Investing

Investing 101: Understanding the 4 Main Investment Vehicles

When investing 101 basicsyou first enter into the world of investment, it’s easy to feel like you aren’t sure which way to go with your money. There are just so many ways to make your money work for you!  But with so many options available, it becomes easy to delay making a decision as you search for the right investment vehicle for you.

There are a number of ways you can build wealth and keep your wealth growing on its own. The trick is to understand each of your options and build a portfolio that meets your needs and tolerance for risk, growth, and longevity.

Before you throw your hands up in despair — or worse, fall into an investment choice out of confusion — it’s worth taking 10 minutes to familiarize yourself with the four most common forms of investments: bonds, stocks, mutual funds, and real estate.

Bonds: Fixed Loans with Reliable Interest

When people talk about “bonds,” they are referring to a fixed-income security that essentially acts as a loan. When you buy into a bond, you are lending your money out to someone else — either a company or the government — who will then pay you back with interest.

If you’re interested in pursuing this option, there are four major types of bonds you’ll want to research: US Corporate Bonds, US Government Bonds, Municipal Bonds, and International Bonds, and you can read more about each of these types of bonds here.

Bonds are usually considered to be one of the safest investments around, especially if you’re buying a bond from a stable government. The trade-off here is a relatively low rate of return versus other, more risky securities. If you’re interested in slow and steady growth for your investment, bonds might be the best fit for your money.

Stocks: Higher Risk, Greater Opportunity

Stocks are another popular form of investment that can seem very complicated at first. Rather than loaning money to a company as you might with a bond, when you buy stock in a company you take on part-ownership of the business.  This is called equity.

This means you vote at shareholders’ meetings and you receive profits from the business as it grows. The downside to this potentially massive growth is that stocks can be highly volatile: they rise and fall, sometimes dramatically, on a daily basis.

The goal of picking stocks is to follow this solid advice from Warren Buffet: purchase as high quality as you can at as much of a discount as you can. In this way you can build a portfolio with stock in strong companies that grow in value over time.

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Mutual Funds: Pooling Your Investment

If stocks and bonds are chess pieces, think of mutual funds as the chessboard: a particular collection of stocks and bonds that you “buy into” with a number of other investors. A mutual fund is run by a professional manager who makes sure that the investments align with the mutual fund’s goal.

Mutual funds usually have a particular strategy in mind, so it’s your job to find the right mutual fund for you: the fund that mixes the right amount of small, large, risky, and low-risk investments.

It’s also important to note that unlike other investments, mutual funds don’t trade throughout the day, so their price doesn’t fluctuate based on supply and demand. Instead, the value of the fund is decided at the end of each day according to the fluctuation of the underlying assets and the number of outstanding shares.

Real Estate: A Classic Risk

Finally, many successful investors still look to real estate as a classic investment opportunity. The risk rises and falls depending on the real estate market, but some real estate investments can outperform stocks, bonds, and mutual funds over the course of 20 years.

Many factors influence the value of real estate investments: the location in which you purchase, whether it is commercial or personal, and how long you’re interested in holding the land. If those factors fall into place for you, real estate might be the most sensible investment for you.  Buying individual properties is one way to invest in real estate, but it requires lot of capital to be properly diversified.  A better approach is to consider investing in a Real Estate Investment Trust (REIT). A REIT is a security that invests in properties and mortgages and offers special tax considerations, high yields, and highly liquid investing options.

There’s no one right way to build an investment portfolio: the only focus is on making your money work hard for you. So when you’re ready to build your investment portfolio, don’t let your investment options overwhelm you. Focus on finding the right combination of bonds, stocks, mutual funds, and real estate to build a portfolio that makes you comfortable and grows your wealth.

Author Bio: Rich Ellinger is a serial software entrepreneur with a passion for investing. His latest company, Wealthminder, strives to help do-it-yourself investors create a workable financial plan and then marry that plan to a sensible investing strategy, all online. You can read more of his work at The Enlightened Investor.

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Grayson Bell

Grayson Bell

I'm a business owner, blogger, father, and husband. I used credit cards too much and found myself in over $50,000 in debt. I paid it off, started this blog, and my financial life has changed. I now talk about fighting debt and growing wealth here. I run a Wordpress management company, along with another blog. It is Empowered Shopper, which helps people get information about products they want to buy.

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9 Comments

  1. July 24, 2014 at 11:43 am — Reply

    Any ideas, besides real estate, for investing that don’t involve Wall Street?

  2. July 25, 2014 at 7:37 am — Reply

    P2P investing is an interesting approach. As far as the article, you pretty much summed up the basics. Good info here! I would add that index funds are the main mutual funds people will won’t to look at. Great article!

  3. July 27, 2014 at 6:21 am — Reply

    I think I’ll try mutual funds in the beginning to get a sense of investing, since I read that it has low risk and I know someone who earned around 10% in their first year (or maybe they’re just lucky haha). Then I’ll try a long term investment such as stock, because even though the price fluctuates if you keep it long enough you’ll have better chance to gain a nice profit.

  4. July 28, 2014 at 1:32 pm — Reply

    I think it’s easy to be over leveraged in real estate because most people eventually buy a home. I’m starting to like mutual funds a lot more, especially index funds and other funds with low fees that mirror a certain index or investment type.

    • July 28, 2014 at 2:10 pm — Reply

      Great point DC! I have enjoyed index funds for some time. They are low fee and easy to get started in.

  5. July 28, 2014 at 7:35 pm — Reply

    Another option with real estate are the new types of real estate companies. They go out and buy residential properties and then rent them out. As a shareholder, you get a piece of the monthly income that comes from renting the houses out for more than the monthly costs.

    Of course, there are downsides. Since these investments are new, there really aren’t dividends being paid since most money is being re-invested to buy more properties. Additionally, you are splitting up that monthly income between all shareholders. So instead of earning a few hundred bucks a month, you might only see a few bucks. But it does take you out of the landlord business and it’s a lot cheaper to get in the door than having to come up with a down payment.

  6. Jill Rogat
    August 2, 2014 at 6:52 pm — Reply

    While the return is minimal, I have found bonds and CD’s are typically safe and solid investments. Real estate has been quite tricky for us.

    • August 4, 2014 at 10:26 am — Reply

      Bonds are CD’s are very safe, but they don’t reap much reward. You should only have some money in CD’s these days as the return is small and you will be keeping money tied up for a specific time period.

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