When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
Different types of investments to include in your portfolio
There are 100s of types of investments, and all fit into what is known as asset classes. Knowing the difference between them and when to own each can significantly enhance your investing portfolio.
Big ideas
- Investments fall into specific ranges/classes depending on the potential returns and levels of risk.
- Your preferred investment type may change with time, depending on risk tolerance, age, income, and the current market position.
- You can select the investing account type that matches your investment preferences.
QUOTE
“You should have a strategic asset allocation mix that assumes that you don't know what the future is going to hold.”
The most commonly cited four types of investment are stocks, bonds, funds, and cash. Within these are many subcategories. While there are other investment vehicles, these 4 types of investment are the most common and represent the basic units for individuals and institutions.
It is well-known by financial professionals and industry experts that the best portfolios are those that are diversified. A portfolio of stocks, bonds, funds, and cash should perform well on a longer time horizon. In contrast, an all-stock portfolio might do well one year and crash the next. This could result in an individual having to liquidate the entire portfolio to make ends meet.
Survival is as crucial as returns, a fact that most miss while trying to make as much profit as possible in a given year. Diversification across the different types of investment is one of the best ways to ensure commercial longevity.
It is well-known by financial professionals and industry experts that the best portfolios are those that are diversified. A portfolio of stocks, bonds, funds, and cash should perform well on a longer time horizon. In contrast, an all-stock portfolio might do well one year and crash the next. This could result in an individual having to liquidate the entire portfolio to make ends meet.
Survival is as crucial as returns, a fact that most miss while trying to make as much profit as possible in a given year. Diversification across the different types of investment is one of the best ways to ensure commercial longevity.
The different types of investment
There are many more ways to allocate funds. The following is a list of 10 different types of investment, subcategorised by paper investments, which usually involve a financial contract, physical investments where you own a real-life ‘thing’ and alternatives, which tend to be riskier. Be mindful that there are many subcategories within each of the below too!
Paper investments:
Paper investments:
- Stocks - shares of ownership in publicly-traded companies, which can rise or fall in value depending on the performance of the company and the overall stock market. High risk and high reward.
- Bonds - loans made to corporations or governments that pay a fixed interest rate and can be bought and sold on the bond market. Bonds are stable with a fixed rate of return, often described as “fixed income” products.
- Mutual funds - these investment vehicles pool money from various investors to purchase diversified portfolio securities at a cost that is typically a little higher than ETFs.
- Exchange-Traded Funds (ETFs) - Similar to mutual funds, but traded like stocks on an exchange, allowing investors to buy and sell shares throughout the day.
Physical investments:
- Real Estate - investments in physical property such as houses, apartments, or commercial buildings, which can generate income through rent or appreciation in value.
- Commodities - physical goods such as gold, oil, or agricultural products that can be bought and sold on commodity markets.
- Art and Collectibles - investments in rare or valuable items such as fine art, rare coins, or vintage cars, which can appreciate over time.
Alternative investments:
- Options - contracts giving investors the right to buy or sell assets at a set price within a specified period.
- Futures - contracts to buy or sell assets at a set price and date in the future, often used by traders to hedge against price fluctuations.
- Cryptocurrencies - digital currencies that use blockchain technology for secure transactions bought and sold on cryptocurrency exchanges.
Cash is not technically an investment, but a general recommendation is to have between 2% - 10% of your portfolio in cash. It’s with the same kind of logic that financial advisors often recommend having six months’-worth of income in your bank.
If an emergency scenario arises, you might have to liquidate your otherwise profitable investments at a steep loss. Moreover, having cash means taking advantage of lucrative opportunities as they appear.
If an emergency scenario arises, you might have to liquidate your otherwise profitable investments at a steep loss. Moreover, having cash means taking advantage of lucrative opportunities as they appear.
Investment types: pros and cons
Initially, all of the investment options can seem difficult to comprehend, and it’s possible to become paralysed by all the currently available choices. But you can really break it down to the primary 2 types of investments: stocks and bonds (fixed income). Mutual funds and ETFs are usually a diversified mix of stocks.
