What can I invest in?

Gist

• Individuals put their money into different investment avenues with the expectation of gaining financial benefit in the future.
• These investment options may include stocks, bonds, ETFs, real estate, and other alternatives.
• Typically, the level of risk associated with an investment is higher if the potential return is greater.

Investing involves buying an asset with the expectation of earning a profit in the future, with the goal of making your money work for you. Like choosing a path up a mountain, investing presents different options with varying risks and rewards. Some paths may not lead anywhere or even be dangerous, but with careful planning and strategy, one can aim for a successful outcome. It's important to balance the risk and return of an investment, as higher potential returns often come with greater risks.

What are some of the risks associated with investing?

Just like how a climber can stumble or lose footing, any investment carries some degree of risk. The assets you invest in can either rise or decline in value, and there's always the possibility of the underlying enterprises or organizations going under or defaulting. These scenarios are usually quite severe. However, you can opt to have all your climbers follow the same path, or you can divide your team and have them take different routes (i.e., diversify your investments).

What kind of assets can I invest in?

It is beneficial to have an understanding of the various investment options available before making any investment decisions. Listed below are some of the commonly preferred asset types.

Cash and Cash Equivalents

Hold on! This is not about stashing your money under your mattress. It's about managing your short-term funds by distributing them across various accounts, such as a checking account, savings account, and cash on hand. Besides these conventional options, some people are opting for higher yielding accounts that offer slightly more interest on their deposits. These accounts, known as high-yield savings accounts, are offered by certain banks and feature higher-than-usual interest rates. However, these rates are subject to fluctuations based on their relation to the federal funds rate.

An alternative option is to deposit your money into a certificate of deposit (CD), which is a type of savings account that offers a more favorable interest rate than a standard savings account. Nevertheless, in return for the increased interest rate, CDs come with stringent regulations on when you can withdraw your funds (typically only at the conclusion of the term or with a fine for withdrawing early).

Stocks

A stock is a share of company ownership that represents a portion of its assets and revenue. Investing in the stock market is often seen as a means of accumulating wealth, but it can be unpredictable as asset values can rise or fall rapidly due to various factors like production, supply chains, economic events, and investor sentiment. To minimize risk, investors may choose to invest in funds that mix different assets for diversification. Exchange-traded funds (ETFs) and mutual funds typically follow an index, such as the S&P 500, but mutual funds are only traded once daily.

Bonds

A bond is a written promise issued by a company, government or institution in exchange for money. Upon lending money to one of these entities, the buyer of a bond will receive a predetermined payment (called a coupon) at regular intervals. Similar to stocks, most bonds can be bought and sold in financial markets. There are various types of bonds available, such as Treasury bonds from the federal government, municipal bonds from local governments, and corporate bonds from companies. Bonds are generally considered less risky than stocks, as companies are obliged to pay bondholders first before stockholders. Interest payments on bonds are also typically more stable than profits or capital gains, which can fluctuate based on a company's performance. Additionally, it is highly unlikely that large and stable institutions, such as the US government, would fail to fulfill their financial obligations.

Real estate

Acquiring real estate, like a residential property, is often seen as a relatively stable financial venture, especially due to the housing shortage in the US. Despite any fluctuations in the property's market value, you can still benefit from residing in it or leasing it to others. For those who cannot afford a deposit or mortgage yet wish to invest in real estate, they may opt for financial instruments referred to as real estate investment trusts (REITs). These are organizations that possess, manage, and strive to generate profits from real estate assets. Owning a portion of them is a means of participating in that enterprise.

Commodities

Commodities are tangible products such as gold, oil, beef, and orange juice. Trading in commodities is typically associated with expert traders who possess knowledge of aspects such as the availability and requirement for these products, along with seasonal patterns. For instance, in the oil sector, a pact among OPEC nations could restrict oil production, which could result in an increase in the price of oil. These markets can be intricate, and traders must take into account various underlying dynamics.

Cryptocurrencies

Digital assets known as cryptocurrencies can be utilized for investment or payments, and typically lack support from a government or central bank, with their transactions being recorded on a blockchain. Despite not being recognized as legal tender by authorities, they are often traded like currencies in foreign exchange markets. It's important to note that since their creation in 2009 and onwards, cryptocurrencies have been known to be exceedingly unstable, with Bitcoin demonstrating sudden surges and falls in recent times.

Collectors’ items

In addition to financial assets, there are also non-monetary investments such as memorabilia, collectibles, and artwork. These can include items like sports jerseys, rare stamps, and artwork by Banksy. Building up a portfolio of these assets takes time and expertise in their respective markets. Without such knowledge, it can be challenging for an ordinary person to determine which pieces are likely to increase in value.

How can a person get started with investing?

Investment involves determining the extent of effort you are willing to apply and the level of risk you are prepared to bear. Typically, younger investors may assume more risk since they have more time to recover any losses. After deciding on your investment goals and risk tolerance, you can explore the various investment options to potentially achieve significant returns.