You also have to exert energy and time to fix everything connected to your business.

Precious Objects

These types of investments include precious metals, collectables, art, and other such things.

However, you have to make some distinction between owning them for profit and owning them for owning’s sake. They can be a type of ownership investment if you plan to resell them someday. But if you’re merely collecting arts, precious metals, and other such stuffs for decoration, you’re not actually investing.

Funds

Funds are not really specific kinds of investments. They’re rather a pool of investments.

Typically, a professional fund manager manages this pool of investments. The manager manages it in a way where the investor can earn profits. Therefore, the investor doesn’t have to shoulder the task of planning and picking assets one by one.

The idea is to choose an investment company that will pick a group of asset for you. You then have to pay an “expense ratio,” or a pay in return for their effort in curating your investments.

Mutual Funds

The term “mutual fund” is just another phrase for “investment funds.”

It’s an investment vehicle made up of fund pools collected from investors. The goal is to invest in securities like stocks, bonds, and money market instruments. Managers design mutual funds in a way that it matches the investment goals of the investor.

See also: Mutual Fund Investors’ Common Mistakes

Index Funds

Index funds serve to mirror or follow a predetermined market, such as the S&P 500. As a result, index funds are passively managed.

Unlike other funds that need active management, index funds don’t need any persons to analyze, forecast, and adjust the assets in the fund. This means you get to keep your bucks because of the lower expense ratio.

Hedge Funds

Hedge funds are similar to mutual funds, but they have some distinct differences.

For one, the US Security and Exchange Commission (SEC) does not regulate them. Market participants also see these funds as riskier than mutual funds. The higher risk comes from the broader range of investments. Additionally, hedge funds use borrowed money, or leverage.

Exchange Traded Funds (ETFs)

These funds have a lot of similarities with index funds. For instance, exchange traded funds are meant to follow or track a benchmark of index. They can also measure a specific kind of market.

To distinguish between index funds and ETFs, remember that you can trade ETFs like stocks. Their prices change like stocks during the course of the day. On the other hand, index funds sport one price throughout the day during the whole market session.

Both active and passive ETFs’ prices change. You can also buy them whenever the markets are open.

Lending Investment

These types of investments require you to buy a debt that you expect the company or another entity will pay.

In a way, you serve as a sort of a bank. They offer you fewer risks, but they also give your lower returns. Consequently, these are considered safe investments and the choice of those who are willing to settle for low-reward investments.

Bonds

Whenever you buy a bond, you are practically loaning some money to an entity. These entities can the government or a corporation.

The idea is to let them pay you back over time with a fixed interest rate. For the purposes of diversification and optimal asset allocation, your portfolio should sport a portion of these.

Related: Learn About Fixed Income

Certificate of Deposit

This is some sort of a promissory note that a bank issues in exchange of your money.

Many investors are quite familiar with these investments. Many banks offer this kind of service. It a little bit like having a savings account. But the difference is that you can’t withdraw your money anytime you want.

What you do is you let your bucks stay with the bank for a specific length of time. What’s in it for you? The bank will offer you higher interest rate. The interest rate level will depend on how long you choose to let your money stay in the bank.

Treasury-inflation protected securities

These are basically bonds. The difference is that they the US Treasury backs them up. They are ideal for protecting you from the negative effects of inflation.

Upon maturation of the treasury-inflation protected securities, you will receive your inflation-indexed principal and interest.

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Choosing the Best Types of Investments

Once you understand how each of these assets work, you have to choose which ones you’ll put in your portfolio. There are various ways to allocate assets in your portfolio.

Strategic Asset Allocation

After you have determined your goals and your budget is complete, you can start allocating assets based on their performance. Then, you should be able to have a long-term forecast.

There are many ways in which you can forecast. The most popular of which is mean reversion. By doing mean reversion, you make the asset class’ performances converge to their average long-term performance.

Tactical Asset Allocation

This one separates the asset allocation from the long-term optimal portfolio goal. Investors adopt this kind of asset allocation because of investors’ independent assessments of fair value. That assessment also differs from the market consensus.

If you plan to use this method, you have to have the information advantage. This means that you should know more about the market more than other investors. Aside from that, you should also have keen analytic abilities to interpret the raw information you obtain.

Insured Asset Allocation

Insured asset allocation is a dynamic strategy. Your payoff is limited downside since you buy into an uptrending market. Also, you use formulas to rebalance your portfolio. However, if you sport this kind of asset allocation, you can suffer from market reversals.

Constant Weighted Allocation

This strategy offers you a slightly concave payoff, which means it’s limited upside. You sell into an upward market while you rebalance your portfolio.

Unlike insured asset allocation, you can get some help from market reversals. That also means that volatility is your friend. If the market returns to its original value, your strategy will give you some profits. The pure buy-and-hold will give zero returns. If, however, the market retains its upward path, the buy-and-hold strategy will gain much.

Read further: Investors’ Common Diversification Mistakes

Conclusion

Your goal is to pick the best and the right assets for you. Aside from the methods we discussed above, you should also consider other factors. Your risk tolerance, goals, time horizon, and other such factors play a huge role in your decision. Lastly, different assets come in different sizes and shapes, so be sure that you totally understand each of them.

 

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