Investing 101: Understanding the 4 Main Investment Vehicles
When you 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.