In the modern era, you can invest in a diversified ETF adjusted to your risk tolerance. You can do this while retaining the option to add select riskier stocks to your portfolio and your diversified, low-cost ETF.
This can streamline your investment as you choose a diversified ETF and allocate 20% - 40% towards fixed income. Commodities, derivatives, FX, and other assets are mainly the domain of experienced traders, and it’s easy to lose money in such assets unless you have experience or industry knowledge.
The table below should be helpful for a more granular approach to the pros and cons of the various types of investment.
This can streamline your investment as you choose a diversified ETF and allocate 20% - 40% towards fixed income. Commodities, derivatives, FX, and other assets are mainly the domain of experienced traders, and it’s easy to lose money in such assets unless you have experience or industry knowledge.
The table below should be helpful for a more granular approach to the pros and cons of the various types of investment.
Asset | Potential returns | Liquidity | Risk | Experience required |
Stocks | High | High | High | Moderate |
Bonds | Low | High | Low | Low |
Mutual funds | High | Moderate | Low | Moderate |
ETFs | High | High | Low | Low |
Derivatives | Very high | Moderate | Very high | Very high |
Crypto | Very high | Low | Very high | Moderate |
Real estate | High | Low | High | Moderate |
REITs | High | Moderate | Moderate | Moderate |
Cash | None | 100% liquid | Zero | None |
Each category will have lots of subcategories, which in turn have their own subcategories. For instance, there are bluechip stocks that pay dividends and extremely risky stocks like penny stocks. The same applies to stable government bonds when compared to riskier “junk” bonds. On average, stocks offer higher risk and reward than bonds.
Types of investment for beginners
What type of investment is best for beginners to try when they start? The term “beginner” is a little misleading in the context of portfolio theory. The type of investment is determined primarily by risk tolerance, which is usually a function of age.
Younger investors are encouraged to allocate more capital towards riskier financial products with higher rewards. A sample portfolio for a younger investor might be 70% stocks, 25% bonds, and 5% cash. This is because the increased earnings from stocks can compound with time.
Younger investors are encouraged to allocate more capital towards riskier financial products with higher rewards. A sample portfolio for a younger investor might be 70% stocks, 25% bonds, and 5% cash. This is because the increased earnings from stocks can compound with time.
Age-based options
In contrast, an older person would be less risk tolerant because they have less time to enjoy increased wealth and less time for the interest to compound. The emphasis is on wealth preservation as opposed to wealth.
Both parties, however, are advised against emotional investment. This means allocating funds each month or quarter and leaving it be. Moving funds around too frequently results in increased fees and diminished returns.
Both parties, however, are advised against emotional investment. This means allocating funds each month or quarter and leaving it be. Moving funds around too frequently results in increased fees and diminished returns.
Types of investment for retirement
Investors looking to retire would have a different portfolio allocation than one looking to improve their wealth. The portfolio allocation might be 60% bonds, 35% stocks, and 5% cash.
The best types of investment change with age because people’s risk tolerance is lower in retirement. You can’t afford to be without money in your elderly years without the capacity to earn an income. Younger people have more options in terms of how they create an income.
However, there are also specific retirement accounts that can be taken advantage of for certain investors. And it’s possible and common for people to have a growth portfolio alongside a retirement account, the two not mutually exclusive.
A retirement account is a type of investment account that is specifically designed to help individuals save for retirement. Retirement accounts offer tax benefits and other advantages to encourage individuals to save for their future.
Retirement accounts offer several benefits, including tax-deferred or tax-free growth, potential matching contributions from employers, and the ability to contribute more money than non-retirement accounts.
However, these accounts also have some restrictions and limitations, such as contribution limits and penalties for early withdrawals.
The tax treatment of these investments depends on your individual circumstances and may be subject to change in future.
The best types of investment change with age because people’s risk tolerance is lower in retirement. You can’t afford to be without money in your elderly years without the capacity to earn an income. Younger people have more options in terms of how they create an income.
