A Beginner’s Overview of Investments

Let’s say that business is doing well and/or your job is paying you well and you have some money set aside for this thing called ‘investing’.

The thing  is though, that you may not know the first thing about investing! (or you might, but in either case, bear with me).

Fear not!

Over the next few posts, I’ll be writing about investing, dispelling some common myths and also giving some tips on where to start. But before we do all that, let’s start with the basics:

What are investments?

Simply put, investments are, to quote Bodie, Kane & Marcus.

“The current commitment of money or other resources in the expectation of future benefits,”

Bodie, et. al, (2014), Investments, 10th Edition

To put it simpler:

“Investment is the act of putting money/time/energy into something now in the hopes of a bigger payoff in the future,”

Harith, S. (2020), www.samharith.com – I totally said this!

Going by this definition, there are many, MANY things that can be called ‘investments’

Investing time now at the gym builds a healthier you in the future

Investing energy now into communicating with your partner builds a stronger relationship in the future

Investing money and time now into education helps give you knowledge to reap benefits in the future

And of course;

Investing money in a savings account now will give you financial returns in the future

(of course there ARE better financial investments out there – but we’ll get there in a bit!)

So you see, investments aren’t ALL money related. Throughout our entire lives we are constantly trading one thing for the expected benefit of another thing in the future. In fact, I would dare say that society conditions us to invest, to plan ahead and to think about the future.

Given that investing already comes naturally to many of us, why are financial investments scary?

Why are financial investments scary?

That’s a good question – the truth is that they aren’t scary, it’s just that many are not familiar with them, and with anything you are unfamiliar with, there is bound to be fear.

Investing is very much like learning to ride a bicycle, or swim, or skate or synchronized sky-diving – it’s a matter of knowledge and practice. Now I won’t be giving you any ‘HOT’ investment tips in this article, but I will talk about the different types of financial investments available to you, as a regular, average individual with a moderate level of income.

The different types of financial investments

Broadly speaking, investments can be divided into three categories:

Fixed income investments:

These are the simplest types of investments you will come across. Fixed income investments pretty much do what they say – they pay you a fixed amount of income for the money that you put into them.

The best example of a fixed income investment is a savings account with the bank. For example:

Gayathri deposits $1,000 with ABC bank in a savings account. At the end of every month, ABC pays her a piddling 0.05% interest on the balance in her savings account.

You see, ABC bank in their endless generosity have paid a fixed income of 0.05% interest to Gayathri for being such a sweetheart for depositing her money with them. 

My heavy sarcasm aside, the point i’m trying to make is that fixed income investments generally don’t pay out very well. 

Arguably you could invest in a term deposit with a bank and maybe get 3%, or if you’re willing to invest with dodgier banks, 5% interest per year on your amount. Bear in mind that when investing in a term deposit, you are locking your money away for at least 1 to 5 years. So you won’t be seeing that money for a good amount of time!

That being said, don’t knock fixed income investments, as they generally are more secure over the short term as compared to our next category of investments:

Equity investments:

Equity, as I’m sure many of you know (wait, what, you don’t know? Go on here and refresh your memory!) relates to an owner’s investment in a company.

Equity investments are simply buying shares in a publicly traded company. I will write in greater detail about how the stock market works one day, but for now, all you need to know is that you, as an individual can purchase shares in some of your favorite companies on the stock market right now.

Buying shares in a company means that you expect your return on investment in one of two ways:

1. Dividends received from the purchase of shares (dividends are like profit sharing by the company)
2. Selling off your share if and when the price increases in the future!

Note that stock markets are weird creatures and more often than not do not reflect the actual economic performance of the companies listed on them. However, there is a lot of research surrounding stock market investing and this means that as an individual investor, you don’t have to personally invest money in the stock market, you can place your investments with fund managers who will research and choose the best stocks to give you a decent return.

Now fund managers (or managed funds) come in two flavors:

1. Actively managed funds
2. Passively (managed?) funds

The main difference between the two is that with Active funds, you have a living, breathing human being that is making the trades on your behalf. The theory goes that a living, breathing human being will make super smart investments for you and make you more money in the long run. Obviously they also will take a larger cut of your investment income for these services as well.

Passive funds are largely automated – meaning that a (super) smart AI will be making investment decisions for you, based on how the market is moving as whole. I won’t get into the underlying theory of all of this, just know that these types of funds are also known as Exchange Traded Funds (ETFs) or Index Traded Funds (ITFs). It goes without saying that the AI charges less than a living, breathing, fund manager who has got 3 mortgages, 2 holiday homes and 4 lambos they need to support.

It’s worth noting that Passive funds and Active funds generally have the same amount of return on investment over a ten year period. Do what you want with that information, but I personally put more trust in our (cheaper) robot overlords than I do with a (more expensive) hairless ape in a suit. 

Derivatives

Derivatives are investments that are based on the price movement of other investments. 

Does that sound funny to you?

I’ve been teaching finance for 12 years now and it still sounds funny to me.

Needless to say, as an average person – you won’t be investing in derivatives. So I’ll stop right here – thank you very much.

So there you have it, a beginner’s overview of investments!

But wait! There’s more!

It’s all fine and dandy to put money away in fixed income investments or buying up shares on the share market, but have you considered investing in yourself?

A higher level of education generally results in a higher net income in the future.

Also, if you are a business owner, perhaps you should be investing that money in your business? Buy a new van to make deliveries, hire some new team members to grow the business, or even invest in an automated sales/CRM system to make your life easier.

Remember, investing is not all about shares and stocks – in fact, investing in yourself or your business may generate a larger, more immediate payoff! So have a think about what you want to do with your money and how it aligns with your long-term financial goals!

And… oh wait – did you have some questions?

What about property? Where does that fit in?

Property can be a fixed-income investment (if you are renting it out on a regular basis) and it can also be an equity investment (since the price increases over time). I didn’t write much about property mainly because there is a reasonably high barrier to entry for property investing and writing about getting good home loans is another article altogether.

However, if you are looking to invest in property, as with all investments, think about how it aligns with your long-term financial goals.

Oooh, oooh! What about crypto and forex? My brother-in-law’s best mate’s girlfriend’s chihuahua made bank with Bitcoin! Surely that’s a good investment!

Sorry mate, you’re in the wrong blog. I don’t peddle in get rich schemes or speculative investments. So no, I have nothing to say about crypto and even less to say about foreign exchange trading.

For me, these are things you can look at once you’ve got some secure investments making money for you and you have $10,000 or so that you don’t mind losing. If you don’t – then stay away from the hype and stick to the boring (but effective) fixed income and equity investments.