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Just like applying for a new job or starting a new business, investing always carries risk. While you can earn lots of money from well-chosen investments, you can also choose bad ones by mistake and lose a lot. Do you prefer safety and lower volatility, or do you prefer riskier and more volatile investments that can generate more income?
Here’s a short guide on how to choose investments based on your risk tolerance.
Disclaimer: Do your research! No matter how “safe” or “good” an investment is, it’s worthless if you get scammed because you didn’t study what you’re buying!
By the way, if you don’t know what the basic investments are, we suggest that you read these articles first:
- Investing Money for Beginners: Five Common Investment Vehicles to Check Out
- What are Mutual Funds? (A Short Guide for Beginners)
- What’s the Best Investment for Beginners?
How to Choose Investments According to Your Risk Tolerance
Conservative Investors: Low Volatility, Lower Returns
For investing newbies, “volatility” (or “risk”) usually refers to how fast the price of an investment moves. Unlike stocks and currencies where prices move a lot like a roller coaster, these investments tend to be a bit more stable. They don’t move a lot, but they don’t earn a lot either.
Disclaimer #2: Since this is an article for beginners, we’ll use ordinary language instead of formal investment terms here so the descriptions might not be 100% accurate. We only want to teach the basic ideas here.
- Saving Accounts (at Banks) – This is the typical savings account at banks. The earnings you get from interest is incredibly low so this can’t really be called an “investment.” It’s just a place to store your money.
- Money Market Funds – These are funds where the managers trade short-term investments. They’re usually really safe and stable, but they don’t earn much. They earn a bit more than savings accounts at least.
- Time Deposits (at Banks) – These are like savings accounts at banks, but they earn a slightly higher interest rate. In exchange, you can’t withdraw them easily and you can get hit with penalties if you withdraw before the maturity date (like an expiration date or deadline for payment).
- Corporate Bonds – When people say “bonds”, they usually mean corporate bonds. Companies sometimes need money for projects so they issue bonds to borrow money from people. When you buy a bond, you lend them money. When the bond “matures”, they’ll pay you back the money plus interest.
- Government Bonds and Treasury Bills – Similar to corporate bonds, the government issues bonds too. There are different kinds like t-bills, TIPS, municipal bonds, and more. Check your state or country to know what’s available.
- Bond Mutual Funds and (Exchange-Traded Funds) ETFs – These are mutual funds and ETFs that invest in bonds. They’re much less volatile than stock funds, but they don’t usually earn as much as those.
*Note: Inflation can eat your returns. Just imagine, a $100 investment is a lot of money in 1970… but if it only grew to $105 because you put it in a savings account, then you’ve lost money. That $105 at 2018 isn’t worth as much as it was in 1970. In short, if the earnings are too low then you’ve actually LOST MONEY due to inflation.
Moderate Investors: Moderate Volatility and Returns
- Balanced Mutual Funds and ETFs – These are mutual funds and ETFs that invest in both stocks and bonds (or other investments) to balance risk.
- “Blue Chip” Stocks – There are many kinds of stocks, and “blue chips” are the biggest and most well-known companies, like Coca-Cola, Apple, etc. Because they’re already very large and well-established, their stock prices usually don’t move as much as smaller companies. While they can usually earn more than bonds (especially if they pay dividends to shareholders), remember that they are still stocks so their prices are more volatile.
- Stock Index Funds and ETFs – index funds invest in a wide variety of stocks in a way that’s designed to mimic an entire market. They tend to “average” all the stocks in that market, so while they don’t increase as much as the biggest winners, they don’t lose as much as the biggest losers either.
Aggressive Investors: High Volatility and High Potential Returns
- Stocks/Equities – These are shares of ownership of companies. Depending on how well the company does, their stock prices increase or decrease accordingly. Because of that, stock prices tend to be very volatile, especially with smaller or newer companies.
- Stock Mutual Funds and ETFs – These are mutual funds that invest in stocks, and they vary a lot depending on their investment strategy. Aggressive growth funds are usually some of the most volatile ones because the money managers actively trade stocks to maximize returns. Sometimes they do well, and sometimes they don’t.
- Forex Trading – The forex market is FAR more volatile than the stock market, and you can earn money by buying or selling currency pairs (e.g. “EUR/USD”, “USD/JPY”, “GBP/USD”, etc.). You’ll need a good strategy and lots of discipline if you want to do well here. The forex market feels like the stock market, but it’s several times faster and instead of watching company movements, you watch pairs of COUNTRIES and economies.
- “Junk” Bonds – These are bonds with a BB or lower rating and they are usually issued by not-so-stable companies. There’s a risk of them defaulting and you can lose your investment when that happens. They have higher rates than “good” bonds, but the risk is higher too. Most investment professionals don’t recommend investing in these.
- Cryptocurrencies – If you’ve heard of Bitcoin, Etherium, and Dogecoin, you should know that those are examples of cryptocurrencies. Like forex, you’re essentially buying (or short selling) money and hoping that the coins you bought increase in value. These are probably some of the most volatile speculative investments out there and the price moves very rapidly.
Others:
- Real Estate – Owning land and properties. You can buy and sell land, or develop them into rental properties. You would usually need a large capital to invest in these, and you can lose a lot of money if you don’t know what you’re doing.
- Commodities and Precious Metals – You can invest in resources like oil, lumber, cotton, and several others. This category also includes precious metals like gold and silver. Just be careful of scams like the one called “Emgoldex” in the Philippines by the way.
- Options – These are like contracts that allow you to buy or sell something (stock options for example) before a certain date. Just imagine paying for a reservation, and if the price goes the way you want you can buy or sell the investment according to the reserved price and then trade it away at a profit. For example, if you bought an option to buy 100 shares of stock at $10 each and the price increases to $20 later, you can use the option to buy the shares at $10 and sell it at $20 to someone else. If you don’t like the price you can just let the option expire to avoid a losing deal.
- Futures – These are contracts that seem similar to options, but you’re REQUIRED to fulfill it and thus it can get very risky. If the price doesn’t go your way, you WILL take a giant loss.
- Antiques and Collectibles – Buying antiques and rare items (rare comic books and trading cards) to auction them off at higher prices is one investing strategy. You’ll have to be really careful here as there are counterfeits and scams and you’ll need to know a lot about your market as well as know collectors who will buy your collectibles at higher prices.
- “Penny” Stocks – These are stocks of the smallest and riskiest companies in the stock market. These are usually not recommended for beginners.
Alright, that’s it for now. These are some the most common investments that you can easily find, but there are many more out there that we didn’t mention. There’s more to the world of investing than just stocks, bonds, and mutual funds (and the other things mentioned here), so try to find the time to learn more about them!
Remember, the more you learn, the more you can earn, and the greatest investment you can make is in investing in yourself and increasing your knowledge!