When it comes to investing your hard-earned money, there are many options to consider beyond just stocks and bonds. It’s important to understand your options, so you can make the right investment decisions.
Stocks
Stocks represent ownership shares in publicly traded companies. By purchasing stocks, investors gain part ownership in a company as well as potential financial returns. Stocks are bought and sold on stock exchanges like the NYSE and Nasdaq. They carry more risk than bonds, but also higher upside potential.
Stock prices fluctuate based on company performance and broader economic conditions. However, historically stocks have generated higher long-term returns than other assets. Penny stocks, which have market capitalizations of under $100 million, are often attractive to investors. Key benefits of stocks include capital appreciation if share prices rise, dividends providing income, and the ability to buy/sell shares easily. Overall, stocks are a core holding for many investors seeking growth over time.
Bonds
Bonds are debt investments where investors loan money to corporations or governments in exchange for interest payments. Bondholders receive regular coupon payments until the bond matures. At maturity, the original principal is returned. Bonds provide fixed income and are considered lower risk than stocks. However, bond prices fall when interest rates rise. Therefore, investors must consider interest rate risk and credit risk when purchasing bonds. Overall, bonds play an important role in balanced portfolios by providing stable income.
While stocks and bonds are traditional investments that can provide growth and income, expanding your horizons can help diversify your portfolio.
Here are some additional investment vehicles to think about on your financial journey.
Real Estate
Real estate can be an attractive part of a balanced portfolio, providing potential appreciation as well as consistent income from rents and other revenue streams. Options range from direct residential and commercial property ownership to real estate investment trusts (REITs) that invest in mortgages or income-producing properties. Real estate tends to be less volatile than stocks, though liquidity is lower.
Private Equity
Private equity involves investing directly in private companies or assets rather than public markets. It includes venture capital provided to startups, growth capital for expanding businesses, and leveraged buyouts of mature companies. Private equity can produce significant returns but also carries more risk than traditional investments. Extensive due diligence is required given the lack of public information.
Hedge Funds
Hedge funds aim to generate consistent returns in both up and down markets using sophisticated investment strategies like short-selling, leverage, derivatives, and arbitrage. They provide diversification, reduced volatility, and the potential to profit in falling markets. However, hedge funds often have high fees, limited transparency, and locks on invested capital. Strict accreditation requirements also limit access to wealthy, sophisticated investors.
Commodities
Commodities like precious metals, oil, grains, and other raw materials can be an inflation hedge and a way to diversify. Investing in physical commodities requires secure storage. More common are futures contracts that fix prices in advance for delivery at a later date. Commodity prices see significant volatility though, and futures trading involves high leverage and complexity. Sticking with broad commodity funds may be best for novice investors.
Cryptocurrencies
Cryptocurrencies like Bitcoin and Ethereum are digital assets that use encryption for security. This novel asset class has seen tremendous price volatility and debate around whether cryptocurrencies are currencies, commodities, or a new asset class entirely. While potentially useful as a non-correlated asset for portfolio diversification, cryptocurrency investing remains highly speculative. Extensive research into blockchain technology is required.
Annuities
Annuities are insurance contracts that provide income for life in return for a lump sum or series of payments. Lifetime income can supplement Social Security and pensions in retirement. However, annuities can charge high fees, restrict access to your funds, and carry complex terms. Certain types also lack liquidity and have high costs to annuitants who die prematurely. Understand all the options before purchasing an annuity.
The variety of investment options goes far beyond stocks and bonds. With prudent diversification, your investments can pave a path toward your financial destinations.
