Investments are the surest way to consistently generate passive income. If you want financial independence, you need to know what investments you can make according to your budget, period, or risk appetite. In this article you will find out how many types of investments there are, what to invest your savings in, but also where NOT to invest this year.
Things to know before starting an investment
In the following, we will present you with a series of things to know before starting an investment, to make sure that you have saved for the safety fund first. This represents a reserve of 6 salaries that can be useful to you in unforeseen moments, thus helping you to continue your investment plan without problems.
Once you have ensured that you have the money for the safety fund, you can start the investment plan. Remember: NEVER invest borrowed money or money you need thinking you’ll get rich overnight. Only risk what you can afford to lose!
The first step is to divide your money according to the goals you want to achieve ( short, medium, or long-term). The next thing is to make your investor profile. You will find out if you are an investor who prefers smaller but safer gains or one who risks more for potentially higher gains. Risk, return, and liquidity are aspects that you need to analyze before making an investment.
The first rule of investing is to only invest in what you understand and believe in. You have to analyze the company or asset you are going to invest in and be convinced that over time its value will increase. This is the only way you will be able to have guaranteed profits with minimal risks. To begin with, until you become familiar with the instruments in which you have decided to invest, you can allocate small amounts to test how each one works. Only then, after you understand how they work, will you be able to make larger investments.
Another golden rule of investing, says don’t keep all your eggs in one basket. Portfolio diversification is the basis of investment success.
Saving must be constant and that is why we recommend that you set aside between 10% – 20% of your income. The sooner you start, the better. We don’t know if Albert Einstein himself said that“Compound interest is the eighth wonder of the world. Whoever understands it earns it, whoever doesn’t… pays for it”, but whoever said it, he was very right. To better understand what this “compound interest” means, we will give you an example by which this “snowball” phenomenon is created.
Let’s say you want to invest 20 euros/month in an instrument that gives you a return of 8% per year. After 40 years of monthly investments, you will save approximately 10,000 euros. In addition to this money, you will have a profit of 70,000 euros from the compound interest, that is, the money that has accumulated year after year and that you have not withdrawn from the account. Interest was added to these amounts, resulting in a substantial profit.
With the objectives set, the investor profile known, and a solid knowledge package, you can start to enter the secrets of investments. Next, you will find out what are the pluses and minuses of investments and what you need to consider in order to be successful.
Advantages and disadvantages of investments
In order to have the complete picture, in the following we will present you the advantages and disadvantages of investments: passive investments are the surest way to financial independence and to a future without material shortages. You can choose to invest in stocks, bonds, government securities, real estate, or precious metals. This way you will have a diverse portfolio from which you can regularly collect rents, interest, or dividends.
The advantages of investing are countless compared to the disadvantages. Passive investing has about a 90% success rate for those who are patient and stick to the plan. Consistency and constancy underpin the success of those who have benefited from these investments. A major advantage is the time spent on order fulfillment. Taxation and low taxes are other advantages that make these investments the best way to make money passively.
The major disadvantage is that you cannot accurately predict the market. Another disadvantage may be cost-effectiveness and reduced flexibility in the case of certain instruments. In the case of investments, as in life, it is important to control our emotions and make decisions calmly, after a careful analysis of the project in which we want to be involved into. The difference between losers and winners is the attitude they have in situations that limit them.
Types of investments
What are the main types of investments? Next, we will present you with a series of investments, including the risks associated with each one, so that you can choose what suits you best.
Savings accountdeposits
If you are conservative and want to put your money in a place where the risk is low, you can opt for bank deposits. The disadvantage of these deposits is that their return can be lower than inflation, thus resulting in a decrease in savings.
Short-term certificates of deposit (CDs)
These certificates are issued by banks and have a better return than if you placed your investments in a savings account. Even though they are considered safe investments, they present risks that you must take into account. The risk of these certificates arises when interest rates fall, with investors thus benefiting from a smaller gain. Another risk occurs when rates rise and investors have their money locked up in another CD and can’t withdraw it without penalty.
