Since most people are lacking in investment experience, the best investment guide for most folks keeps things simple and starts with the basics. The ideal guide to get you off and running should cover virtually every investment option of interest to the general investing public. Buckle up and read on as I lay before you the universe of investments in plain simple English.
Not only will this basic investment guide for the inexperienced investor list all of the popular investment choices out there, it puts them into perspective. For example, some investments are safe and can quickly and easily be bought or sold because they have high liquidity; while others offer high profit potential with significant risk and low liquidity. This investment guide divides the investment universe into just two general categories: FIXED and VARIABLE investments. Each of these can be further separated into two parts, for a total of just four basic investment options, which are often referred to as asset classes.
Fixed investments pay interest and are safer than their variable counterparts. They get their name from the fact that either the investor’s principal (amount invested) or the interest rate paid is fixed and does not change for the life of the investment. Cash equivalents like money market funds or savings accounts is the first subcategory here, where the principal is fixed and does not fluctuate in value, while the interest rate can vary over time. The other subcategory is bonds, where the interest rate is fixed but the principal is not, as bonds fluctuate in value.
Variable investments are growth oriented and their price or value fluctuates, or is variable. Both profit potential and risk are greater here as the primary objective is to profit from an increase in the price or value of the investment. Stocks are the first subcategory and they offer good growth potential with some dividend income, and can easily be bought or sold on any business day at market price. Alternative investments include real estate, oil, gold, other commodities, and all other investments not mentioned above as the fourth category; and they can offer investors growth opportunities and perhaps income with varying degrees of liquidity.
In a fixed investment the investor is simply lending money to an entity like a bank, corporation or the government to earn interest. With a variable investment you take on the risks associated with ownership in order to make a higher rate of return. In putting together and managing your personal investment portfolio include all four of the asset
classes to achieve balance. In this way you should be able to get long term growth plus income with only a moderate level of risk.
In any endeavor the devil can be in the details, and investing is no different. Even a complete investment guide can’t walk you through the details of every specific investment option available today. But now you should have the big picture in your mind and a foundation to build upon.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.