The world of investing can often be confusing, so we’re here to explain to you the four main types of investments that you can choose from.
Oct. 11, 2022
Young investors will often believe that an investor is someone with a whole lot of money, like Berkshire Hathaway’s (NYSE: BRK.B) Warren Buffett or Amazon (NASDAQ: AMZN) CEO Jeff Bezos. This couldn’t be further from the truth.
As well as that, simply investing in the likes of Apple (NASDAQ: AAPL), Tesla (NASDAQ: TSLA), Virgin Galactic (NYSE: SPCE) or any other publicly traded company is not the only form of investing. In fact, many analysts believe there are four distinct types of investment, split into two sub-categories, which are:
- Growth investments: Long-term investments in shares or property.
- Defensive investments: Consistently generated income such as cash and bonds.
While we have a primary focus on stock investments here at MyWallSt, it is still important to know the difference between these four main types.
We are in the midst of a ‘war on cash’ according to some, with companies such as Block (NYSE: SQ) and PayPal (NASDAQ: PYPL) set out to end the need for cash as a utility altogether. However, cash will likely always have a place in the economy, whether in paper or digital form.
Cash investments include everyday bank accounts, high-interest savings accounts, and term deposits, and typically carry the lowest potential returns of the four different investment types.
However, it is always healthy to have a good amount of cash on hand in case of a rainy day. It is safe, and though it will lose value over time due to inflation, it can play an important role in providing you with liquidity should a downturn occur.
The average bank interest rate for checking accounts in the United States is 0.03%.
The one that investors might know a lot about is ‘bond’ investments. This is effectively a loan taken out by the government from willing investors with the promise of repayment with a fixed interest rate.
In the U.S., Federal Treasury bonds are the most well-known. Treasury bonds are fixed-rate U.S. government debt securities with a maturity range between 10 and 30 years.
Bonds are considered a defensive investment, because they generally offer lower potential returns and lower levels of risk than shares or property. Government bonds are not the only form of fixed-interest investments, but they are probably the safest, and virtually guarantee a fixed return rate over the established period.
The long-term average interest rate return on government bonds, as of October 2022, is 5.90%.
Property is considered a very risky growth investment. This is because the price of the housing market can shoot up or down substantially over time, which is what happened in the lead-up to the 2008 Economic Crash.
It is possible to invest directly by buying a property but also indirectly, through a real estate investment trust (REIT).
REITs generally specialize in one particular sector of real estate, such as retail, residential, healthcare, or office blocks. Some examples include American Tower (NYSE: AMT), Vanguard Real Estate ETF (NYSEARCA: VNQ), and Prologis (NYSE: PLD).
The average return on residential rental properties as of the midpoint of 2022 was 10.6%.
And finally, the investing type we all know and love: shares. Whether you’re a fan of the safe and solid Microsoft (NASDAQ: MSFT) or the risky, potentially high-growth Beyond Meat (NASDAQ: BYND), investing in shares allows you to take a slice of either.
As I’m sure you are already aware of how investments in company shares work, I’ll keep this brief:
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 could also receive income from dividends, which is when a company shares a portion of its profits with investors.
Although the stock market can dip and the value of shares can be volatile, in general, the market has always risen. The stock market has historically returned an average of 10% annually.
The important thing to remember with investing is to diversify your portfolio. In fact, this is one of our 6 Golden Rules here at MyWallSt, along with investing with the long-term in mind.