What are financial investments, and what is the best way to approach the task of investing?
Financial investments are essentially bets on the future price of a financial asset. The most common example of a financial investment is found in the stock market. When an investor buys stock in a company, he or she is making a bet that sometime in the future the price of the stock will be higher than it is today.
Another example of a financial investment is a bond. A bond is different from a stock, because a bond represents a loan of money for interest, while a stock represents an ownership stake in the company. Both stocks and bonds are financial investments, but the way they behave in the marketplace is very different.
Stocks go up and down in price more than bonds do. Stocks pay no interest, but they may pay a dividend. Bonds are a loan of money, and they have a maturity date. The company or government that issued the bond has a solemn obligation to repay the loan, in full, on the maturity date, including interest.
Because of this solemn promise to repay in full, bonds are considered to be safer investments than stocks. But there’s a downside to this relative safety. Bonds will not appreciate in value as much as stocks, which means that investors in bonds will not make as much money as investors in stocks do.
There are other types of financial investments outside of stocks and bonds. For example, real estate. When an investor buys a property for the purpose of renting it out or speculating on the price of the property, this is a financial investment. Real estate is considered to be safer than stocks or bonds, because it’s a real, tangible asset. Because of this safety, real estate does not appreciate as quickly as stocks do. Investors who buy real estate are generally looking for safe, steady capital gains with very little risk of losses.
There are other examples of financial investments, like gold and silver. Precious metals are considered a speculative investment, because their prices have been volatile over the years. As a financial investment, gold and silver make a good addition to a well-diversified portfolio of stocks and bonds, but they should never be the only holding in an investment portfolio.
Another financial investment is fine art and other collectible artifacts. Apart from the enjoyment one gets from owning and looking at pieces of art, it can also be a good financial investment because art appreciates in value over time. As is the case with gold and silver, one should never limit his or her investments just to art and other collectibles. It’s always wise to limit this kind of a financial investment to 10% or less of an investor’s overall portfolio.
Other examples of financial investments include annuities, whole life insurance, and private equity ventures. A well-diversified investment portfolio will include all or most of these different types of financial investments. As a rough guideline, a typical portfolio will have 60% invested in stocks, 20% in bonds, 10% real estate, 5% gold and silver, and 5% on other financial investments. This creates an investment portfolio that is well balanced and should grow consistently over time.