(Newswire.net — January 8, 2020) — Whatever your investment goals are; whether it has to do with earning passive income or saving up for retirement, the investment strategy you use has to be in tandem with both your budget and your current needs.
The investor at the crossroads of deciding where to primarily stake his/her funds in has to turn over a couple of options in their minds- should you invest in stocks, in the real estate market or in other options? The final option chosen would be determined by how much risk an investor is willing to take, the potential dividends of investment and the investor’s knowledge base.
It is common for individuals to consider the stock market as one of their first investment options, but the real estate market is burgeoning and slowly taking over as a principal investment option in the minds of potentiates. Perhaps, this is due to the perception of low risk, better yields and greater diversification which the real estate market projects.
Nonetheless, choosing what to invest in cannot be done on a whim. First, what are the major investment vehicles to be considered by a potential investor?
Major Investment Vehicles
For the average investor, there are three major investment vehicles through which money can be made to work:
- Investing in Fixed Income Products Such as Bonds
- Investing in the Stock Market
- Investing in Real Estate
Investing in Fixed Income Products
Bonds are forms of debt security, in which the issuer (commonly the government, strong corporate organizations) owes the holders a debt and is obliged to pay back the principal to holders, usually with interest, at a specified time of maturity.
Examples of these fixed income products include GIC, government bonds such as US treasury bonds, bank savings. While fixed income products are pretty steady/safe/low-risk as investment choices, they usually have very low returns, so if you’re looking to make a lot of passive income, you might be disappointed with them. As such, fixed income products are typically recommended for very risk-averse individuals e.g. old people.
Investing in the Stock Market
In terms of volatility of investment, the stock market ranks highest. However, extensive research has led to the conclusion that when investments are made over the long term (for as long as 20 years), returns from the stock market are much better than investing in bonds. In his classic book ‘Stocks for the Long Run’ Jeremy Siegel analyzes the historical performances of investment types over a 130-year period (from 1871 to 2001), concluding that the real return for stocks (after correcting for inflation and tax) was about 6.8% per year, with bonds yielding 2.8% .
Because of the stock market’s volatility, however, it is recommended that the average investor who has a paucity of financial knowledge should invest in indices (such as index ETF); and its preferable for young people -who typically aren’t as risk averse as the elderly- to invest in stocks with funds such as their pension contributions.
Investing in Real Estate
Over the long haul, investing in real estate is one extremely reliable option for the potential investor mainly because of a sense of stability that’s foreign to the stock market (real estate returns are much less likely to fluctuate rapidly) and the possibility of using banks borrowed money as a leverage factor. After considering which property type you should buy for example, you can put as low as $15,000 of your own money as a mortgage down-payment of the $300,000 property, and borrow $285,000 to make up for the rest. Typically the rent of a property covers most costs including the interest you are paying on the mortgage so even then if the home goes up on average by 3% per year means earning 9k each year on $15k initial investment! As such, investing in real estate is very attractive, and is one investment vehicle that should never be taken for granted.
Other Considerations: Risk, Returns and Leveraging Options
Before choosing which investment vehicle to go for, risk is one critical aspect that should be considered. When characterizing the three investment vehicles discussed in this article from the highest to the lowest risk; stocks, real estate and bonds take the first, second and third positions respectively.
From the perspective of the highest to lowest returns, that is highly dependent on which country this investment is being made. In Canada, however, real estate takes the lead, followed closely by stocks, and bonds. In the United States however, the stock market sometimes performs better than the real estate market.
Real estate has the highest leveraging factor of all three investment options, as you can get returns over money borrowed!
Conclusion
Choosing an investment vehicle (bonds, stocks or real estate) is a personal choice, depending on the particular investor’s goals, risk tolerance, investment style and cash at hand. Since each investment option carries differing levels of risk, returns and opportunities, the eventual choice should be made after critically reviewing these factors. Better still, smart investors are known to spread their investments across all three vehicles to maximize the risk-benefit ratio across the board.