This post may contain affiliate ads
So you’ve decided to start investing. Congratulations! No matter what stage of life you are currently experiencing, it is always a good time to starting thinking about investing. Whether you’re just starting out on your own, in the middle of your career, approaching retirement age, or in the midst of your golden years, this means you’ve begun to think about your financial future, and how you might prudently manage your capital so that it can work for you.Nobody starts out an expert, and even the best investors in the world were once sitting where you are. Let’s start with two basic questions:Where should you begin?How do you begin?
There are four main investment types, or asset classes, that you can choose from, each with distinct characteristics, risks and benefits.
Once you are familiar with the different types of assets you can begin to think about piecing together a mix that would fit with your personal circumstances and risk tolerance.
1. Growth investments– Growth investing is a style of investment strategy focused on capital appreciation. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios. In typical usage, the term “growth investing” contrasts with the strategy known as value investing.These are more suitable for long term investors that are willing and able to withstand market ups and downs.Growth investors typically look for investments in rapidly expanding industries (or even entire markets) where new technologies and services are being developed, and look for profits through capital appreciation—that is, the gains they’ll achieve when they sell their stock, as opposed to dividends they receive while they own it. In fact, most growth-stock companies reinvest their earnings back into the business, rather than pay a dividend to shareholders. They tend to be small, young companies (or companies that have just started trading publicly) with excellent potential.The idea is that the company will prosper and expand, and this growth in earnings and/or revenues will eventually translate into higher stock prices in the future.Because investors seek to maximize their capital gains, growth investing is also known as a capital growth or a capital appreciation strategy.
—Shares– Shares are considered a growth investment as they can help grow the value of your original investment over the medium to long term.If you own shares, you may also receive income from dividends, which are effectively a portion of a company’s profit paid out to its shareholders.Of course, the value of shares may also fall below the price you pay for them. Prices can be volatile from day to day and shares are generally best suited to long term investors, who are comfortable withstanding these ups and downs.Also known as equities, shares have historically delivered higher returns than other assets, shares are considered one of the riskiest types of investment.
—Property– Property is also considered as a growth investment because the price of houses and other properties can rise substantially over a medium to long term period.However, just like shares, property can also fall in value and carries the risk of losses.It is possible to invest directly by buying a property but also indirectly, through a property investment fund.
2. Defensive investments– These are more focused on consistently generating income, rather than growth, and are considered lower risk than growth investments.A defensive investment strategy is a conservative method of portfolio allocation and management aimed at minimizing the risk of losing principal. A defensive investment strategy entails regular portfolio re-balancing to maintain one’s intended asset allocation; buying high-quality, short-maturity bonds and blue-chip stocks; diversifying across both sectors and countries; placing stop loss orders; and holding cash and cash equivalents in down markets. Such strategies are meant to protect investors against significant losses from major market downturns.Defensive investment strategies are designed to deliver protection first and modest growth second. With an offensive or aggressive investment strategy, by contrast, an investor tries to take advantage of a rising market by purchasing securities that are outperforming for a given level of risk and volatility. An offensive strategy may also entail options trading and margin trading. Both offensive and defensive investment strategies require active management, so they may have higher investment fees and tax liabilities than a passively managed portfolio. A balanced investment strategy combines elements of both the defensive and offensive strategies. Selecting investments in high-quality short-maturity bonds, such as United States Treasury notes (T-notes) and blue-chip stocks are solid tactics for a defensive investment strategy. Even when picking stocks, a defensive portfolio manager will stick to large, established names with good track records. Today, that portfolio manager is more likely to lean towards exchange traded funds that mimic market indices, as these offer exposure to all the established stocks in one diversified investment.
3. Cash– Cash investment is a short-term obligation, usually fewer than 90 days, that provides a return in the form of interest payments. Cash investments generally offer a low return compared to other investments. They are also associated with very low levels of risk and are often FDIC-insured.
A cash investment also refers to an individual’s or business’s direct financial contribution to a venture, as opposed to borrowed money.Cash investments include everyday bank accounts, high interest savings accounts and term deposits.They typically carry the lowest potential returns of all the investment types.While they offer no chance of capital growth, they can deliver regular income and can play an important role in protecting wealth and reducing risk in an investment portfolio.
4. Fixed interest The best known type of fixed interest investments are bonds, which are essentially when governments or companies borrow money from investors and pay them a rate of interest in return.Bonds are also considered as a defensive investment, because they generally offer lower potential returns and lower levels of risk than shares or property.They can also be sold relatively quickly, like cash, although it’s important to note that they are not without the risk of capital losses.A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I. O. U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debt holders, or creditors, of the issuer. Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually includes the terms for variable or fixed interest payments made by the borrower.