Investing is an important way of growing wealth, achieving financial targets. It is also a means of building up purchasing power, but every type of investment is associated with varying degrees of risk.
Municipal bonds issued by cities and other local governments tend to be safer than Treasuries and, in some cases, can be tax exempt at the federal level. Even these, however, may not be safe.
Emerging Markets
At a time when many big emerging markets are blazing a rapid path of growth and reshaping the global economy, the promise of markets in Asia, Latin America and beyond can be enormous. But greater potential for return comes with more political risk and volatility than more established markets. These developing economies often have natural resources which power exports and foreign investment, and younger, growing middle classes whose purchasing power accelerates growth and generates more and more wealth. Price volatility, political instability and frequent policy changes can make or break businesses, and cause investor confidence to plummet. Regulatory complexity, illiquidity and lack of clarity in local laws, property rights and contract enforcement can also be chilling – and make a big impact on who does and does not succeed. Devising ways to learn local approaches to doing business – from cultural mores to regulatory hurdles – is imperative to a company’s success. This necessitates developing effective partnerships with domestic players: Starbucks’ joint venture in India, with the Indian conglomerate Tata, is a good example. Uber dovetailed its entrance into south-east Asia with a joint venture with Grab.
Stocks
Stocks are important assets in many investors’ plans to get rich and achieve other financial goals, such as retiring. Stocks are units of ownership in companies that can be bought and sold on public and private stock exchanges as shares, giving their owners a fraction of ownership in the firm; the different kinds of stock vary depending on voting rights. And although stocks provide the best returns when held over long periods of time, the values of stocks can be highly volatile and can depreciate very quickly. Thus, an investor can attenuate this risk with diversification across industries and portfolio weightings that reflect an individual’s risk tolerance and financial objectives. An investor can harvest income from dividends and capital appreciation plus, in order to raise capital, a corporation can borrow money by issuing bonds – a form of debt security where creditors possess senior status over and above non-creditors in liquidation and repayment of the principal.
Bonds
Bonds are investments in debt securities (certificates) where investors receive regular interest payments and are usually guaranteed the return of their full principal at a specified maturity, typically years in the future. In an alternate universe composed of only the safe portfolios of certain retirees, bonds, issued by the government or the private sector, could perhaps offer some of the most secure ways of keeping capital safe from financial ruin. Stocks are investments in corporations’ growth and representation in ownership shares. High-yield corporate bonds that pay more interest – or have a higher return – than investment-grade bonds can make available another source of income, but they also come with higher risk and greater volatility so they can be more prone to default. Alternative investments are in some cases more risky than stocks, bonds and cash investments, and have the potential to generate higher returns. Such investments might include cryptocurrencies or venture capital. The bad news is that these types of investments can be harder to convert quickly into cash, which can cause problems if you need to get your hands on money.
Real Estate
To invest in real estate is to own real property (real estate) — that is land and the buildings and roads on it. The owner of real estate can profit by accepting rent payments (when the property is rented) or accepting lease payments (when the property is leased). Typically, the value of property will rise over time as well. Office buildings, other commercial properties with multiple tenants, such as shopping centres and apartment buildings fall into the former category, but there’s a third type of property I’ll call the special-use property. A manufacturer might own a factory, but places of worship would also fall into this category. Many investors buy and rent real estate, or flip property, that is they buy and sell quickly to take advantage of temporary price increases or short-term business opportunities. Other investors buy REITs (real estate investment trusts).
Alternative Investments
Alternative investments (or ‘alternative assets’) is a term used to describe any asset class outside common stocks and bonds, including hard commodities or rare goods like precious metals and collectibles, and financial types of assets such as distressed debt or hedge funds and private equity funds. They are riskier than the low-risk investment – more likely to lose your money and more likely to deliver greater returns. Furthermore, they tend to lack regulation and transparency, and be harder to evaluate than low-risk investments (which are often highly liquid and require less research). In addition, they tend to be illiquid with longer investment timelines. Previously only available to sophisticated (accredited) investors or to those with significant ‘net worths’, today there are a multitude of ways in which individuals may invest in alternatives. Find out how.
