We’ve all heard advice from friends and co-workers, “You need to be in the market.” More often than not, they are referring to the real estate market, with their never-researched philosophy that real estate is the best investment.
Unfortunately, this “be in the market” advice is rather misleading, as there are a wide number of investment markets you can participate in. Furthermore, the actual annual returns from various markets often switches each year. Putting this together, it simply means that there is no one “right way” to invest your money to guarantee top returns.
Here are 5 of the common markets you can be in:
Referring to stocks, the equities markets are the most common investment. An equity, or a share, refers to an ownership interest in a publicly traded company. As a shareholder, you are entitled to a portion of the company's growth and earnings. As a company does well, you can experience investment returns through dividends, earnings being paid to shareholders, or through stock appreciation, the company becoming more valuable which makes the price of the share(s) you own increase.
As a subset of this market, there are various funds and Exchange Traded Funds (ETFs) that hold a collection of shares from different companies. You can buy into these ETFs, and thus own a collection of different companies. This way of investing is extremely popular these days, as it allows you to own a diversified stock portfolio as a low cost of entry.
Fixed Income investments are debt loans you make to others, usually in the form of Bonds. Most commonly these borrowers are governments and large corporations, who are reasonably certain to pay you back the loan. The structure of these investments is that you provide up-front capital, and the borrower pays you back interest over time, and your principal is returned to you at the expiration of the loan.
When considering loaning money, or buying bonds, you want to be compensated for the risk. This is often seen when purchasing a government bond, as most governments in the developed world are stable. Knowing that the US or Canadian government will still be around in 100 years, you can be fairly sure that your money will be returned to you. With this lack of risk, the amount of interest is fairly low.
With the advent of the internet, there are also peer-to-peer lending sites popping up. These sites allow you to loan money to other consumers. Since these debtors (people borrowing money) are an unproven entity, the interest rates are higher to compensate you for the risk that some of these debtors won’t ever pay back the money you loaned.
Another common investment is in commodities, which we hear about in the financial segments on the evening news. While there are many commodities, most commonly we hear about the price of oil and gold. Since these are used in production, you can invest, or buy rights to, a certain amount of these materials. The objective is of course to buy when there is excess supply, and sell when the demand is high.
Given the cost and scale of purchasing aluminum or copper, cattle, oil, etc these markets aren’t quite as accessible to the general consumer. For many of us, to invest in the commodities markets we would need to use a financial instrument called a derivative. These complex financial instruments are best left for another time.
Another form of investment is in foreign currency. With the global nature of trade, the cost of currencies fluctuates as goods and services are performed internationally. This causes currencies to be worth more, or less, relative to each other. These fluctuations provide an opportunity to buy and sell currencies to make a profit.
Most currencies are pegged to the US Dollar, and these fluctuations are directly impacted by economic performance compared to the US. Trade between countries has a very strong impact, which means that the number and level of tariffs can dramatically impact the fluctuations of currency. For example, government policy replacing NAFTA with USMCA will impact trade in North America, and that will cause currency fluctuations.
Physical assets provide another option for investing. This is where you buy an asset that will make you money. This includes real estate as an investment, where you will buy property and rent out its use to generate income. Over time, the asset may become more valuable, which will allow you to sell at a profit.
While real estate is by far the most common example of a physical asset, there are also specialty markets for a wide variety of assets. It could be as simple as buying and renting out a camera lens to make money. Or a sports cards / stamp collections. Or exotic cars. Or artwork.
The purpose of investing in a physical asset is that it allows you to generate income through rental, or investment returns through increases in value. The key distinction between investing in an asset and simply buying stuff (being a consumer), is that the asset is expected to go up in value or provide a financial return while you own it.
Where should you invest your money?
There is a long list of ways you can invest your money, with these 5 being some of the most common. Equities means buying ownership in a company, fixed income is loaning money to generate interest income. Commodities and foreign currency trade on supply and demand, impacted by global trade and government policies. And physical assets provide an extremely wide range of options to invest money in valuable items, such as real estate and artwork.
With numerous markets, and a wide variety of options, you can truly create your own financial adventure. BUT, the most important aspect of investing still remains the same;
You need to be investing now for your future.
Where you invest is up to you. But don’t be scared by the doomsday sellers promising you that if you aren’t in their chosen market that you will lose out.
There are a lot of investment options out there, make sure you are participating in some of the different markets on a regular basis. With regular, disciplined investing, no matter the market, financial freedom can be yours.