With so much information online, it is tough to know what you can trust and what can you cannot. For that reason, we’re going to provide a detailed breakdown on what investments are appropriate based on your appetite for risk.
Index funds
Index funds are great for the risk adverse investor. Its interesting because most people will tell you that investing in stocks is risky, but the catch is that they are only risky if you are investing in individual stocks, and if you don’t hold your investments for a long period of time (several years).
There are two points involved here:
One, when you are investing in an index fund, you are tracking the returns of hundreds of stocks, so if one performs poorly or goes bankrupt, your returns will not be impacted too heavily, so there is not much risk involved.
Second, an index fund can be risky if held short term (less than 3-5 years) because stock markets do crash every few years, but if you hold onto your investments long term, history has shown us that returns will be at least 6%, but more likely closer to 8-10% per year.
Real Estate
Real estate is a great long-term investment for those willing to take some risk. Quality real estate investments should yield close to 20-25% with a 5-10 year investment horizon. You should spend a lot of time learning the real estate markets before you decide to invest, as there are two major factors (high level) that can hurt you. The first is buying a property when markets are at their peak (high). This sounds obvious, but you would be surprised at how many people get burned this way. This will all but ensure that the price of the property will not increase from your purchase price when you try to sell it. The second point is a lack of capital to pay your mortgage payments. For instance, if you buy a building where tenants do not have a consist history of paying, or they often leave before their lease is up, you probably made a poor choice. So take some time, and make sure you do your research before investing, but real estate can and does build wealth.
Bitcoin / cryptocurrencies:
I put this in here just for fun. Bitcoin is an excellent example of a speculative investment. As of December 2017, it is quite the hot commodity and if you made an investment in 2013-2015, you made an excellent return (in the range of 1000%), but it is important to note that Bitcoin and other crypto currencies are completely speculative investments. By definition, they do not produce any value, so you cannot say that there is value embedded within them.
However, speculation like this can in fact provide great returns, but we do not recommend that you invest any more than you don’t mind losing, because there are many cases where these speculative investments can go straight to zero, stay pending for Bitcoin on that front!
Business
Starting your own business can by far provide that best potential return on your investment, again, by far. The caveat is the classic risk vs. rewards scenario. There is no doubt that starting your own business will involve risk, and may take many attempts and failures before success is found.
Essentially, when considering your investment options the main thing you need to consider is your tolerance for risk and keep in mind that this may change over time. You may not take want to take on any risk and you’ll simply invest in an index for most of your career, but then once you have enough saved then you may feel comfortable taking on some more risk.
For an intro to your investing future, the best investing book by far is The Intelligent Investor by Benjamin Graham. Warren Buffet has vouched for it as the best value-investing book of all time, and there is no doubt it will help you in your investing endeavors. Good luck!