If you want to manage your free money by yourself and you do not want to leave the job to financial advisors or investment companies, you need to know in which financial assets you should invest. You simply need to know how to invest your savings, how to invest like a pro. The right allocation is important because this decides on future returns. In this article I will introduce the classes of investment products and their performance.
Where to invest your money?
In today’s rapidly changing times you can invest practically into everything you can imagine. It may not be just in traditional conservative assets like stocks, bonds or products of financial markets, but also into peer to peer loans, startup investments, alternatives such as wine (en primeur), whiskey, veterans, diamonds, gold, silver.
In the financial world we can find three basic groups:
- Cash and cash equivalents
Further classes may include:
- Real estate
Separate chapters would be the alternative investments, which are not normally found in the portfolios of large investment companies.
In today’s consumer world, we may not be just consumers, but we can also participate in profit of companies selling Coca-Cola, electricity, everyday consumer goods (P & G) or bras (L Brands, Victoria secret). Just by buying shares we have the right to participate in the company’s profits, we also have the right to vote as well as other rights connected with the shares. That’s nice, isn´t it? You can set up your own company and take the whole business risk or put your finances to established companies with a profit that are managed by experienced management (many times also not experienced).
Imagine bonds as a non-bank loan. For example, a state or a company (corporate bonds) can borrow money to finance its activities. State may borrow money for investments in infrastructure, company may borrow money for expansion of production, or for purchasing of new machines. A bond is therefore a security that is linked to the payment of predetermined interest (coupons, on a regular basis) and payment of the due amount. The issuer of the bond sets the nominal value of the bond and the interest (coupon). The market price of the bond fluctuates and changes with a change in interest rates. Changing rate brings to the market bonds with a better interest rate, the price of older bonds with lower interest rates is declining. You can trade bonds in the secondary market or in the form of ETF instruments.
Cash and money equivalents
Cash is very good when the assets are inexpensive, so it is always good to have liquidity ready for investment. These are money held on current, term or savings accounts, but also on tradable securities, government treasury bills or commercial papers.
We can count among the commercial real estates: land, garages, apartments or houses. Their liquidity is lower because the sale of real estate can take several years. However, it is possible to choose REIT (real estate investment trust), which can be bought through the ETF involved in real estate investments, ETF is much more liquid than buying real estate.
Such as gold, silver, oil, coffee, corn wheat, soy beans, natural gas or beef hogs and more. The commodities are good that they cannot go to zero. Commodities can be traded easily, the portfolio can be categorized as part of diversification, and I myself have part of the portfolio in gold. We can either buy them through futures, physically, or again via ETFs that are more suitable for smaller investors.
Like diamonds, commemorative coins, watches, veterans, investment wine, whiskey, art, stamps, and everything else you can remember.
You have just seen basic investment classes. You will be probably interested in the average yield they bring and how they differ, or how to divide the money between them. We look into history and use the data from Jeremy Siegel’s book Stock for the long run. The yield of individual asset classes since 1801 after inflation adjustment:
- Shares: 6.6% per year
- Bonds: 3.5% per annum
- Treasury bills: 2.7% per annum
- Gold: 0.6% per year
- Cash: -1.4% per annum
What about real estate? The longest time horizon is covered by the Case Shiller home index. Prices rose after calculating the inflation by about 70% for 127 years, an average of 0.55% per year.
For alternative investments, we can use a chart from Coutts.com, where we can see historical returns:
Historical yields are not significant for future returns, but it is absolutely clear and logical that stocks are the most profitable in the long run. The mankind moves forward, we had started with the flint and now we have electronic knives or lasers in industry. Asset classes give us a basic overview of where we can invest money to create an investment portfolio to suit our needs (investment horizon, risk, pricing, etc.). Each asset class behaves differently in different economic environments. Now I do not recommend buying bonds, interest rates are rising, market prices are falling. The shares are quite overbought according to indicators (PE, etc.), we are experiencing wage growth, low unemployment, recently low interest rates (money in the form of credit are cheap). Monetary wheels of central banks are turning. When the recession comes, it will be a time when every investor will want cash to find investment opportunities with discounts. Something like when you go shopping after Christmas with a 50% discount. This article is not an investment recommendation, it serves for educational purposes. Do smart investing, not emotional.