There are three different main kinds of investments, stocks, bonds, and cash. Sounds simple, right?
Well, unfortunately, it can get very complicated from there. You see, each type of investment has numerous types of investments that fall under those three categories.
There is quite a bit to learn about each different investment type. The stock market can be a big scary place for those who know little or nothing about investing, and often the first time investor is disappointed, and perhaps even so badly burnt that they never have the confidence to try again.
In the same way that you have to practice in order to learn how to swim, and swim well on your own, you can easily learn the basics of investing and then decide to dip your toe in to test the water. Jumping in without checking, diving, or doing a belly flop, is not recommended.
Fortunately, the amount you have to learn is usually in proportion to the type of investor that you are.
THREE TYPES OF INVESTOR, TWO LEVELS OF RISK
There are also three types of investors: conservative, moderate, and aggressive.
The different types of investments also cater to the two levels of risk tolerance: high risk and low risk.
Conservative investors often invest in cash. This means that they put their money in interest-bearing savings accounts, money market accounts, mutual funds, US Treasury bills (T-Bills), and Certificates of Deposit.
These are very safe investments that grow over varying periods of time, usually a longer period of time. These are also low-risk investments, and don’t require a great deal of time each week in follow-up and decision-making.
For example, if you go to the government website to buy T-Bills, you can set up your account in minutes, buy one for the sum you want, and the duration of time before it accrues its value.
So as an example, for a $1000 T-bill, you would pay $970, and in 4 weeks time, it would be worth $1000. This is a simple but fool-proof strategy, and while the returns might not seem that high, in a volatile economy, it is an investment with no risk. Plus, this is just one example. There are t- bills and t-notes, and auctions online that might secure you that same $1000 T-bill for, say, $930 or even less.
Moderate investors often invest in cash and bonds, and may dabble in the stock market. Moderate investing may be low or moderate risk investment. Moderate investors often also invest in real estate, providing that it is low-risk real estate.
For example, in your 401k portfolio, you may see a US Property Fund account, with a 6 to 8% return. Again, it may not be a huge return, but there is not much risk.
Continued in Part II.