What Should I Invest In?

When it comes to investing there are almost endless ways to do it. If you have mastered the Fundamentals and are wondering what else is out there, this article will break down some of the more common forms of investing. As you start to move into more “alternative” investments it is important to do your research and make sure you fully understand how the investment works before putting any capital at risk. With many of these options there are taxes, lockup periods, fees, etc. which may not clear at the onset. Read on for the following asset categories:

1. Traditional

2. Real Estate

3. Businesses

4. Digital Assets (Cryptocurrency)

5. Art & Collectibles

Traditional

Under the category of traditional investments you have what is often referred to as the “stock market”. This is a bit of a misnomer because there are more than just stocks.

1. Stocks

   • Stocks, also known as equities, are a way to own a piece of a company. There are two main types of stocks, common and preferred, which have different rights. Most investors are usually concerned with common stocks. Stocks are traded on stock exchanges, and their prices can fluctuate based on supply and demand, company performance, and market conditions. Stocks offer the potential for capital appreciation (increase in value) and may also provide dividends, which are a portion of the company's profits distributed to shareholders.

• Stocks are often broken up into the following categories:

• Growth

• Value

• Large-cap

• Mid-cap

• Small-cap

• International

2. Bonds

• Bonds are similar in concept to a loan. They can be issued from a government, municipality, or a corporation. When you buy a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity. Bonds are considered relatively lower-risk investments compared to stocks because they offer fixed interest payments and the return of principal, assuming the issuer doesn't default. Bond prices can be influenced by interest rate changes and the creditworthiness of the issuer.

3. ETFs (Exchange Traded Funds)

• ETFs are investment funds that trade on stock exchanges. They are designed to track the performance of a specific index, sector, commodity, or asset class. ETFs are similar to mutual funds but have some key differences. ETFs can be bought and sold throughout the trading day like individual stocks, while mutual funds are priced at the end of the trading day. ETFs offer diversification by holding a basket of underlying assets and can be passively managed (tracking an index) or actively managed (striving to outperform the market).

4. Mutual Funds

• Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. They are managed by professional fund managers who make investment decisions on behalf of the investors. Mutual funds are priced at the end of the trading day based on the net asset value (NAV) of the underlying securities. They offer investors the opportunity to access professional management and diversification, making them suitable for those who prefer a hands-off approach to investing.

• Mutual funds also come in many different share classes which have different types of fees associated with them. Make sure you understand the fee structure of what you are purchasing ahead of time. Some charge an upfront fee to buy them, some charge a fee to sell, etc.

5. Index Funds

• Index funds are a type of mutual fund or ETF that aim to replicate the performance of a specific market index, such as the S&P 500. I.E. all index funds are an ETF or Mutual Fund, but not all ETFs or Mutual Funds are Index Funds. Instead of actively selecting investments, index funds hold all or a representative sample of the securities in the index they track. Index funds typically have lower expense ratios and turnover compared to actively managed funds, making them a cost-effective way to gain broad market exposure.

6. Commodities

• Commodities are raw materials or primary agricultural products that can be bought and sold, such as gold, oil, wheat, or natural gas. Investors can gain exposure to commodities through various means, including commodity futures contracts, ETFs, or commodity-focused mutual funds. Commodities can be influenced by supply and demand factors, geopolitical events, weather conditions, and global economic trends. They are often used as a hedge against inflation or as a portfolio diversification tool.

• Commodities present certain challenges when it comes to investing due to their physical nature. Getting direct exposure is very difficult unless you want to take possession of 40,000 pounds of live cattle to own a single contract. It is very important to understand the instrument you are actually purchasing because it does not always track the spot price perfectly.

7. Derivatives

Derivatives are financial products whose value is derived from an underlying asset or set of assets. Derivatives are used for various purposes, including hedging against risks, speculating on price movements, and gaining exposure to different asset classes. 

The underlying assets of derivatives can include commodities (such as oil or gold), stocks, bonds, currencies, interest rates, or market indices. Derivatives derive their value from these underlying assets, but they do not represent ownership of the assets themselves.They allow you to perform unique financial operations but come with significant complexity.

• Options

  • Options provide the buyer with the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset, such as a stock or an index, at a predetermined price within a specific timeframe. Options allow investors to speculate on price movements, hedge existing positions, or generate income through option writing (selling options). They can be complex instruments and involve risks such as time decay and the potential for loss of the entire investment.

• Futures

  • Futures contracts require the buyer to purchase or sell an underlying asset at a specified price on a future date. Unlike options, futures contracts carry an obligation to fulfill the terms of the contract. Futures are commonly used by investors and traders to speculate on price movements, hedge against potential losses, or gain exposure to various asset classes, including commodities, currencies, stock indices, and interest rates.

