Investments is a complicated yet simple matter. Many who first come into contact with investments are intimidated by the dynamic and ever-changing investment landscape, complicated investment jargons, and the multiple asset classes. However, those who take the time to learn and understand the basic principles and various different asset classes stand to gain significantly in the long run.
The first step is learning to distinguish the various types of investments and where it stands on the risk ladder.
Cash investments are the safest and most relatable investment asset. They include everyday bank accounts, high interest savings accounts and term deposits. It not only gives investors precise knowledge of the interest that they’ll earn but also guarantees that they’ll get their capital back.
However, the interest earned from cash rarely beats inflation, and gives back the lowest returns among all investment assets. Nonetheless, although they offer no chance of capital growth, they can deliver regular income and play an important role in protecting wealth and reducing risk in an investment portfolio.
The best known type of fixed interest investments are bonds, a debt instrument representing a loan made by an investor to a borrower. Governments or corporations will issue a fixed rate of interest to lenders in return for their capital.
Bonds are also considered as a defensive investment, because they generally offer lower potential returns and lower levels of risk than shares or property.
They can also be sold relatively quickly, like cash, although it’s important to note that they are not without the risk of capital losses.
Stocks are considered a growth investment as they can help grow the value of your original investment over the medium to long term.
However, the value of shares may also fall below the price you pay for them. Prices can be volatile from day to day and shares are generally best suited to long term investors. They have historically delivered higher returns than other asset classes, and are considered one of the riskier investments.
Real estate is also considered as a growth investment as the price of houses and other properties can rise substantially over a medium to long term period.
However, just like shares, property can also fall in value and carries the risk of losses.
Investors can acquire real estate by directly buying commercial or residential properties. Else, they can purchase shares in Real Estate Investment Trusts (REITs), a mutual fund where people pool together their money to purchase properties.
Commodities refer to tangible resources such as gold, silver, and crude oil, as well as agricultural products.
There are specialized ETFs designed to focus on commodities. Investors can also invest in commodities via a commodity pool, a shared private pool of money from multiple participants to speculate the futures and commodities markets. An individual investor’s risk is limited to her financial contribution to the fund.
Many veteran investors in SG diversify their portfolios using the asset classes listed above, with the mix reflecting their risk tolerance. A good piece of advice to investors is to start with simple investments, then incrementally expand their portfolios. Specifically, mutual funds or ETFs are a good first step, before moving on to individual stocks, real estate, and other alternative investments.