Hello and welcome to the latest edition of investing! In our last episode (i.e. blog), we took a macro view and talked about setting goals to determine why you are investing. In this blog, I want to go one step below the macro view and focus on the different categories available to you for investments.
So you've determined your goals and how much risk you are willing to assume in your investments. What next? Do you jump right in to buying stocks from Amazon, and shares in that mutual fund that will set you up for your retirement? No. Before you get down to the nitty gritty of what specific bond to buy, you want to understand your options. You have your goals as your guide, now its important to understand the different directions you can take. Here are a few big picture categories:
Investing for Safety: When I read about this category in Kristof's book, my first thought was "this isn't an investment category!" Alas, I bow to those with greater knowledge because apparently it is. This category is where you put your money when you want to have little to no risk, put still want to earn a small (and I mean a small) amount of money. The type of investment you would make in this category is opening a bank account. That's right; opening a bank account is considered investing for safety. Your money is guaranteed up to a certain amount (check your bank) and you can earn an iota of interest by having your money in an account. To see what banks will give you a little more than an iota, check out this blog post. Other safe investments are short-term CDs, and treasury notes (loans to government that are paid back with interest). It is important to note that CDs and treasury notes can live in other categories depending on their length of time held.
People who invest for safety typically are very risk-averse, and also use common sense because they have a bank account. This is not where you put your money to save for retirement, but it is a good place to keep money that would want to be mostly flexible.
Investing for Income: Investments in this category help achieve goals such as saving up for a car or saving up for a down payment on your new house (depending on how much you already have saved). It helps cover those short to mid-term goals and can supplement how much you have to spend on a regular basis. The type of investments you would make here are: mid- to long-term CDs; treasury bonds (longer term than notes); corporate bonds (similar to treasury bonds but with corporations; more risk, but higher reward); stocks from companies that are no longer growing and regularly turn out a profit (i.e. utilities); and municipal bonds (issued by local rather than federal government and are typically federal and state tax free). Most bonds pay out interest every 6 months, so you can expect a supplement to your income regularly if you invest in that asset.
People who invest for income are not as averse to risk but are still cautious, and have some clear financial needs in the short term that investing can help them achieve. It is good to invest for income if you know exactly how much and when you need money by, and can also use an extra boost of income (honestly, who couldn't?) every few months.
Investing for Growth: This is the category we hear most about. When people talk about getting rich on investments, or investing in general, they are talking about investing for growth. Investing in assets in the growth category help you save for the future, either in terms of retirement, or long-term goals of saving for your new baby's college tuition, or buying that dream house years down the road. The main type of investments for growth are domestic, and international stocks; equity funds (growth or aggressive growth mutual funds); and global and international mutual funds.
These investments tend to have higher risks but result in greater rewards. Kristof (and many others) do not advise that you invest in these assets unless you have the time to ride out the inevitable highs and lows. These investments are for long-term growth. If you are already retired, or will be so shortly, these are typically not for you.
The majority of people have a mix of the three categories. They have some investments for safety (i.e a bank account), some mid-term CDs and income stocks, and some shares in individual companies as well as in mutual funds. What is essential is that you diversify. Diversifying your investments doesn't just mean that you invest for growth and income, or that you have stocks, CDs and mutual funds. It also means that you invest in different companies, industries and products. You could have several different stocks, corporate bonds, and mutual funds all focused on technology. If the tech industry tanks, all of your investments tank. You should not only be diversifying the category and assets you invest in, but also ensuring that your investments are broad enough that if one industry or company does poorly, the rest of your investments will balance out that loss.
Writing these blogs have been extremely helpful to me because I've been able to digest what I've learned in order to share it out to you all. Please believe that once I start putting these lessons into action, I'll share that more practical knowledge as well. In the meantime, I hope these high-level blogs are whetting your investing appetite!