Real Estate

Real estate, the revered asset class. There is no shortage of people touting the benefits of real estate investing. It does have a strong history but there are also many things to consider and many different ways to go about it. Real estate can provide significant tax advantages which is one of its main advantages and oftentimes why it is described as the asset class for the wealthy. If you are just starting out and don’t have a significant asset base, there are still ways to get exposure to this asset class.

1. Long Term Rentals

• Long term rentals are what most people think of when they think of real estate investing. Renting a property for 6+ months at a time can provide a steady stream of income. Consistent cash flow is the major advantage here and price appreciation of the property is just a bonus. You do have to deal with tenant relationships and any potential damages or vacancy issues that may come up but assuming all goes well, a long term rental can be a great income producer.

2. Short Term Rentals

• Short term rentals are all the rage these days with the likes of Airbnb. Renting a property for a handful of days at a time can provide higher immediate income but comes with the challenge of keeping the property occupied consistently. There is more time required with this approach as you are constantly having tenant turnover. This can also be done on an as desired basis and makes for some nice side income.

3. Fix and Flip

• Fix and flip is also another common real estate technique where you buy a property, make it better in some way, and then sell it. The goal being to sell it for more than your improvements plus the purchase price. Done well, this can net some significant income in a relatively short time period. Buying the right property, making the right improvements, and getting a quick sale are key to being successful with this approach. Done wrong, you can be stuck with a significant loss if people aren’t willing to pay more than what you paid into it.

4. Real Estate Investment Trusts (REITs)

• If you want to invest in real estate but don’t have a lot of excess cash laying around, a REIT could be a good option. REITs are like stocks but for real estate. There is a management company that buys and maintains properties and you are buying shares of that company. REITs are traded on the stock market and are very liquid so provide a simple way to get exposure to real estate as well as the income producing potential with a minimal investment and the option to exit at any time.

5. Real Estate ETFs and Mutual Funds

• Real Estate ETFs and Mutual Funds are similar to REITs but have even more diversification. Now you are purchasing a stock-like instrument that is going to invest in multiple REITs, real estate companies, etc. This is also a simple way to get exposure to real estate.

6. Real Estate Syndicate

• A real estate syndicate is a partnership of individuals or entities that pool their resources to invest in real estate projects. It is a symbiotic relationship between the general partners (managers) and limited partners (investors) to access deals that otherwise wouldn’t be available to either party. Each investor only needs to provide a small piece of the overall capital and isn’t responsible for any of the legwork of purchasing or managing the property. 

7. Real Estate Crowdfunding

• Real estate crowdfunding is similar to syndication but involves a more public platform. The minimum investment is much lower and it is easier to diversify across multiple properties. Some common platforms are Realty Mogul, Yieldstreet, and Fundrise.

Businesses

Owning a business can be seen as another form of investment. Businesses create cash flow and can pay out income as well as be sold.

1. Owner/Operator

• Whether you start your own business or buy one, being the direct owner of a business offers you many opportunities. Ultimately it is up to you the success and profitability of that business. If desired, you could create a business that pays you a respectable income with minimal time required. You also have the option to sell your business usually at some multiple of the amount of income it produces. 

2. Venture Capital

• Venture capital is a type of investment strategy where you invest in early stage, high growth potential companies. Usually you need a significant amount of capital to make an investor and you usually don’t see a return for years. The potential can be huge but there are also many businesses that fail. It is also very illiquid.

3. Private Equity

• Private equity is similar to venture capital but focuses on more established businesses. The goal here is to get involved with a mature business and make improvements. This can lead to generating high cash flow as well as being able to turnaround and sell the business for a profit. Private equity firms usually takeover the company so they have control to implement their improvement strategy.

4. Business Crowdfunding

• Crowdfunding platforms also exist for small businesses. This is similar to venture capital but on a more accessible, diversified scale. Some platforms offer equity investments while others offer non-equity rewards. StartEngine, Indiegogo, and GoFundMe.

Digital Assets (Cryptocurrency)

Bitcoin, Ethereum, Dogecoin, NFTs, what? Digital assets are the latest type of investment to hit the market and have grown significantly in popularity over the last handful of years. But really, what are they? It is a difficult question to answer because there are so many of them and they all work differently and have different use cases. Simplistically, digital assets are a way to exchange value through a digital means utilizing blockchain technology. There are several main categories of digital assets.

Checkout our deeper dive into Digital Assets if you want more information.