However, there are also specific retirement accounts that can be taken advantage of for certain investors. And it’s possible and common for people to have a growth portfolio alongside a retirement account, the two not mutually exclusive.
A retirement account is a type of investment account that is specifically designed to help individuals save for retirement. Retirement accounts offer tax benefits and other advantages to encourage individuals to save for their future.
Retirement accounts offer several benefits, including tax-deferred or tax-free growth, potential matching contributions from employers, and the ability to contribute more money than non-retirement accounts.
However, these accounts also have some restrictions and limitations, such as contribution limits and penalties for early withdrawals.
The tax treatment of these investments depends on your individual circumstances and may be subject to change in future.
Types of investment risk
This is a type of risk that refers to the possibility of loss or underperformance of an investment. Investors must understand and consider these different types of risks while making investment decisions. There are several types of investment risks:
Systematic Risks:
- Market risk - the possibility of an investment declining in value due to changes in the market or economy.
- Credit risk - the chance that the borrower may default on the loan, resulting in a loss for the investor.
- Inflation risk - the risk that the investment may not keep up with inflation, causing the value to decrease over time.
- Interest rate risk - the risk that changes in interest rates may affect the value of fixed-income securities.
- Currency risk - the possibility that changes in exchange rates may impact the value of investments denominated in a foreign currency.
Unsystematic Risks:
- Political and regulatory risk - the potential for government policies and regulations to affect the value of investments.
- Liquidity risk - the chance that an investment may not be easily sold without a significant loss.
- Concentration risk - the danger of being overly exposed to a particular asset or sector, leading to more significant losses if that asset or sector performs poorly.
- Event risk - the possibility that unexpected events, such as natural disasters or geopolitical tensions, may affect the value of investments.
Note: Systemic risks are risks that affect the entire financial system or a significant portion of it, while unsystematic risks are risks that are specific to individual assets or sectors.
Diversifying your portfolio is one of the main techniques for reducing unsystematic risks. However, it is practically impossible to accurately gauge all possible systemic risks in an ever-changing and volatile world. As such, diversification remains the best possible form of financial insurance.
Diversifying your portfolio is one of the main techniques for reducing unsystematic risks. However, it is practically impossible to accurately gauge all possible systemic risks in an ever-changing and volatile world. As such, diversification remains the best possible form of financial insurance.
Types of investment accounts
There are several types of investment accounts, each with its own benefits and limitations. One of the main things to consider when choosing an investment account is the tax implications, alongside the fees and the variety of investment options. Here are some of the main types of investment accounts.
Brokerage accounts allow individuals to buy and sell stocks, bonds, mutual funds, and other securities. Capital gains and dividends earned in these accounts are subject to taxes.
Trusts - these are legal arrangements generally used for the purpose of tax planning around inheritance for wealthy families. The idea is one person, usually a parent, is the trustor and transfers assets to a second person, usually a lawyer or accountant, to hold for the benefit of a third person, usually the child of the parent as the beneficiary. Trusts can also be used for charitable giving and other purposes.
Individual Savings Accounts (ISAs) - this is a type of savings or investment account that is available to residents of the United Kingdom. An ISA allows you to save or invest money tax-efficiently, meaning that you don't have to pay tax on the interest, dividends, or capital gains you earn.
General Investment Accounts (GIAs) - This is a type of investment account offered by financial institutions that allows you to invest in a range of different assets, including stocks, bonds, mutual funds, and ETFs. Unlike ISAs, GIAs do not have any tax advantages, meaning that you will need to pay tax on any income or capital gains that you earn from your investments. However, GIAs offer more flexibility than ISAs.
Note that some of these are specific to the UK. But regardless of your jurisdiction, you will likely be able to find an account to suit your preferences, as there is a great variety of choices in the investment world. The tax treatment of these investments depends on your individual circumstances and may be subject to change in future.
Brokerage accounts allow individuals to buy and sell stocks, bonds, mutual funds, and other securities. Capital gains and dividends earned in these accounts are subject to taxes.
