For those just starting the long journey of investing and financial planning, the obvious question is: What products are out there? Here is a brief introduction.
Cash and money market funds
Cash or CDs (certificate of deposit) generate returns in terms of interest income. Money market funds, which include high-quality, short-maturity debt instruments, perform similarly to certificates of deposit, but can be traded once a day. While they are the safest instruments, the yield may not be high enough to offset inflation.
Stocks / Equities
Owning shares means owning a part of a company. As an owner, you get the most benefit in the good times, but you take the most risk in the bad times. Statistically, this “high risk-high return” investment offers the best long-term investment return.
Bonds / Fixed Income Products
A bond is a loan made to the issuer of the bonds (for example, government or corporations) by an investor (for example, an individual). In return, the investor receives regular interest payments (the rate is called the yield) until the bond matures, at which point the issuer repays the principal.
At the same time, the bonds can be traded on the market. Like stocks, bond prices go up and down depending on many factors, and this fluctuation affects effective yield.
- Therefore, although bonds generate fixed and regular interest income, they are by no means a risk-free financial instrument.
FOREX (foreign currency exchange)
- Economies around the world use different types of currencies, creating the need to trade and exchange currencies.
- When we buy stocks or bonds from a foreign country, we are inherently buying FOREX. For example, you live in the US and own shares in a French company. If the euro strengthens against the US dollar, even if stocks are unchanged, you are already better off with a foreign exchange gain.
ETF (exchange traded funds)
- ETF is a basket of securities that tracks the performance of an index of stocks, bonds, or commodities.
- It can be easily bought and sold on the market (just like stocks), gives you diversity (exposure to different industry / regional indices), and is generally lower in cost than mutual funds.
- A mutual fund is a portfolio of stocks or bonds created for a particular industry, country, or product. It can be traded once a day based on the price (called NAV, net asset value) calculated at the end of the day.
- Unlike ETFs, mutual funds are actively managed by fund managers and their performance can vary greatly.
Real Estate / REIT
- The investment can be in the form of: (1) owning physical property, (2) owning shares in publicly traded real estate companies, or (3) owning shares in REITs (real estate investment trust).
- Real estate is an interesting and complicated type of investment and has many unique properties; But overall, we can expect your investment performance to fall between stocks and bonds over the long term.
- Commodities were once only open to private equity customers.
- As energy and commodities go into a big up cycle, products have become very popular and related funds / ETFs are making their way onto the mass market.
In addition to the investment products above, sophisticated investors can include structured products, hedge funds, private equity investments, and collectibles (eg, antiques, fine arts, special editions) in their portfolios. The range and diversity of investment products could be endless!