“Don’t put your eggs all in one basket.”
This ought to be the cardinal rule in investing. Diversifying your assets means massive gains and fewer losses. If you’ve just dipped your toes in this financial activity, you’ll quickly find that the pool is both deep and wide.
There are many different types of investments. And the information available out there can be overwhelming. This article aims to help you, the novice, navigate the waters by knowing all about the most important investment types.
In the United States, a retirement plan is made up of cash you set aside to invest later on. The two major types of retirement accounts in the United States are the 401(k) and the IRA.
This is the retirement account offered by most employers. The significant benefit of this option is when your employer matches the amount of money that you put into your account up to a certain percentage. The downside is that the funds on a 401(k) are typically invested into mutual funds, which almost always fails to outperform the market average.
An IRA is a retirement account you can set up for yourself. It offers more control over where you invest your money. You can choose to invest them in Exchange Traded Funds (ETFs), stocks, and bonds.
There are two types of IRAs: traditional and Roth. The main difference between the two is how taxes are applied.
A traditional IRA is tax-deferred. This means that it will be taxed at the current tax rate once you start making withdrawals to the fund.
Meanwhile, a Roth IRA is tax-free because the money you put into it is taxed before it is invested. So you aren’t taxed on the income from your investments when you withdraw it during retirement.
The risk and reward of retirement accounts depend on what they are invested in, which can vary greatly.
Photo by Avi Waxman from Unsplash
You can invest in real estate in many different ways—for example, flipping houses, constructing commercial buildings and renting out apartments. The price of entry is relatively high, but there are effective ways to get around this.
Real Estate Investment Trusts
Business buildings, land, and residential properties are expensive investments. Fortunately, crowdfunded real estate investment opportunities are beginning to pop up. One example is the Real Estate Investment Trust or REIT.
Like a mutual fund, a REIT takes the funds of many investors and invests them in a collection of income-generating real estate properties. REITs can also be bought and sold like stocks on the stock market, making them cheaper and easier to invest in than property.
Now, the most challenging part about investing in real estate is finding a property that you can purchase with a margin of safety. This is why novice investors must conduct due diligence through a reliable platform. Do that, and you can expect to make some decent returns investing in property.
Photo by Patrick Weissenberger from Unsplash
The Stock Market
Like the previous investment types, there’s more than one way to profit from the stock market. You could invest in a stock market index, stock options, or individual stocks.
Stock Market Index
A stock market index, or index fund, is an investment meant to track a market index typically made up of stocks or bonds. These are run by fund managers, who make sure that the index fund performs the same as the index does.
A stock option lets an investor bet on the rise or fall of a given stock by a specific date in the future. Many large corporations opt for purchasing stock options to hedge risk exposure to given security.
Individual stocks are what are commonly referred to as “shares” of ownership in a particular company. Purchasing an individual company’s stock means you become part-owner of that company.
You make money when the company makes money. When the company grows in value, the value of your stock grows as well. What’s more, you could receive rewards via dividends if the company chooses to distribute earnings to their shareholders.
Minimize the risk of your investment value plummeting by buying stocks from well-performing companies. Remember to purchase these stocks at prices that guarantee big returns.
Put Those Retirement ‘Eggs’ in Different Baskets
Like the previous investment types, there’s more than one way to profit from the stock market. You could invest in a stock market index, stock options, or individual stocks. But before diving into the stock industry, you have to equip yourself with the right knowledge. Investment books such as Seth Klarman’s Margin of Safety will help you learn about value investing and how you can apply this strategy in your investments.
At the end of the day, the most successful investors know it’s better to diversify. Invest in each of the types explained above if you can afford to do so. Otherwise, start by purchasing individual stocks. The risk is higher, but you usually can make better returns with it than with any other investment type.
Finally, educate yourself. What you’ve read above might be the premier investment type, but there are many others out there too. Once you’ve gained confidence and achieved initial success with those first few investments, venture into other newer ones like cryptocurrency.