Trusts - these are legal arrangements generally used for the purpose of tax planning around inheritance for wealthy families. The idea is one person, usually a parent, is the trustor and transfers assets to a second person, usually a lawyer or accountant, to hold for the benefit of a third person, usually the child of the parent as the beneficiary. Trusts can also be used for charitable giving and other purposes.
Individual Savings Accounts (ISAs) - this is a type of savings or investment account that is available to residents of the United Kingdom. An ISA allows you to save or invest money tax-efficiently, meaning that you don't have to pay tax on the interest, dividends, or capital gains you earn.
General Investment Accounts (GIAs) - This is a type of investment account offered by financial institutions that allows you to invest in a range of different assets, including stocks, bonds, mutual funds, and ETFs. Unlike ISAs, GIAs do not have any tax advantages, meaning that you will need to pay tax on any income or capital gains that you earn from your investments. However, GIAs offer more flexibility than ISAs.
Note that some of these are specific to the UK. But regardless of your jurisdiction, you will likely be able to find an account to suit your preferences, as there is a great variety of choices in the investment world. The tax treatment of these investments depends on your individual circumstances and may be subject to change in future.
Which types of investment are securities?
Practically all investments are securities. This includes stocks, bonds, futures, options, commodities, mutual funds, and ETFs. Securities are regulated by the Securities and Exchange Commission (SEC) in the USA and the Financial Conduct Authority (FCA) in the UK. Different types of securities might have specific regulatory authorities overseeing their use, particularly derivatives.
Most things you trade on an exchange will be deemed security for all intents and purposes. Cryptocurrencies, however, are an exciting area in this regard. Currency is not a security, and there is debate as to whether cryptocurrency is a security or a currency. It resembles both, as some cryptocurrencies can be “staked” to generate a fixed return. Most securities will generate a fixed or variable return.
An ongoing case of SEC against Ripple is set to determine whether or not the US legal system will deem cryptocurrency a security. However, you’ll still have to pay capital gains tax on cryptocurrency gains when you cash in or on the interest earned from staking, regardless of its current legal status.
An ongoing case of SEC against Ripple is set to determine whether or not the US legal system will deem cryptocurrency a security. However, you’ll still have to pay capital gains tax on cryptocurrency gains when you cash in or on the interest earned from staking, regardless of its current legal status.
Recap
It takes patience and skill to master the many types of investments. Part of this mastery involves saying no to the plethora of investment offerings, selecting only those you believe in, and matching your investment preferences.
QUOTE
“The difference between successful people and really successful people is that really successful people say no to almost everything.”
Realistically, most investors will need to choose a basket of stocks (25+) along with some fixed income products and wait for a year before making any movements. Making changes too frequently is a quick way to reduce profits.
There is no shortage of investment options in the modern era. With Trading 212, you can access most investment offerings quickly, easily and commission-free.
There is no shortage of investment options in the modern era. With Trading 212, you can access most investment offerings quickly, easily and commission-free.
FAQ
Q: What types of investments pay large returns?
A golden rule of investing to always keep in mind is that investments that offer higher potential returns almost always come with a higher risk of loss.
Alternative investments, such as private equity or hedge funds, may provide high returns but typically require large minimum investments and come with higher risks.
Stocks are often considered one of the investments that have the potential to offer the highest returns, particularly over the long term. However, stocks can be volatile, with great variance from one day to the next.
Bonds are generally considered lower-risk investments than stocks, but they typically offer lower returns as well. However, certain types of bonds, such as high-yield or emerging market bonds, may offer higher returns but also come with higher risks.
Real estate investments, such as rental properties or REITs, can also offer attractive returns, particularly in a strong market. However, real estate investments can be illiquid and require significant up-front capital.
Alternative investments, such as private equity or hedge funds, may provide high returns but typically require large minimum investments and come with higher risks.
Stocks are often considered one of the investments that have the potential to offer the highest returns, particularly over the long term. However, stocks can be volatile, with great variance from one day to the next.
