If you’re starting your investment journey, you might be wondering what types of investments are best for your needs. Learning about different kinds of investments can help you build a diversified portfolio, which should be the goal of any investor. So, keep reading to find out about four different types of investments, with the benefits and risks of each.
Why Do I Need a Diversified Portfolio?
Building a diversified portfolio allows you to balance safety with earning potential. As Erin Gobler writes in TIME, diversifying your portfolio can protect you from any value changes in specific types of assets, like stocks and property. For example, if the stock market goes down, investors who only have shares might experience a significant loss. However, if they have other types of assets, like property or cash, they can stay safe from market fluctuations.
Diversifying your portfolio also keeps you from relying solely on stable but low-yield investments. For example, if all your money is in government bonds, you might have a great deal of security, but these investments might not make enough money to keep up with inflation. With a diversified portfolio, you can have some stable investments and some high-risk, high-yield investments, allowing you to increase your earnings while keeping your overall risk low. Here are the four main types of investments:
The term “investment property” usually refers to residential or commercial real estate properties owned by an investor. When you own an investment property, you might use it to make money through rental income or by selling the property in the future. These investments might provide short-term or long-term profits. For example, for a short-term gain, an investor might purchase an older home, hire a team to make necessary repairs and then sell the house for a higher price. Long-term property investments often include rental homes, where an investor might make money for decades by renting to a series of tenants.
Owning investment properties can have considerable benefits, but there are some difficulties with this type of investment. Buying property can be a great way to diversify a portfolio, making real estate usually one of the less volatile investment types since land and buildings are always in demand. If you choose a neighborhood or geographical region that experiences growth, you can increase your profits substantially. However, buying property typically requires more capital than other types of investments, and it can take lots of time and effort to maintain a property and collect rent from tenants.
Investing in shares or stocks involves buying a part of a business, which gives you a percentage ownership in the company. As the company grows, the value of your shares increases, which means you can make a profit by selling them at a higher cost. Many people own shares in companies, using free or low-cost trading programs to buy and sell stocks. Some people make a living from trading stocks, while others use the stock market to earn extra income or prepare for retirement. You can also hire a trading professional to maintain your portfolio for you.
Getting started buying and selling shares is fairly easy, and you don’t need much capital. If the market is healthy and you choose growing companies to invest in, you have the opportunity to make a significant profit, especially if you develop a talent for trading. However, some types of shares are more volatile than others, which means you can also lose a lot of money on risky investments, according to the balance. Also, success in the market often requires lots of time and effort.
Fixed-interest investments, also called fixed-income investments, are low-risk investments that produce a steady amount of interest over a specified period. Common types of fixed investments include government and municipal bonds. When investors buy a government bond, their money contributes to government spending on infrastructure and other social programs. The investor receives a certificate verifying their purchase of a bond, with information about the fixed interest rate that their bond accrues every six months until it matures. You can sell a government bond at any time.
While fixed investments have some benefits, their slow interest accrual and low rates mean they’re not the quickest way to make substantial money. The interest rate on a government bond depends on the type of bond you purchase and the market conditions when you buy the bond. They can be a valuable part of your portfolio because they allow you to diversify and provide stability. Still, their earning potential is limited, especially if you don’t have a lot of time before you plan to divest your funds.
Cash investments, like high-yield savings accounts and Treasury bills, are short-term, small-yield investments that can supplement your other investments. Some people use cash investments to keep their money safe from market fluctuations and earn more interest than a traditional bank account. For example, you might take money out of the stock market and put it into a cash investment until the market stabilizes. You can also use it if you need to access the funds quickly.
While cash investments aren’t as lucrative as property or shares, they can be a good option if you want to start making interest on your money while you decide how to build your portfolio. For example, you might inherit a small legacy from a relative. If you’re unsure what type of long-term investments you’d like to make, you may consider placing your money in a high-yield savings account while you speak to a financial advisor about your options.
There you have it — four key types of investments. Castle Development is here to help if you’re in the Dallas/Ft. Worth area and are interested in commercial property investment options. Our experienced team is happy to talk to you about your investment and property interests, so we can design a plan that meets your financial needs and goals. Contact us for more information.