When comparing investments, you’ll want to take several things into consideration in order to determine which one will be the best choice for you. Investments can be broken down into four main categories, and there are plenty of differences between each type, making it important to think about each of them carefully before making your final decision.
The four investment types are securities, commodities, real estate, and businesses. Below, we’ll discuss these types as well as other important things to keep in mind when comparing investments so that you can make an informed decision about your money.
There are different types of investments
It’s crucial to have a solid understanding of what you’re investing in and why. Some investments, like stocks and bonds, are riskier than others, like certificates of deposit (CDs) or treasury bills.
Your risk tolerance—that is, how much you can tolerate a loss or decrease in value without losing sleep at night—will help determine which investment is right for you.
The more risk you take, the higher your potential return
It’s a simple rule of investing, but also one of its biggest pitfalls. If you want big returns on your investment, you’ll have to take some big risks. Don’t let a bad economy deter you from taking calculated risks.
Just make sure you’re doing your research and making smart moves before jumping into any investment opportunities.
Fees can have a significant impact on your bottom line
Fees are not just a one-time expense: They can lower your returns over time. In fact, small fees can really add up over many years of investing.
For example, if you lose 2% of your return per year for 20 years with a 5% annualized return, you will miss out on more than half of all of those gains (1). The bottom line is that it’s very important to consider fees when evaluating investments.
Choose from ETFs or Mutual Funds
Mutual funds are a good way to begin investing, but if you’re looking for a simple and convenient way to invest, ETFs might be better. An ETF is a type of mutual fund that tracks an index, rather than attempting to beat one. (To learn more about index funds vs. actively managed funds, check out our tutorial.) These funds can often be bought and sold quickly with small transaction fees—making them ideal for small portfolios or those looking for short-term investments.
Diversify with Stocks, Bonds, and Real Estate
All successful investors know that diversification is key. This means investing your money into a variety of assets and not putting all your eggs in one basket. One simple way to diversify is by owning stock, bonds, and real estate. All three are great long-term investments with different levels of risk.
Review Risky Investments Prior to Making an Investment Decision
Some investments carry a higher risk than others, so it’s important to understand what level of risk you are comfortable with before making an investment. While higher-risk investments typically have a higher return rate, some people will be hesitant to take such risks. You should also consider your time horizon, as time is a major factor in how risky an investment is.