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The ever-evolving investment landscape features extremely high dynamism and competition. This often complicates matters for beginners.
From my in-depth research, I realize that it’s necessary to learn the basic principles. Whether you prefer buying ETFs instead of other different assets helps to understand which one stands a better chance to bring better returns.
Therefore, I advise you to understand the different types of investments first before making a decision.
Different types of asset classes on the risk ladder
In this section, I include the list of major asset classes in ascending order of risk.
Cash
Making a cash bank deposit is the simplest and safest investment. Investors can understand the interest they expect to earn, and the safety of their capital is a guarantee. The money is locked for a set period, with penalties applied on early withdrawals.
The disadvantage with a cash investment particularly that locked in a savings account is; the interest you earn may not beat inflation.
Bonds
Bonds are debt instruments representing loans investors give to borrowers. Typically, this investment asset involves corporations or government agencies. In this case, the lender will receive a fixed interest rate from a borrower for using their capital.
Bonds are necessary for organizations that need capital to finance purchases, business expansion, daily operations, and many other projects.
Since interest rates determine bond rates, they’re usually in high demand when central banks or Federal Reserve increase their interest rates.
Mutual Funds
Mutual funds involve many investors pooling their money in one basket to purchase securities. While they may be deemed passive, a lot goes into managing these assets. Portfolio managers manage these assets by allocating and distributing the mutual funds to buy bonds, stocks, and other securities.
To invest in mutual funds, an investor needs $1,000 to buy a share. This then translates to a portfolio with 100 different stocks.
Mutual funds need to be actively managed all the time. It’s the work of portfolio managers to make necessary updates- careful tracking and adjustments of their allocations within the fund.
On the downside, investing in mutual funds can be costly. Investors have to pay yearly management fees and other charges. Often, these costs cut into the returns you receive from the fund.
Mutual funds’ valuation is carried out at the end of the trading day. Likewise, buying and selling place after the market’s closure.
Exchange-Traded Funds (ETFs)
Many investors prefer buying ETFs because of their increase in popularity. Since their introduction in the mid-1990s, they’ve risen in prominence.
ETFs bear a resemblance to mutual funds, with the only difference being; you can trade them the entire day on a stock exchange. This means that they reflect the trading behavior of stocks. Therefore, they can experience drastic changes in value during the trading day.
Also, ETFs can track an underlying index any other stock that an issuer chooses including, commodities, emerging markets, biotechnology, agriculture, and more.
Many investors find them easy to trade. Besides, they offer broad coverage.
Stocks
When investors buy shares of stock from different companies, they expect to gain some dividends from a booming increase in the stock’s price. In the event of the company’s liquidation of assets, investors can have a claim. That is if the company is declared bankrupt and doesn’t own physical assets.
Unlike holders of preferred stock, Individuals who hold common stock exercise voting rights during shareholders’ meetings. However, they enjoy preference over common shareholders when receiving dividends.
Other investments
If you don’t prefer the investment assets mentioned above, I have other alternative investments for you:
Hedge funds and private equity funds:
These investment assets allow investors to invest in various acquisitions that promise to earn you beyond market returns, known as “alpha.” Note that their performance to deliver positive results is not a guarantee. They’re are vulnerable to significant shifts in returns. Sometimes, they can underperform by an incredible margin.
Since these investment assets require $ 1 million or more, they’re often available to accredited investors only. Also, you have to declare your net worth to invest in hedge funds. They can also take a long time to get beyond market returns.
Real estate:
These investment vehicles require investors to purchase commercial or residential properties. However, you can also buy real estate investment trusts (REITs). Similar to mutual funds, many investors pool their money to acquire properties. They are also traded on the stock exchange.
Commodities: These are tangible resources, including silver, crude oil, gold, agricultural products, and more.
How to make a sensible, suitable, and simple investment
Most experienced investors’ portfolios reflect a combination of the various investment vehicles mentioned above. It also explains their risk tolerance. However, if you’re starting, I would like to advise you to invest in simple investments, then gradually expand your portfolio.
The best assets to start with include mutual funds or ETFs. After that, you can consider real estate, individual stocks, and other alternatives.
It’s also important to keep an eye on your portfolio on every trading day. Choosing a viable option like index funds is an excellent move as it mirrors the market and makes it easy to monitor.
Conclusion
There are varieties of investment vehicles to help you reap better returns. However, many radical changes take place in the investment landscape, making it essential to understand the basic principles first. Understanding this vital information will help you understand various investment vehicles and their requirements. But if you choose to ignore and jump in, you might as well be preparing yourself for failure. Would you rather risk your money investing in an asset you don’t fully understand?
There are valuable resources from veteran investors with diversified portfolios to help you. Sound advice from financial advisors can also come in handy. Avoid untrustworthy sources and those who collect commissions.
If you’re a beginner, you should start with simple investments, then gradually diversify your portfolio. I advise you to start with roboadvisors (e.g. Whitebox) or buying ETFs before considering other alternatives.
