Investing is an essential part of a person’s finances. Investing comes in many different forms, but it is done with the expectation of achieving a profit from an initial purchase. Typically we associate investing with the purchase of stocks or these days cryptocurrency. Investing can include but is not limited to putting your money in financial plans, shares, property, or the development of a commercial venture. Whether or not you handle your investments or the responsibility is given to a financial advisor investing helps to ensure future long-term financial security. You can check out some of my past blogs to learn about the importance of investing (Investing 101). Today I will be discussing some of the most well-known investments.
Types of Investments
A GIC or a Guaranteed Investment Certificate is a low-risk savings account where the money is deposited in a lump sum and the interest rate is locked in for the term. While this method will not produce a high yield it can be a great place for people to store money who are looking to take their money out at a specific period of time and cannot risk fluctuation in the value of their money. These cases may include money deposited for a down payment on a house, purchase of a car, or home renovations. The interest rate offered is usually slightly higher than traditional savings accounts therefore it can be a good place to store funds you do not expect to touch such as your emergency fund. Overall GICs are a safer and much more conservative investment than stocks or bonds and are offered by almost every bank or credit union.
A bond is a fixed-income investment. The government or companies raise money by borrowing money from investors with a promise to pay back the investment with interest over a certain time frame. Bonds can often be used to offset more volatile markets and make your portfolio more stable. A strong bond portfolio can even outperform many stocks during a bear market and help to provide a cushion when equities are struggling as they move in the opposite direction of interest rates. As equities fall so does the interest rate and bond rates increase. Bonds are a low-risk way in order to diversify your portfolio. They provide a consistent stream of income and can be considered in every portfolio.
Probably the most well-known type of investment. Stocks are an investment that is an ownership share within a company. People tend to invest in companies that they expect to go up in value. Stocks tend to get the majority of the media attention and are a good place to put a significant amount of your assets. Stocks have many advantages such as growing in value with the economy. Corporate earnings tend to increase at a similar rate to the economy and with technological change constantly expanding production possibilities, our efficiency and output grow which increases profits. Stocks average a return of 10% a year and therefore they help to keep the value of your money ahead of inflation. Stocks have a plethora of benefits and are a great investment. Any portfolio should have a significant amount of its assets in stocks.
Property requires a large upfront investment but is able to provide the investor with income from, rent, and appreciation. If the property is being used for personal use it can also be a means of generating business profits. Property is a fairly stable source of income and can help to diversify a portfolio. While stocks are liable to change in a short period of time a renter is under contractual agreement to continue payments until the end of the term. This allows a property owner to know the amount of income they will be receiving for that given period without risk. Although an expensive addition to a portfolio property has a number of benefits and should be considered.
There are many benefits to investing in cryptocurrency and it is worth checking out one of my previous blogs for more information on cryptocurrency (What is Cryptocurrency?). In summary, cryptocurrency is a highly volatile market that has the potential for investors to significantly appreciate their money. Cryptocurrency is very new but it has the technological advantage of becoming the currency of the future. It has already proven that it is here to stay but still has to prove itself as a store of value, unit of account, and medium of exchange to become a widely accepted form of money. A portfolio can be very successful without cryptocurrency but if it is to be added consider having as little as 5-10% of your entire portfolio.
As you can tell there are many types of investments and the important thing to know is that they all work in some capacity. It all depends on your risk tolerance, the goals you want from your life, and many other factors. It is important to do your own research and talk with experts within the industry to determine what the best investments are for you. You can check out our Instagram @therichcollegestudent to learn more about risk tolerance and what may affect your investment decisions.