This is Finance 104: Where to invest money? Find out what are good assets to invest into for maximing profit and minimizing risk.
The question where to invest into or in what assets to invest in depends mainly on your risks preference but also in the period we’re living in. For the last 12 years we have very low interest rates due to monetary policy. This means central banks buy bonds from companies and governments to support economy (quantitative easing). However, this also means that there’s a high demand for bonds which increases their price and lowers their interest rate. Finally the savers are the victims because they receive very low interest on their bank account. Same with risk-averse investors who usually buy safe bonds will receive nearly no interest. Remember 2005? Banks used to pay 5 % interest for money on your bank account. This time is over and you need to adjust your investment behavior if you don’t want to lose money due to inflation. In the following part, I will show you the different asset classes and explain why stocks are the best investment opportunity.
What Assets to Invest into: Savings Account
Savings accounts, for example an “Instant Access Savings Account” or a “Fixed Deposit Account” are the most safe ways to invest money. Basically you put your money on an extra bank account that is not used for your regular spendings. The bank can work with this money and reinvest it on the capital market. As an incentive you will get a small percentage back since you’re lending the money to your bank. However, as your capital is very safe and accessible, you only receive a very small interest (~ 0,5 % p.a.).
In my case I only use the savings account for a security reserve and invest the rest of my money into more profitable assets.
What Assets to Invest into: Money Market
At the money market you are invested among others in short term government bonds which have a high solvency and very low risk. Due to the current zero interest rate policy, the return for these securities is about 0-1% in Europe and 1-2 % in the US.
What Assets to Invest into: Bond Market
The bond market deals with long term government and corporate bonds with a fixed interest rate. Bonds are a form of debt capital, which means you borrow your money to a state or company for a certain period, and you receive an interest in return. Depending on the solvency and thus risk of the lender, the interest rate can vary significantly. For example: Would you rather borrow your money to Germany or to Greece? Of course you expect a higher risk premium when borrowing to a less solvent country like Greece. Altogether, bonds are also affected by the current zero interest rate policy so that you can only expect interest rates between 0-3%.
What Assets to Invest into: Real Estate Market
The real estate market is already more interesting for an investment. Basically you would be invested in houses, lands and apartments. As you probably know, the real estate prices have been massively growing in the last years. However, certain professionals believe that the market is overvalued – also because of low interest rates that accelerate the demand for houses and therefore inflate the growth of this bubble. A similar scenario has already led to the burst of the real estate bubble in the US followed by the financial crisis in 2008. Still the real estate market is a good investment for diversification and generated a return of yearly around 5% in the last 5 years.
What Assets to Invest into: Stock Market
With a stock you buy a share of a company and own it for an unlimited time until you decide to sell it to another person. In contrast to bonds, stocks are equity capital, not debt. Trading happens on the stock market, which means you do not have to manually look for a buyer or seller. When you own a stock you cannot claim the repayment of the price, however you have a legal right to receive a profit participation (dividend). Historically, stocks have the highest price fluctuation (volatility) among the other above mentioned securities. But they also generate the highest return in the long term with about 7–9% p.a. in industrial countries.
Especially in the current economic situation (2020) stocks generate the highest return with a reasonable risk. For long term investments, stocks are the number one choice over other asset classes. If you combine stocks in a diversified portfolio you can mitigate risks to a low level. The best practice is to invest in so called ETFs.
Alternative Investments
The following assets can be considered as more speculative because they won’t guarantee that they are growing in long-term. You can still profit by price fluctuations of these assets but I recommend them rather for experienced investors.
What Assets to Invest into: Commodities
Commodities or raw materials (oil, water, metals, agricaltural products) usually have a price fluctuation depending on current supply and demand. Especially oil prices went from 140 $ to 20 $ per Barrel in the last 15 years. However, there’s not a significant long-term growth. Sometimes the price is high, sometimes it’s low, but it only grows long-term by the inflation rate.
What Assets to Invest into: Gold
Gold is actually a commodity but I want to seperate it because it has a different character for investors. Usually gold is considered as a safe investment. But I want to make thing sure: ,,Gold is not an investment! Same as other commodities the gold price has risen due to speculation or short change of supply and demand. Gold cannot increase its intrinsic value like a stock of a company. So be aware that there’s no long-term growth for gold except its price increase due to inflation. The only reason it could make sense to add gold to your portfolio is for savety issues for example when your currency lose value.
What Assets to Invest into: Cryptocurrency
Cryptocurrency like Bitcoin can be an interesting alternative for payments in the future. But it’s still not guaranteed that the particular cryptocurrency will gain acceptance. In 10 or 20 years they can be disappeared from the market. However, cryptocurrencies can be interesting if you have extra money for short- or mid-term speculation because they have experienced tremendous growth rates in the past.
Conclusion:
In my oponion our current time does not allow many alternatives to what assets to invest into. Due to monetary policy, bond and real estate prices are way too high for gaining high returns. This gives us the only alternatives to save some money on a savings account and invest the mainly in stocks. I have created a strategy for my own to automate my investments. Here you can find out more.
