What can I invest in? An overview of assets

Investing is the act of buying an asset with the hope of earning a profit later on. The whole idea is to “let your money do the work for you”.

Investing is like sending a climbing team up a mountain…

When climbing a mountain, you’ll encounter different paths. Some are short and steep, while others are longer and well-traveled. Sometimes, a path may lead nowhere or pose a danger. Just like investments, every path involves some risk. However, with careful planning and a strategic approach, reaching the summit can be highly rewarding.

Picking your investments involves finding the right balance between risk and reward. Typically, the greater the potential return, the higher the level of risk involved.

What are some of the risks associated with investing?

Similar to a climber on your team who may stumble or lose their footing, every investment involves a degree of risk. The value of your assets could go up or down, and there’s a chance that the companies or institutions supporting them could face financial difficulties or even collapse. These scenarios are typically more extreme.

Remember, you can opt to send all your climbers up the same route, or you can spread your team out on different routes (aka diversifying your investments).

What kinds of investment accounts can I choose from?

Investment accounts come in many different types. Here are a few that are commonly used.

Individual Brokerage Account

With a brokerage account, people can invest in stocks, bonds, ETFs, and mutual funds as individual investors.

Retirement

Planning for the future is important, especially when it comes to retirement. A retirement account is designed to assist individuals in accumulating savings and investments for their golden years. The best part is that these accounts often offer tax advantages, such as tax-deferred or even tax-free investment returns, depending on the specific account type. However, it’s crucial to keep in mind that there may be restrictions or penalties if you withdraw funds before reaching retirement age.

What kind of assets can I invest in?

It’s a good idea to understand the different types of assets available before you begin investing. Here are some of the most popular types.

Cash and Cash Equivalents

It’s not about stashing your cash under the mattress. It’s more about managing your short-term funds across various accounts – like a checking account, savings account, and the cash you carry. Besides the typical short-term money choices, a lot of people are are exploring higher yielding accounts to possibly earn a little more interest on their deposits. Some banks provide high-yield savings accounts with higher interest rates, but these rates can go up and down based on the federal funds rate.

Another option is to store your money in a certificate of deposit (CD). CDs typically have higher interest rates compared to regular savings accounts, but they come with strict rules for withdrawing funds, usually at the end of the term or with a penalty for early withdrawal.

Stocks

Stocks are basically a piece of a company that you own. They represent a share of the company’s assets and earnings. A lot of people see investing in stocks as a way to grow their wealth.

However, stock investments can be quite volatile – the value of your assets can fluctuate rapidly. Many different factors can affect a company’s stock price, including their production and supply chain, as well as significant global economic events and general investor sentiment.

To potentially minimize the impact of market volatility, consider investing in funds that pool together different assets for diversification. This is a common strategy used by exchange-traded funds (ETFs) and mutual funds. ETFs usually track an index, like the S&P 500, while mutual funds are limited to one trade per day.

Bonds

A bond is similar to an IOU that’s issued by a company, government, or institution in return for cash. When you buy a bond, you can expect to receive regular payments (or coupons) at a fixed interval. And like stocks, most bonds can be traded in financial markets.

There are various types of bonds out there such as Treasury bonds, municipal bonds and corporate bonds. Treasury bonds are issued by the federal government, municipal bonds are issued by individual cities or locales, and corporate bonds are issued by companies.

Bonds are often seen as a safer investment option compared to stocks because companies usually prioritize paying bondholders over stockholders. Interest payments on bonds are also viewed as more reliable than profits or capital gains, which can fluctuate based on a company’s performance. Moreover, it’s highly unlikely that established institutions, such as the US government, would fail to meet their financial obligations.

Real estate

Investing in property, such as a home, is commonly considered a stable investment, especially given the housing shortage in the US. Regardless of fluctuations in the property market, you can still benefit from residing in it or renting it out. For those unable to afford a down payment or mortgage, investing in real estate investment trusts (REITs) is an option. These financial vehicles allow individuals to invest in real estate through companies that own and operate properties.

Commodities

Commodities are physical goods such as gold, beef, oil, etc.

Trading commodities is usually seen as something for experienced traders who know about things like supply and demand, as well as seasonal patterns. For instance, in the oil industry, if OPEC countries make a deal to reduce oil production, it could cause the price of oil to go up. These markets can be complex with lots of factors to think about.

Cryptocurrencies

Cryptocurrencies are virtual currencies that can be used for investing or making payments. They typically lack government or central bank support and their transactions are stored on a blockchain.

While cryptocurrencies aren’t considered legal tender and aren’t regulated by any government, they can still be traded like traditional currencies on the foreign exchange market. But be cautious, because they’ve been incredibly volatile since they first emerged in 2009. Bitcoin, in particular, has seen some dramatic fluctuations in value recently.

Collectors’ items

In addition to financial assets, there are non-financial assets that can be valuable investments. These can include memorabilia, collectors’ items, and fine art like sports jerseys, rare stamps, and Banksy artwork. It takes time and expertise to build up these portfolios, as well as a deep understanding of the market they belong to. Without this knowledge, it can be challenging for the average person to determine if a piece of art or collector’s item will appreciate in value.

How can a person get started with investing?

When it comes to investing, it’s all about finding the right balance between the work you’re willing to put in and the risks you’re willing to take. Younger investors often lean towards higher risks as they have more time to recover from any potential losses.

Once you’ve figured out how much risk you’re willing to take and what you want to achieve with your investments, you could consider allocating some of your funds to one or more of the strategies mentioned above, in the expectation that they will help you reach your financial goals.