Investing helps you grow your money. That is the main purpose of investing.

However, there is a lot of noise regarding investing.

How much to invest, what to invest in, what returns you can expect, what risks do you have to take?

In this article, I am going to break down the five ways you can invest your money.

The number of investing products in the market is huge and growing.

Under the hood, the investing world uses the same basic asset classes or ingredients.

For example, Rental properties or REITs are both real estate.

One may be residential and the other commercial, but the base is real estate.

So what are the five ways you can invest your money?

Note that this is a quick introduction to investment options if you are new to investing.
This is not a full guide on investing and no financial action should be taken based on this.

Cash and equivalents

This is the least risky and easier to start with.

You just keep your money in a bank.

You are loaning your money to the bank and earning interest.

Products – checking, savings account or certificates of deposit.

The interest earned depends on the liquidity of your money.

The more liquid it is, the less the interest.

The risk is the least due to the Federal Government’s FDIC guarantee of up to $250,000 per account.

Short Term Notes and Bills

These are short term loans that the US government or other bodies can take from the public. So your money is relatively safe by the sovereign guarantee of the government.

Here also you are loaning your money to an institution and charging interest in return.

Products – Money Market, US Treasury Bills and Notes.

Note that there is no FDIC guarantee of your money.

Bonds – more loans

You can loan your money for a longer duration in exchange for more returns.

The more someone can hold on to your money, more bets can be played in the economy as interest rates rise and fall.

Thus bonds can be traded in the secondary market and additional returns (and risk) are generated. The bonds are traded at a premium or discount at their PAR value, depending on the market conditions. But the coupon rate (interest rate) stays the same in most cases.

The rise and fall of the value causes something called bond yield, which is a measure of the return of the product.

Products: Government, Municipal and Corporate Bonds of various durations (short, intermediate and long term).

Again, there is no guarantee here – even though the coupon (interest) offered is fixed till maturity, there are risks of the institution or company defaulting on its promise, or if the bond is not held till maturity, then interest rate risks kick in.

As interest rates in the economy rise, the bond becomes less attractive in the market and vice-versa.

Ownership stake through stocks

This is not same as above, loaning your money.

In fact, now with every stock you own, you are part shareholder in the company.

You are entitled to any profits that are distributed in the form of dividends.

Any profits that is retained in the business grows the business, so you get a share of it through a rise (hopefully) in the stock price.

Note that there is nothing guaranteed here – not even a coupon rate held till maturity like a bond.

Stocks can be held till you sell it to another investor (secondary market) or the company buys back your shares.

You make money by two ways:

• The regular dividends (not guaranteed) that the company may distribute.
• The difference in price between what you bought it for and what you sell it for.

The upside and downside both are huge. You can lose all your money or you can make a lot of money.

Which stocks to buy and when is an art and science, though.

But good news is that through Mutual Funds and Exchange Traded Funds, you do not need to be an expert. You can just hold a basket of stocks like S&P 500, Total US Market, Real Estate Investment Trusts or International Market.

This gives diversification and a normalization of the risk and return to the market.

Products: Stocks, Mutual Funds, ETFs, Managed Portfolios.

Return and Risk are usually correlated in these – higher the return, higher the risk and vice versa.

The Tangibles – real estate, precious metals, art, wine and several others

In the above few asset classes, you are either loaning your money to a bank or institution or you are owning a paper share (electronic nowadays) indicating your ownership stake in the company.

But you don’t get to see or hold the ownership. You cannot say I own this corner of the bank or the company, or even one chair or table within the premises.

A company or a bank can exist completely online without any buildings or hard assets. Imagine a software company, whose products are run on the cloud and developed by engineers from their homes, spread across the globe.

Investing in tangibles (often called alternative, off market etc.) solves that problem.

If you buy a home, an investment property or even a share in a commercial property, it exists somewhere. You can go, see, feel and touch it if you take the pains of traveling or obtaining the necessary permits.

Tangibles are often considered less volatile since they are usually not traded on the market like a stock, bond or even cash instruments.

These investments may have long holding cycles due to the difficulty of finding a buyer or the tangible element playing against you (for example, the home may be damaged by a natural calamity).

The risk and return profile is very different than stocks and bonds and often asymmetric, that is you can find investments with high return, low risk and vice versa.

Conclusion

This is of course not an investing masterclass.

What I have touched upon is a very high level view of the different places where you can put your money.

Investing comes with risk, hence it is very important to understand what you are investing in. You should never put your money in something that you do not understand.

I hope this article will add a dash of clarity on what to do with your investible funds.

Allocating your money in different asset classes as above is called Asset Allocation and is part of Investment Planning.

You should do this yourself only with enough research, use pooled funds like mutual funds and ETFs, or take the help of a professional like a Certified Financial Planner.

If you have multiple financial goals, struggling to save money and want to make your finances investing ready, I am here to help.

I help single-income technology immigrants in their mid-career go from feeling stuck and anxious about financial instability to gaining clarity and financial confidence. This is so that they can boldly pursue their dreams and the next steps in their career and life without the fear of financial inadequacy, connecting their financial decisions to their purpose.

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