Many different financial products can help you achieve your saving and investing goals. Each product is better at meeting specific objectives, while others are better for other purposes. When you start investing, it is a good idea to become familiar with the more common ones. I am an experienced investor, so I know many of these saving and investment vehicles.
To keep it easier to understand, I categorized investment vehicles into four groups relative to their risk vs. reward potential.
Cash and Cash Equivalents
These are very low-risk investment vehicles that can be easily liquidated into cash, with a mandatory holding period of 12 months or less. They typically provide a very low return on investment, and little or no inflation protection. In fact, with the average inflation rate of about 2.5%, these assets are yielding negative real returns, i.e., you have less purchasing power after factoring in inflation.
Our family carries very little cash around, preferring to use our reward credit cards when possible. We do have some money in bank deposit accounts for emergencies and regular expenses.
Here is the list of investments under the cash and cash equivalents group:
- Savings Accounts
- Certificates of Deposit
- Money Market Accounts and Funds
Fixed-income investments are low-risk and low-return investments. When you buy these investments, you are guaranteed regular interest payment plus the return of your principal at the end of the term, assuming the borrower does not default on the loan. If you invest in a fund, your fund could lose value if the interest rate rises. This is called interest rate risk.
The only thing we invest in personally from this group is Bond ETFs. We have a small portion of our investment portfolio invested in bonds as part of our asset allocation and diversification strategy.
Here is the list of investments under the fixed-income investments group:
- Strip Bonds (Zero-Coupon Bonds) such as Treasury Bills and US Saving Bonds.
- Government Bonds (Treasury Securities) such as Treasury Notes and Treasury Bonds.
- Corporate Bonds, excluding Junk Bonds
- Bonds Mutual Funds and ETFs
- Bankers’ Acceptances
Equities and Moderate-Risk Investments
The majority of our investments fall into this category of investment vehicles. They provide the best balance between risk and reward for long-term investing.
When I was a more active investor, I used to invest more in stocks than mutual funds and ETFs. The majority of my stocks were blue-chip stocks (e.g., DOW and S&P500 stocks). Now, most of my investments are in low-expense mutual funds and ETFs. Although investing in individual stocks can bring greater rewards, it is also riskier. In the end, I found it better to diversify with funds and ETFs instead.
Although real estate is part of this group, we minimize our investment in REITs because we own our home, plus three rental properties and two real estate private equity investments. Since our real estate portfolio is about 1.5 times our other investments, we figured it would be best to leave real estate out of our investment portfolio.
Here is the list of investments under the equities and moderate-risk investments group:
- Stocks, excluding Penny Stocks
- Stock Mutual Funds and ETFs
- Real Estate Investment Trusts (REITs)
- Royalty Trusts
- Real Estate Ownership and Rental Properties
Speculative Investments and Derivatives
As far as investing goes, we do not utilize any of these investment vehicles in our portfolio due to its high-risk nature. Here is the list of investments under the speculative investments group:
- Futures Contracts
- Stock Options
- High Yield Bonds (Junk Bonds)
- Peer-to-Peer Lending Notes – These work most similarly to bonds. However, your contract is not with the government or a corporation; instead, your contract is with individuals. In terms of risk vs. reward level, you’re probably in the same range as Junk Bonds.
- Penny Stocks (Micro-cap Stocks)
- Inverse Funds and ETFs
- Leveraged Funds and ETFs
- Collectibles, such as antiques, stamps, coins, artworks, etc.
- Foreign Exchange Market (Currency, Forex, or FX)
- Hedge Funds
Some investments do not fit well into the groups above. I will highlight some of them here:
- Precious Metals and Gems – These are mainly stores of value. There is no underlying mechanism or contract that generates value. As such, the value of your investment is entirely dictated by supply and demand, and perhaps, the trendiness of the asset.
- Insurance Products – There are also “investment” products that are offered by insurance companies. We stay far away from these since there are much better alternatives to these “investments.”
- Whole Life Insurance
- Universal Life Insurance
There are many choices when it comes to investment vehicles you can choose to invest in. My personal preference is to stick with the core financial products like savings, checking, CD, money market, stocks, mutual funds, ETFs, bonds, REITs, and real estate. You can do well by focusing on these proven products without ever trying anything else on this list.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.
I like how you use the term “speculative investments” instead of something like high risk.
I liked how you simplified these categories. Though sometimes the word “risk” can be misunderstood.
I believe our biggest risk financially is that our money will not grow as fast as inflation and taxes will take it away. Which is why we can’t put all our money in the bank, and think we’re living risk free.
Barbara Stanny, author, “Prince Charming Isn’t Coming: How Women Get Smart about Money.”
@Jason – thank you. I think it’s safe to use the terms interchangeably.
@Barbara – welcome to Moolanomy. Great point about inflation risk; in fact, I have a post about it coming up next week.
I’m curious–how would you classify indexes?
I enjoyed seeing a complete list of investment vehicles.
My question to you is now that the real estate bubble is collapsing, and stocks are faltering, whats the next investment vehicle the masses will move their money to?
Brilliant post, really good summary of the various investment types and the portfolio which can be built from it. I thought the medium/moderate risk investment risks were especially well explained