If you’re looking to break into investing, there are three major types of investment you’ll be looking toward: ownership investments, lending investments, and cash equivalents. Though there are thousands upon thousands of investment opportunities open to you, they will usually fall into these three broad categories. Acclimating yourself with the benefits and drawbacks of each is an ideal first step on your path towards wealth.
Cash equivalents are so dubbed because they are highly liquid; they can be converted into cash quite quickly. An example would be a money market fund. Cash equivalents have very little risk, but they also yield a low reward. They are often used for cash that may be needed in the immediate future or as a low-risk portion of a broader portfolio.
If you’ve ever let a friend borrow a few bucks and then charged them interests, congratulations – you just became an investor. Lending investments can range from becoming the angel investor for a startup to branching out into micro-loans online for developing countries. Any time you give money to another individual or enterprise in exchange for a small fee on top of that money, you’re acting as a lender. Fun fact: savings accounts are also a form of lending investment, although usually very weak, as are certificate of deposits. In this scenario, you’re lending money to the bank.
Real estate, business investments, gold – all of these are considered to be ownership investments. Ownership investments can be relatively stable, such as the purchase of precious metals, or highly volatile, such as an investment in a new business. Ownership investments are unique because many of them provide both value, which can hopefully appreciate, in addition to passive income. A restaurant, for instance, will have both the value of the restaurant and its equipment as well as its monthly revenue. A rental property will have both rental income and the value of the property itself. Naturally, this isn’t always true – precious metals provide no passive income.
Understanding your personal finance strategy is critical to the preparation of a well-rounded portfolio with appropriately managed risk. If you need help with your retirement investing – or just investing at all – contact FMT advisory today for more information.