Bonds are generally considered lower-risk investments than stocks, but they typically offer lower returns as well. However, certain types of bonds, such as high-yield or emerging market bonds, may offer higher returns but also come with higher risks.
Real estate investments, such as rental properties or REITs, can also offer attractive returns, particularly in a strong market. However, real estate investments can be illiquid and require significant up-front capital.
Q: What types of investments are the most liquid?
Investments that are considered the most liquid can be easily converted to cash without affecting their value. Cash and cash equivalents, such as bank deposits and money market funds, are the most liquid of all investments, as they can be converted to cash quickly.
Stocks are also highly liquid investments, easily traded on exchanges. Similarly, exchange-traded funds (ETFs) can be bought and sold like stocks, making them relatively liquid. Some types of bonds are also considered liquid, such as those issued by government agencies or highly-rated corporations.
Real estate and other tangible assets, such as art or collectables, are generally considered less liquid because they can take longer to sell, and their value can be more subjective. Mutual funds can also vary in liquidity depending on the underlying investments and the fund's structure.
Stocks are also highly liquid investments, easily traded on exchanges. Similarly, exchange-traded funds (ETFs) can be bought and sold like stocks, making them relatively liquid. Some types of bonds are also considered liquid, such as those issued by government agencies or highly-rated corporations.
Real estate and other tangible assets, such as art or collectables, are generally considered less liquid because they can take longer to sell, and their value can be more subjective. Mutual funds can also vary in liquidity depending on the underlying investments and the fund's structure.
Q: What types of investment are low risk?
Low-risk investments are less likely to lose a lot of money but also unlikely to make a lot of money either. They also tend to experience less significant fluctuations in value, making them less stressful to own than more volatile high-risk investments. The classic low-risk investments are savings accounts and government bonds.
Savings accounts offer a guaranteed return in the form of interest, while government bonds are backed by the government's ability to repay the debt.
Index funds are considered higher risk than the two items mentioned formerly but lower risk than single stocks because they provide diversification across many different stocks and typically have lower fees than actively managed funds. However, it's important to note that even low-risk investments come with some level of risk and the chance of losing money.
Savings accounts offer a guaranteed return in the form of interest, while government bonds are backed by the government's ability to repay the debt.
Index funds are considered higher risk than the two items mentioned formerly but lower risk than single stocks because they provide diversification across many different stocks and typically have lower fees than actively managed funds. However, it's important to note that even low-risk investments come with some level of risk and the chance of losing money.
Q: What types of investments have compound interest?
Compound interest is a powerful force in investing that allows investors to earn interest on their principal and on the interest, they have already achieved. Some types of investments that may offer compound interest include savings accounts and certain types of bonds.
In addition to these, some types of funds (ETFs and mutual) can provide compound interest. The earnings from these investments may be reinvested in the fund, which can result in compound interest for the investor.
Retirement accounts may also offer compound interest. Contributions to these accounts may be invested in various assets, which can generate compound interest over the years.
In addition to these, some types of funds (ETFs and mutual) can provide compound interest. The earnings from these investments may be reinvested in the fund, which can result in compound interest for the investor.
Retirement accounts may also offer compound interest. Contributions to these accounts may be invested in various assets, which can generate compound interest over the years.
Q: What are the different types of investment commodities?
Investment commodities are goods that are bought and sold in financial markets to generate profits. There are various types of investment commodities, including precious metals, energy commodities, agricultural commodities, livestock commodities, industrial metals, rare earth metals, and water.
Water is a relatively new commodity being traded on financial markets, which involves the buying and selling of water rights and contracts. This has to do with a water crisis in certain areas, such as California. Commodities are often traded on exchanges through derivative contracts. But they have industrial and consumer applications.
Water is a relatively new commodity being traded on financial markets, which involves the buying and selling of water rights and contracts. This has to do with a water crisis in certain areas, such as California. Commodities are often traded on exchanges through derivative contracts. But they have industrial and consumer applications.
