Exploring Different Types of Investments

We often begin our investment journey by choosing one of the existing types of investments. In my case, I begin my journey with what is often considered the riskiest option: cryptocurrency. Looking back, I initially saw my decision as a smart one, but with hindsight, I now realize it was a risky and somewhat irrational choice.

Now, let’s take a look into the various types of investments available, where I’ll outline the pros, and cons and how I use them.

Table of contents:

1. Stocks
2. Bonds
3. Real Estate
4. Mutual Funds
5. Exchange-Traded Funds (ETFs)
6. Cryptocurrencies
7. Commodities
8. The Bottom Line

1. Stocks

Stocks are one of the most common investment options. When you purchase shares of a company’s stock, you become a shareholder, which means you own a part of that company. This option offers a balanced risk-to-reward ratio. By adopting the right strategy, you can achieve significant gains over the long term.

Pros:

• Potential for high returns: Stocks offer the potential for significant returns on investment.
• Liquidity: Stocks are relatively easy to buy and sell, providing liquidity.
• Ownership and Dividends: Stockholders have ownership rights and may receive dividends.
• Diversification: You can diversify your stock portfolio by investing in various companies.

Cons:

• Higher volatility: Stocks tend to have higher price fluctuations compared to other assets.
• No guarantees: There are no guarantees in the stock market, and prices can fluctuate significantly.
• Research Required: Successful stock investing requires research and analysis to select the right stocks.

How do I use them? I see stock as the best type of investment suited for me. They are accessible, easy to manage, and provide a remarkable risk-to-reward ratio. I enjoy spending my free time researching companies, which is why stocks make up a significant 70% of my total assets.

2. Bonds

Bonds are like loans you give to governments, cities, or companies. When you invest in bonds, you’re lending them money, and in return, they pay you interest and return your money when the bond matures.

Pros:

• Steady Income: Bonds, provide a reliable source of regular interest income.
• Lower Risk: Bonds are generally considered safer than stocks.
• Diversification: Adding bonds to your portfolio can help spread risk.

Cons:

• Lower Returns: Bonds typically offer lower potential returns compared to stocks.
• Interest Rate Risk: Bond prices can drop if interest rates rise.
• Inflation Risk: Bonds returns may not keep up with inflation.

How do I use them? I don’t invest in bonds because historically, they offer lower returns compared to stocks. Given my age, I focus on growth-oriented investments rather than seeking a steady income.

3. Real Estate

Real estate investments mean buying properties, like houses or offices, to make money from rent or selling them later for more money.

Pros:

• High return: Can earn rental money and property value may go up.
• Diversification: Different from regular money investments.

Cons:

• Requires significant capital: Need a lot of money to buy property.
• Property management: Have to take care of property and fix things.

How do I use them? Given the substantial upfront costs associated with physical real estate, I don’t currently have direct investments in properties. However, I allocated 5% of my portfolio to Real Estate Investment Trusts (REITs).

4. Mutual Funds

Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. They’re managed by professional fund managers.

Pros:

• Instant diversification: Mutual funds offer instant diversification across various asset classes.
• Professional management: They are managed by professionals with in-depth research.

Cons:

• Management fees and expenses: There are fees and expenses associated with mutual funds.
• Limited control over the fund’s holdings: Investors have limited control over the assets held in the fund.
• Intraday trading options: The fund provides the flexibility of buying and selling throughout the trading day.
• Lower expense ratios: Funds generally have lower fees compared to some mutual funds.

How do I use them? I choose other kinds of investments that fit better with what I want to achieve financially. This way, I can customize my investments to suit my specific goals and how much risk I’m comfortable with.

5. Exchange-Traded Funds (ETFs)

ETFs are similar to mutual funds but trade on stock exchanges, offering intraday trading flexibility. They track specific indices or asset classes.

Pros:

• Intraday trading options: ETFs provide flexibility with intraday trading.
• Lower expense ratios: They typically have lower expense ratios compared to some mutual funds.

Cons:

• Limited ability to actively manage holdings: ETFs may offer limited control over the active management of their holdings.
• Complexity in understanding some ETF strategies: Certain ETF strategies can be complex and require a deeper understanding.

How do I use them? I believe it’s the most efficient way to invest with minimal research involved. I’ve also assisted my girlfriend in her investment journey, and we’ve allocated her entire portfolio to the S&P 500.

6. Cryptocurrencies

Cryptocurrency is digital money protected by computer codes. It operates on a technology called blockchain, which is like a secure online ledger for all cryptocurrency transactions.

Pros:

• High Growth Potential: Cryptocurrencies have shown the potential for significant price increases.
• Decentralization: They are not controlled by any central authority, such as a government or bank.

Cons:

• Extreme Price Volatility: Cryptocurrency prices can experience extreme fluctuations.
• Regulatory Uncertainty: Cryptocurrencies are still evolving in many countries, leading to regulatory uncertainties.
• Lack of Consumer Protection: Cryptocurrencies may not provide the same level of protection as traditional assets.
• Complexity: Cryptocurrency technology can be challenging to understand for beginners.

How do I use them? After a year of going all-in on cryptocurrencies, I realized that my emotional well-being is more important than money. So, I’ve decided to stop investing in cryptocurrencies.

7. Commodities

Commodities include physical goods such as gold, oil, and agricultural products. Investors can gain exposure to commodities through futures contracts or commodity-based ETFs.

Pros:

• Diversification: Commodities can help balance your investments because their prices don’t always move the same way as stocks or bonds.
• Protection from Rising Prices: Some commodities, like gold, tend to keep their value even when prices for other things go up.

Cons:

• Prices Change a Lot: The prices of commodities can go up and down a lot, often because of things like weather or politics.
• Not Easy to Own: It can be tricky to buy and store real commodities like oil or wheat, so many investors use special contracts instead.

How do I use them? I don’t currently invest in commodities because it requires a lot of research to understand supply and demand dynamics, along with unpredictable factors like weather and politics.

The bottom line

As we can see, each investment type offers something unique. It makes sense to choose investments based on your specific goals and approach. Whether you decide to invest in only one or diversify across several, the key is to understand your reasons for each investment.