State titles
Through these investments, the state borrows from the citizens, and after the established period, they are offered a fixed interest rate. Being guaranteed by the government, securities are one of the safest investments and enjoy the great advantage of not being taxable. A major risk of investing in government securities is inflation which can exceed the interest received.
BONDS
When a company, state, or bank needs money, it can borrow from citizens for a predetermined period of time. In return, they receive an annual interest, and when the period is over, the issuer returns the borrowed amount. Bonds can be municipal, corporate, state, or supranational, depending on the issuer. Government bonds have minimal risk, given that the government cannot go bankrupt. The same cannot be said for corporate bonds, where the company can go bankrupt. Even so, in the event of bankruptcy, creditors, i.e. bondholders, have priority in the recovery of claims. If you want to sell before the loan matures, you will be exposed to price risk. Choose periods of time that you know you will honor and that way you will enjoy a steady income without additional effort.
Shares
Shares are securities that certify that you own a part of the issuing company and come with several benefits. You can make money by selling shares when they have risen, or you can get material benefits from dividends after each financial year is over. You can start with any amount, and if you keep them for the long term, the chance that your profit will increase is much higher. In case of a need for liquidity, you can instantly sell part or all of the shares held, thus benefiting from money in a short time.
Just as the profit is shared among all the associates, so is the loss. If the price of the shares falls below your purchase price, then you may suffer capital losses. Another major risk is the collapse of the Stock Exchange, which can even lead to the total loss of your shares. Before you buy shares, make sure you know how this tool works, that you’ve studied the company you want to invest in, and that you understand the risks you’re taking on. For this investment, the risks are very high, but the gains are high.
Investment funds
Investment funds or mutual funds are a form of association between several private investors with the aim of creating together a diversified portfolio of assets. They are divided into 4 categories, depending on the monetary instrument in which the investment is to be made and according to the degree of risk. They can be government securities, bank deposits, bonds, or shares.
The risks of these investments appear when you face poor management that can lead to the loss of invested money. Another risk is that the return may be lower than if you bought the shares separately. For this type of instrument, profit tax is charged and to start, with certain funds you need a minimum of $1000. You have to be careful about commissions and exchange rate variations, but also about the very sudden fluctuation of the price.
ETFs
ETFs are similar to mutual funds, the difference between them is given by the trading period. In ETFs, the price fluctuates throughout the day, whereas in mutual funds, it is fixed at the end of the trading day. The risks are the same as with investment funds.
S&P500 Funds
This fund is the American barometer in terms of stock indices, as it brings together 505 of the most successful American companies. About 80% of the companies in this fund are listed on Wall Street. This type of investment is one of the safest ways to make money for those who do not want an immediate income. Consider that with this instrument, there is a risk of losing money due to fluctuations in value.
Cryptocurrencies
These virtual currencies have gained more and more momentum in recent years because they have a very high volatility and more and more people have invested in them, hoping to get rich overnight. Cryptocurrencies are the riskiest investments you can turn to. If you have a high degree of risk and knowledge about this field, you can be among the lucky ones who will benefit from this investment. To be sure that you won’t be disappointed if you lose everything, don’t forget that you only have to invest the money you can afford. Do not go into debt to banks or third parties with the hope that you will generate guaranteed profits. There is a risk of losing your coins due to cyber attacks or not being able to redeem them.
Examples of the best investments that have been successful
Success can be found in almost any type of investment if you know the market if you take a series of measures by which you can reduce the risk, and if you have patience. We present you with some examples of the best investments that have been successful.
Of course, cryptocurrencies have shown us that anyone can become successful (or lucky) overnight. However, success should not be confused with luck. If you do not do a thorough analysis of the project in which you are going to invest, you cannot call yourself an investor, but a gambler. Those who are really successful, analyze their degree of risk, and the duration of the investment and constantly track data about the project. Even though the crypto market has generated many losses, it still remains the most successful, but also the riskiest investment due to large price fluctuations. By forecasting the market (or speculating), people have generated handsome profits, so it remains one of the favorite financial instruments for people with a high-risk appetite.
