There’s a tendency amongst folks who aren’t finance professionals, that they assume that making investments requires some sort of wizardly powers or a master’s degree in finance. Many people are tempted to put their savings in a tax-free savings account (TFSA), and while there’s nothing wrong with that strategy, it also precludes a healthy growth of, say, 5% a year to your annual income. The truth is that investing is a common sense endeavour that has been made to seem overly complicated – in reality, making smart investments is not that difficult.
In this post, we’re simply going to look at a few basic ways you can invest your money to get a decent return. This involves understanding asset classes, which consist of three broad categories that have many subcategories within. We’ll try and keep it as simple as possible.
When people talk about investing in public companies like Apple, Nike or Starbucks, they’re talking about investing in equity, where you literally own a small piece of the company. A popular strategy, popularized by the legendary Warren Buffet, is called value investing. Value investing involves finding a company with good fundamental stats that serves a growing market, buying a chunk of it and waiting patiently. Ideally you would buy at a time when the company was undervalued.
Trading typically means riding volatile fluctuations and cashing in an out often. This is more of a time commitment, and it can take a toll on your nerves. Additionally, trading can make use of more complex financial instruments – you can short a stock, buy options, buy on margin, and so forth. If you don’t want to get too involved, this probably isn’t for you.
Equity in commodities like gold, oil and coffee can be purchased on a futures market, which is basically tantamount to predicting the price of a commodity at a particular date. Oddly, in the past few years the rise of cryptocurrencies has created a unique investment opportunity that closely resembles a commodity investment, rather than a currency investment. If you get the latest price of Bitcoin and then look at a chart from the past few years, you’ll see that it fluctuates quite a bit, creating a sort of digital gold rush.
Bonds are government issued assets that yield a set amount over an agreed upon amount of time. Bonds are tethered to the national borrowing rate, so in a healthy economy they are an excellent option for someone who is averse to risk. For some perspective, while a TFSA will yield a maximum of about two percent, a bond should yield at least three percent. Thus, a bond is the safest investment you can make above and beyond simple bank interest.
Real estate is a great bet for people who like to deal in tangible, physical assets. Furthermore, as a young family, you could take out a mortgage on a property with one or two extra units and use the income from tenants to pay off the debt. Of course, issues of maintenance, tenant laws and so forth make this option a part-time job, but those who are active, handy and sociable may enjoy it.
Hopefully this post has given you some sense of what you’d like to invest in if and when you take the leap!