Investment and savings are two related, but different categories. The primary difference is that investments deal with capital accumulation while savings are for present consumption – like savings accounts (even high yield ones). In terms of asset classes, savings utilize cash options, with investing utilizes income and growth vehicles. With income and growth options, there are a number of investment opportunities that vary in terms of liquidity, risk, return and investment period.
♦ Mutual funds
Mutual funds refer to diversified funds that are pooled from contributions by various investors sharing similar investment goals. These financial instruments have differing investment attributes – from the low-risk and liquid Money Market Funds (MMFs) to more sophisticated mutual funds that offer greater capital appreciation, higher risk and lower liquidity.
Mutual funds spread the risk among investors and are a good way for those who are less risk tolerant to explore growth options. They also have the advantage of giving investors access to growth options that would not have been available to them as individual investors. There are also specialty mutual funds like Loan Participation Funds (LPFs), where investors pool money together and lend money to reputable enterprises.
♦ Commodities trading
Commodities that are typically cited in investment circles are art, gold and silver. Investment in art is usually capital intensive and long-term, but the markets for gold and silver are more liquid and offer opportunities for investment on the short term and long term.
♦ Currency trading
Currency trading – commonly known as Forex trading – is the most liquid of all investments. Whereas a person might find themselves holding stock that no one wants to buy, in Forex trading, there are always many buyers and sellers available. Previously, currency trading was limited to large-scale institutional investors, but now individuals can use the power of leveraging and the authority of Forex brokers to earn returns on their investment. Forex trading involves significant risk, but this risk can be easily mitigated with Forex education and proper risk management strategies.
♦ Stock trading
The most popular growth investment option is stocks. Like Forex, stock trading was the preserve of the wealthy in previous centuries, but the market has long since opened up to individual investors; even those with a few dollars can participate in stock trading. Stocks involve significant risk and are considered a growth option as a result. The liquidity, risk, return and investment period for stocks vary depending on the specific stock. The beauty of stock trading is that it is not the preserve of a few. Those who have a few extra dollars and risk tolerance can participate in the stock market.
♦ Real Estate
While the myth that property never depreciates has long been debunked, real estate are a good investment option for investors. House flipping is a popular way for persons to capitalize on property appreciation. The difference with investing in real estate is that you only need one buyer and there are ways to easily improve a property’s value in the short term. Even if real estate prices are low, that might be the ideal time to buy, improve and sell later.
Bonds are essentially loans to corporations or state institutions, which bond investors can trade. Major types of bonds are Treasury bonds, Government bonds and corporate bonds. Bonds involve some level of risk, but are generally low-risk instruments. This is because bonds purchased from large, financially strong corporations or state institutions are typically honored. Diversified investment portfolios and low-risk mutual funds rely heavily on bonds as a stable investment option.
Annuities are medium to long term contracts with annuity providers that offer moderate rates of return with a safety net. These financial instruments usually have a longer investment horizon and can be used for a variety of reasons – including tax savings and retirement income. There are many types of annuities characterized by different structures and rates of return. The annuity is viewed as a stable investment option with rates of return that just surpass headline inflation.
♦ Retirement funds – 401K/ IRA
Retirement funds are dedicated to retirement savings and involve plans that are registered with the IRS or relevant tax authorities. In the United States, these include employer-sponsored retirement plans, 401K, IRA and Roth IRAs. These plans offer long-term appreciation through a diversified portfolio and are classified as income options because they offer decent rates of return without exorbitant risk involved.
Each investment option has a myriad of associated financial instruments, including several that are not mentioned in this article. Usually, investors focus on mixing income and growth options. The better investors tend to specialize broadly in terms of investment types and in specific subtypes of these investments as well. Investing is not only critical to wealth accumulation, but for achieving a real rate of return. Proper diversification is necessary, and it is prudent to explore the options that better suit your investment style.