- Two primary types of investments: Debt & Equity
- Perceived risk vs. real risk
- Understanding investor emotions
Investing is allocating resources, often savings, with the goal of generating an income or profit. Your life stage and financial circumstances play a significant role in your investment objectives. However, regardless of your objectives, investing boils down to two important rules; earning a return on your investment and ensuring the protection and return of your principle.
Investing is generally broken into two major category, debt and equity. Debt investments involve lending your money to others, a borrower, in exchange for a fee. This fee functions like rent, but it is commonly referred to as interest. The general goal with debt investments is preservation of capital and income. Debt investments include:
- savings & money market accounts
- certificates of deposits (CDs)
- Corporate bonds
- government & municipal bonds
- Private lending
Unlike debt investments which don’t participate in ownership, equity investments involve partial or complete ownership of an asset and offer the potential for the asset to increase in value. If the asset, such as a business is profitable, the equity investment may also provide income in the form of dividends or rental income such as from real estate. The general goal with equity investments is for the asset to increase in value, commonly referred to as growth. Equity investments include:
- Mutual Funds
- Real Estate
- Real Estate Investment Trusts (REITs)
Another factor to consider when investing is risk. Risk can be real or perceived. If you’ve ever experienced turbulence while flying on a commercial airline, the perceived risk to passengers may appear high while the real risk is low. Passengers on the Cruise ship Titanic probably had exceptionally low perceived risk but tragically faced high real risk.
Real risk can actually be lowest when perceived risk is highest. The stock market in March of 2003 and February of 2009 had just experienced significant declines from previous highs. After experiencing substantial losses, investors were fearful that the market would continue lower. While the perceived risk was extremely high, these dates turned out to be exceptional buying opportunities and real risk was in fact low.