Out there in investment land, there are more than 14,000 mutual funds to choose from and 5,000-plus individual companies to invest in. Through a diversified portfolio and strategic asset allocation, you can dip your toe into quite a few of them, but you’re still just skimming the water.
If you’re a beginning investor, you’ll want to wade in with index funds to start; if you’re a smart investor (which, of course, you are) you will also follow your three Rs – Reading, Research and Resources – before diving into the deep end. There you will find a vast and exotic array of investment options.
From liquid stocks to precious metals, here’s a sampling of where else you could be putting your money.
1. Liquid Investments: liquidity translates to how quickly you can convert investments into cash without loss of principal. For example, you need access to an asset for a tuition payment or real estate closing. To do this, you’ll want your funds to be liquid and in investments that experience less volatile price fluctuations. Otherwise, you run the risk of cashing in on stock when it’s down.
Some examples of safe liquid investments include certificates of deposit, savings accounts, short-term bonds and money markets. Mutual funds are also liquid, but not necessarily safe.
2. Stock Mutual Funds: this type of fund invests in common stocks issued by U.S. and/or international companies. Each fund is named and classified according to investment style or objective. Some funds pay dividends; others don’t. Some specialize in hot sectors, like tech or health care; others focus on a specific size of company (called “market cap”).
3. Bond Mutual Funds: this type of mutual fund is made up of ‘debt instruments’ – what governments and corporations issue for the purpose of raising capital. These pay out regularly scheduled dividends.
4. Balanced Mutual Funds: these mutual funds invest in stocks and bonds, as well as cash alternatives. Typically, cash is ‘stored’, so to speak, in extremely short-term debt instruments. It might also be invested in index funds, which attempt to duplicate broad-based indexes like the Standard & Poor's 500 (S&P 500) or Moody's bond index.
5. Precious Metals: this sort of investment relies on the purchasing power of silver, gold and other precious metals as a hedge against inflation and currency fluctuations. When inflation goes up, the dollar normally goes down. Whenever there’s been a big drop, gold and silver (and even platinum) have historically boomed. The thinking behind investing in precious metals is that, ultimately, money is just paper. Precious metals are actual things with intrinsic value all their own.
6. Real Estate Investment Trusts (REIT): this is a corporation or business trust that invests in real estate or provides financing for real estate development. They derive income from rent and capital gains from the sale of commercial real estate. REITs let you dabble in real estate without actually dealing with the day-to-day hassles of property management.
7. Options: once purchased, these are called premiums. They’re used to give investors the right to buy or sell an underlying asset – like a currency, stock, index, bond or Treasury bill – at a set price (strike price) before an expiration date.
- There’s a call option (the right to buy the underlying asset), which is purchased because an investor believes the price of a stock will go up during a certain period of time.
- There’s also a put option (the right to sell the underlying asset), which is purchased because the investor believes the price will go down.
If the investor has guessed wrong, the option will expire. It will also be worthless, i.e. the total premium paid for the option could be lost. Options are best for investors who would consider themselves market savvy and understand exactly how the stock market ticks.
8. Futures: when you invest in futures, you promise to buy or sell a commodity for a certain price on a future date. The commodity might be oil, natural gas, lumber; it could be an agricultural product like beef, pork, coffee or cocoa. Futures are also traded on foreign currencies, Treasury bills, precious metals and market indexes like the S&P 500.
With any investment that you make, there’s going to be an element of risk. Futures and options are especially high-risk investments, and should only be pursued by experienced investors and professionals. As for the rest, it’s up to you to decide how deep into the market you’re willing to venture. One thing is for sure: when your money’s in, you’re in for an adventure.