ETFs are among the most successful investments. These funds are on an upward trend as more and more people understand how this system works.
Mutual funds andS&P index funds are also substantial income generators if executed correctly.
For those who prefer to invest in real estate but want to avoid the stress of buying and renting real estate,REITs have proven to be a successful solution. A REIT is an investment fund focused on the real estate sector. The good thing about this type of investment is that REITs are required by law to pay out at least 90% of their taxable income to shareholders, so you’ll receive dividends every year.
No matter where you choose to invest, always do it in a project you trust and that presents as few risks as possible. The time you let your money work for you is essential, and that’s why we’ll show you what investments you can make depending on the desired period.
Short term investments
Surely everyone wants to invest today and win tomorrow, but this is possible only in case of few investments. If you want to make short-term investments, you have to consider a period of one year, after which you can mark the profit. However, you can follow market trends and take advantage of rises or falls to sell or buy as needed.
Shares, mutual funds, ETFs, and digital currencies are among the tools you can turn to if you want a short-term capital increase. You can choose to trade regularly and score constant profits or sell and buy after the set period. The degree of risk influences these trades, so the return is correlated with the risk. If you choose to make a high-risk investment, chances are good that the return will be commensurate. If you prefer safe investments, then you will have to be patient and let the market dictate the pace at which you will get the amount you want to earn. Whether you choose to invest in the stock market or virtual currencies, make sure that you are risking the money that is from your own savings and that you can afford to lose. The market is volatile and recent events have shown us that any system can be destabilized very easily, resulting in very large losses.
What to invest in for the long term?
When it comes to answering the question “What to invest in for the long term?”“, we refer to investments that exceed 15 years. After 10, 15 years, your monthly deposits will turn into a generous package of shares and accumulated interest during this period.
If you want a consistent profit, assuming a low risk, you can opt for buying bonds.The loan is repaid at the agreed period, but until then you benefit from an interest for the borrowed money.
Shares held on the stock market represent one of the most effective instruments for long-term investments. In addition to the profit obtained, you enjoy a passive income from the annual dividends.
However safe a project may seem, choose not to invest all your savings in a single investment. Diversify your investments by buying stocks, commodities, gold, or coins and analyze their returns periodically.
What to invest small amounts in?
The healthiest way to start investing is to do it with small amounts until you understand the algorithm of each instrument. Anyone can invest 10% of their income without this habit of changing their lifestyle. You can invest 10, 50, or 100 euros per month, but over time these amounts will bring you the well-being you desire. So if you want a recommendation on “what to invest small amounts in ?” … if you have $100/month and want to invest it, you can build a portfolio containing ETFs, bond mutual funds, and digital currencies.
ETFs can be foreign or listed on the BSE. You can invest in the BET index or the S&P 500 index which has averaged over 11% performance over the past 35 years. With such interest, in 10 years you can triple your invested amount, with minimal risk. These are investments that have a positive track record and have maintained their interest rate increasing.
Bond mutual funds are another asset you can invest in. They are safe and you can start investing first in the BSE and then diversify your portfolio with foreign market funds.
Cryptocurrencies can be bought fractionally, so you can invest part of your savings in this tool.
If we consider Taleb’s “Black Swan” strategy, that is, to invest most of the savings in a safe instrument and only a small part in an instrument with high volatility, high risk level, but which can generate margins of higher profits, we can divide our portfolio into 2 categories. The first category contains 75-85% government bonds and the rest investments that can have a very strong impact. Bitcoin is such a black swan because 10 years ago it didn’t seem like it would have the impact it did.
What to invest 5000-10,000 euros in?
If you have passed the threshold where your investments are 100 euros per month and now you have a budget that exceeds 5000 euros, it is time to diversify your portfolio. What to invest 5000-10,000 euros in? You can create a portfolio ofbonds(government and corporate),ETFs, andcommodities (gold, oil) and you can make a small investment in the crypto market. If you have reached 10,000 euros you can direct to investments, in addition to the assets mentioned above, you can take shares in emerging countries, or you can deposit the money inreal estate investment fundsin developed markets