1. Store of Value

• Digital assets that serve as a store of value are designed to maintain and preserve purchasing power over time. They are often used as a means of wealth preservation or as an alternative to traditional store-of-value assets like fiat currencies or physical commodities. Examples of digital assets used as a store of value include Bitcoin (BTC) and other established cryptocurrencies with limited supply and long-term potential for value appreciation. 

  As these assets are still in their early days and going through the phase of price discovery, they still experience significant volatility. They should be compared with broader money supply and looked at through the lens of inflation protection.

2. Platforms & Scaling Solutions

• Digital assets categorized as platforms and scaling solutions are tokens or cryptocurrencies that are specifically designed to facilitate and enhance the functionality of decentralized applications (DApps) or blockchain networks. These assets serve as a means of accessing and utilizing the features and services provided by the platform. Examples include Ethereum (ETH), which enables the development and execution of smart contracts, and Layer 2 scaling solutions like Polygon or Optimism that aim to improve scalability and efficiency of Layer 1 blockchains.

3. Decentralized Finance (DeFi)

• DeFi refers to the use of blockchain technology and cryptocurrencies to recreate and enhance various financial services traditionally provided by centralized intermediaries. DeFi digital assets are tokens that power decentralized financial applications, protocols, and platforms. They facilitate activities such as lending, borrowing, yield farming, decentralized exchanges, and more. Popular DeFi tokens include Compound (COMP), Aave (AAVE), and Uniswap (UNI).

4. Applications & Utility

• Digital assets categorized as applications and utility tokens are specifically created for use within a particular decentralized application or ecosystem. These tokens often represent access rights, usage rights, or rewards within the application. Examples include Filecoin (FIL), a token used for decentralized file storage and retrieval, or Chainlink (LINK), a token used for decentralized oracle services, providing real-world data to smart contracts.

5. Non-Fungible Tokens (NFTs)

• Non-Fungible Tokens are unique digital assets that represent ownership or proof of authenticity of a particular item or piece of content. Unlike cryptocurrencies that are interchangeable, each NFT has a distinct value and cannot be replicated. NFTs have gained popularity in the art world, enabling digital art, collectibles, virtual real estate, and other unique digital assets to be bought, sold, and owned on the blockchain. Ethereum-based platforms like CryptoPunks, CryptoKitties, and NBA Top Shot have popularized the use of NFTs.

Art and Collectibles

On the opposite side of Digital Assets, you have Art and Collectibles. Existing in the physical world, these are often artifacts that have been passed down for generations. Their value is in direct relation to the material they are made of as well as their rarity and popularity. These types of investments come with high risk and high reward. Very thorough research is required as most of the value is based on popularity or demand which can change over time.

1. Art

• Beauty is in the eye of the beholder, right? Art has long been considered an alternative investment, offering potential financial gains and diversification opportunities beyond traditional asset classes like stocks or real estate. 

2. Precious Metals

• Gold, silver, and other precious metals have been collected and coveted for millenia. Whether you are looking at just bullion, rare coins, or jewelry, there are a lot of ways to get your hands on some. With their long history and relative stability over time, having some precious metals exposure can be a great addition to your portfolio. Read our deeper dive on Gold here.

3. Wine

• Who doesn’t love wine? The only issue with investing in it, is that you can’t also drink it. Fine wines have a fairly active market between buyers and sellers. Buying an extra bottle and holding onto it for years can lead to some gains, but make sure it is properly stored.

4. Collectibles

• Sports memorabilia, stamps, comic books, cars, etc. can all be various types of investments. Usually an investor in one of these has a strong passion or interest around the type of collectible. Being heavily involved in a space can give you a pulse on what is popular or valuable. Investing this way can be a good way to monetize a hobby that you are already spending time on.

What Do I Do Now?

This article was meant to provide a brief overview of some of the more common types of investments. There are many more ways to take a dollar and turn it into two. After you have mastered the fundamentals, you may be wondering what to do next. Aligning your investments around how you live your life can help narrow in on what makes the most sense for you. 

If you don’t know anything about cars, maybe don’t try to collect vintage vehicles. If you love business and building something, maybe look to spend more time/money there.

At the end of the day, investing is very personal and it is important to understand why you are investing as well as what your expectations are. An investment vehicle should be chosen with regards to how much time you want to spend on it, how long you intend to hold it, how liquid you need it to be, and how much return on investment you expect to receive.

Finding good opportunities in these alternatives can require a significant amount of research. Being a part of communities or groups that are active in the space can be key to developing an understanding of what is a good versus bad investment.

When it is all said and done, investing is a game of risk versus reward. Bigger risks can lead to bigger rewards but come with a higher chance of not working out. Make sure to do thorough research before committing any capital or work with an expert in the space to help you out.

Good luck out there!