So you’ve found yourself in a place in life where you are no longer living paycheck to paycheck. Congratulations! Pat yourself on the back for achieving some financial stability. That’s no small effort on your part! But in order to maintain that stability, you’re going to want to start investing your money. You may have become curious about investing apps. If you’re not in the US you might be looking for an app like Robinhood outside the US. Before you start your journey to financial success, let’s do a quick run-down of the four major kinds of investments.
Growth investments
Most people when they talk about investing are talking about growth investments. Growth investments can yield a lot of capital for the investor if things go right, but investors also stand to lose their investments if the company fails or the market takes a downturn.
Most investors agree that a good investment practice is to have a diversified investment portfolio. Growth investments are best for long-term investors who have anticipated market fluctuations and are prepared to weather them. There are two main types of growth investments: company shares and property.
Company shares
Everyone dreams of buying shares of the next Google, but it’s best to keep your expectations about investing in company shares realistic. Also known as equities, company shares are best for increasing the value of your stock portfolio in the medium to long term. Investors purchasing equity with a growth investment mindset typically look for new companies that show a lot of promise.
Shareholders can also receive income from dividends. Dividends are a portion of the company’s profit paid out to shareholders, meaning equity investment can still generate income for investors even while the investors are still holding on to their shares.
Of course, there’s always the risk of the company going bankrupt, or just poorly performing in the market, which causes the values of the shares to go down. Shares have the ability to depreciate in value. Some investors find that shares they bought at a certain price lose value, and thus even if they sell the shares, they sell at a loss.
Equity is considered both the highest risk and highest reward form of investment. For this reason, shareholding is best suited for long-term investors who can stand the ups and downs of a volatile market.
Property
Property is also a common form of growth investment because housing prices typically rise over a medium to long period of time. However, if you lived through 2008, you are aware that housing prices are not guaranteed to rise. That said, property is a great option for investment because it can serve as either a long-term or short-term investment.
When it comes to investing, property has some distinct advantages. The biggest advantage is that even if the value of the property takes a decade or more to increase, it is still a livable space. Even if the investor does not live there themselves, properties can be rented out, so they can generate income while they remain in the investor’s portfolio.
Some investors decide to use property as a short-term investment and start “flipping” houses. This means they buy a run-down property and renovate it, dramatically increasing the resale value of the property. This is a way to turn properties into faster-returning growth investments, but this strategy requires good project management to not go over budget and create a loss upon sale.
While most are referring to real estate when talking about investment property, the term could also refer to any other asset the investor has collected, expecting it to appreciate in value. Art, land, securities, collectable, even rare Beanie Babies can all be considered investment property.
Defensive investments
While growth investments focus on generating capital, defensive investments are meant more to prevent losses. Any properly diversified investment portfolio is incomplete without some defensive investments. For the risk-averse investor, like a retiree or someone investing for a college fund, defensive investments are appealing because they focus on protection first, and then modest growth.
Defensive investors typically focus on high-quality short-maturity bonds, like treasury notes and blue-chip stocks. Defensive investors still purchase growth investments like company shares, but with a much more conservative approach. A more defensive style of equity investment would be to pick stocks from established businesses with good records of growth, rather than looking at promising new companies that could either skyrocket or flop. Defensive investors don’t look for the next Google, they simply buy shares in Google.
Cash
Cash investment is another low-risk, low-return investment, but unlike defensive investments, they are typically pretty short-term. A typical cash investment lasts fewer than 90 days and the return comes in the form of interest payment. The most common types of cash investments are savings accounts, money market accounts, and certificates of deposit. When investors need a place to keep their cash while researching other investments, they usually opt for a cash investment.
Fixed interest
If you’re looking for an investment that generates a regular income at a set interest rate for a certain amount of time, a fixed-interest investment might be right for you. These are generally issued by governments, corporations, and financial institutions like banks to raise funds. A fixed interest investment could be a government or corporate bond, a capital note, a debenture, or income security. Fixed interest investments are generally considered defensive investments because they have a very low risk, but have the added benefit of being able to be sold off quickly if the investor needs cash in a pinch.
Bottom line
There are many types of investments, and any shrewd investor will want to build a diverse portfolio with all kinds of investment. You know the old saying, “don’t put all your eggs in one basket?” That applies doubly to your investment portfolio! A well-diversified portfolio will contain multiple growth investments, some defensive investments, cash investments, and fixed interest investments to both generate income and defend against market fluctuations.
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