Just like personalities, investment styles differ from person to person. What works for one may not work for another. I’m comfortable with risk, my spouse is not. Finding and understanding your personal investment style will influence the types of investment products that will make up your portfolio.
We can review six of the most common types of investments here:
1. Cash and commodities are typically considered low-risk investments. If your tolerance for risk is low, this is probably the best place to start. Gold and crude oil are examples of commodities that are on the market that people invest in. Examples of cash investments would be bank products like savings accounts, CD’s, and money markets. Money market accounts are like savings accounts but typically earn higher interest rates on return for higher balance minimums. Keep in mind that low-risk investments like these also tend to have low returns.
2. Bonds are sort of like an IOU. Companies issue corporate bonds, governments issue municipal bonds, and the US Treasury issues Treasury bonds. They are debt instruments that investors buy with the understanding the principal will be paid back with interest after a specified length of time. Bonds are considered low risk investments and generally very safe as well.
3. Investment funds are a way to invest money collectively with other investors. Investment funds can be public such as a mutual fund, or private such as a hedge fund. Typically there is a fund manager who manages the investment decisions; a fund administrator who manages the trading; a board of directors or trustees who oversee compliance with laws, regulations and rules; the shareholders who own (or have rights to) the assets; and a "marketing" company to promote and sell shares of the fund. There are varying degrees of risk from fund to fund, so researching and choosing the right one is important.
4. Stocks are probably the most well-known type of investment. Buying stock means you’re buying an ownership stake in a publicly traded company. When you purchase stock in a company the hope is that the price of that stock will rise so you can then sell it for a profit. The risk is that the price of the stock could go down meaning you would lose money. Since stock is sold through brokers, it’s important to do diligent research into available brokers to find one who fits your needs.
5. Retirement plans are a vehicle through which to buy stocks, bonds, and funds in two tax-advantaged ways. You can enroll through your workplace, if they offer one, or you could get an individual retirement plan (IRA) – either traditional or Roth. The risks on these investments would be the same as if you were purchasing those investments outside of a retirement plan.
6. And finally, real estate investments. There are many ways to dip your feet into this investment pool, some that don’t involve purchasing real estate directly. Real Estate Investment Trusts (REITs) are often compared to mutual funds. There are online real estate investment platforms that match investors to development projects. You could also consider investing in rental properties or renting out a room in your own home. Flipping houses can also be lucrative but does require experience and up-front capital.
No matter how you decide to invest your money, make sure you are aware of all the risks, including tax implications, involved.
Your tolerance for risk, your reasons for investing in the first place, the timeline for avoiding capital gains, and an understanding of certain markets are all important factors in getting the most out of your investment. If have any questions about your investment plans, please don’t hesitate to call us – we and our investment advisor affiliates are here to help!
Michael Allen, CPA
Allen & Company, PC
(770) 428-6229 (T)
(770) 425-5481 (F)