So, you’ve decided to start investing. You figured out that having a self-sustaining investment portfolio that balances stability, growth, and passive income will serve as your financial safety net and give you the freedom you yearn for.
Investing feels empowering because it allows you to plan for the future and enjoy the life you want without constant worry about money. The core premise is the expectation of a positive return in the form of price appreciation or income, but there’s a vast spectrum of assets you can invest in, which can make this journey feel a little intimidating initially. Risk and return go hand in hand in investing: while low risk means low expected returns, higher returns are accompanied by higher risk. For example, you may have seen online that many people are learning how to purchase dogecoin, because this meme coin has made millionaires in the past, and some continue to believe in its potential to generate substantial returns.
But here’s the catch: cryptocurrencies (and especially meme coins) are risky investments. They are exciting, yes. And it’s true they can provide a path to financial independence. But they are also notoriously volatile, and many individuals who get started with them lose money. It is imperative not to jump into an investment just because everyone else is doing it; instead, understand what each investment type entails. We’ll break down the most popular investments below, so keep reading!
Stocks
Stocks are the most well-known and simple type of investment. When you buy a stock, you become a fractional owner of a company (a shareholder). Many of the major companies are publicly traded, which means you can buy stock in them, including Apple, Microsoft, and Exxon. Most financial experts recommend investing in stocks at a young age because this helps you capitalize on compound growth. According to historical returns of the S&P500, most investors double their investment in about 6 to 7 years (so yes, it can take time).
But it doesn’t mean you should avoid it if you’re starting later, because your performance is also tied to the market forces and the positions you choose, which is why researching stocks is very important. Keep in mind that this investment type can be risky because the underlying company could go bankrupt in the worst-case scenario, and the stock price could tank to zero, leaving you with a devastating loss. However, diversification (such as buying stocks across different market caps, industries, and regions) can help limit your risk.
Bonds
When you purchase a bond, you essentially lend money to a government or business, typically for a set period of time. While local governments issue municipal bonds, companies issue corporate bonds. With the money lent, the investor (or lender) receives interest payments, and as soon as the bond matures (when they’ve held the bond for the set period), they get their principal back.
Bonds have a lower rate of return compared to stocks, but they come with lower risk, although that doesn’t eliminate it completely (the company you purchase the bond from could fold, for example). If you want to play it safe, consider treasury bonds, notes, and bills.
Funds
Funds represent pooled instruments that enable investors to choose what they want to invest in, whether bonds, stocks, commodities, preferred shares, and so on. Two of the most popular types of funds are exchange-traded funds and mutual funds. Mutual funds are valued at the end of the trading day, and you cannot trade them on an exchange. You make money when the value of the bundled securities the fund invests in increases, but you are required to pay an annual fee, and there’s a minimum investment you need to make.
ETFs, on the other hand, can be traded on stock exchanges and are valued throughout the trading day. This type of investment is ideal for newbies in particular because it offers more diversification than individual stocks.
Investment Trusts
Investment trusts are a type of pooled investment, with real estate investment trusts being the most popular in this category. They invest in residential or commercial properties and pay distributions regularly to investors from the rental income generated by these properties. They trade on stock exchanges, providing investors with immediate liquidity.
If you’re considering this investment, it’s wise to start with a small percentage and increase it gradually. Throughout the process, you want to pay attention to how your REIT investments impact your risk profile as well as other parts of your portfolio. According to some financial advisors, you could allocate 5% to 15% to real estate, but the right amount ultimately depends on your risk tolerance, financial goals and investment timeline.
Options And Other Derivatives
Derivatives represent a type of investment that derives value from another instrument, such as an index or a stock. It’s basically a contract between two parties, an agreement to sell a specific asset at a particular price in the future. Suppose the investor agrees to buy the derivative; they’re betting that the value won’t go down.
One thing to note is that derivatives are more advanced investments, which is why institutional investors are typically the ones to consider them. One of the most common types of derivatives is an options contract, which gives the buyer the right (but not the obligation) to buy or sell an asset at a fixed price within a specific time.
Alternative Investments
This type of investment includes any financial asset that doesn’t fall into one of the categories of traditional investments, such as bonds, stocks, or cash. For example, private equity, hedge funds, commodities, and cryptocurrencies all belong to the category of alternative investments. These have low correlations with traditional investments, so investors often choose them to diversify their portfolios and mitigate potential risk.
However, because they have the potential for higher returns, they are considered riskier and subject to a less clear regulatory landscape. Therefore, investors must conduct comprehensive research when considering them to make informed decisions.
The Bottom Line
Investing isn’t reserved for the wealthy only. You can start with a small amount of money and grow from there. Since there are many types of investments available, it’s important to understand how they differ and choose the one that’s most suitable for you. If the do-it-yourself route is too intimidating for you, remember you can always enlist the help of an investment expert, whether a broker or an advisor.