While we’re on the topic of investment and diversification, you should also familiarize yourself with the most important types of investments. What we’re talking about here are asset classes.
· Cash: You’re already familiar with this one. I like to say that “cash is queen,” although in light of interest rates, it can be the case that you’ll be paying fees with your cash instead of earning money on it. That’s why you should invest it instead. Keep a portion of your assets as cash so you can have it in hand quickly in case of an emergency. Everything you don’t need in the next five years or as a nest egg should be invested.
· Stocks: Also known as shares, stocks are basically equivalent to owning a small part of a publicly traded company. If you own stocks in Allianz, for example, you’re essentially part owner of Allianz. The great thing about it is that when the price of the stock goes up, the value of the investment increases. You can invest in stocks individually (e.g., by buying stock in Amazon or Google) or with a diversified basket of stocks that contains stock from different companies (e.g., an ETF).
· Bonds: Bonds are comparable to loans or debt and are also called fixed-interest securities or fixed income. To put it simply, you loan your money to a company or the government through them. You receive ongoing payments (coupons) for this, and you also get your money back at the end of the designated time period. Bonds also get traded, so their value goes up and down based on many factors. One of the most important factors is interest rates. When interest rates go up, the price of the bond usually goes down, and vice versa.
· Commodities: This refers to the common commodities, from iron ore, steel, silver, and gold to oil and even wheat. You can buy commodities directly (gold bars or coins, for example), as an exchange-traded fund that tracks the development of a certain commodity price, or in an exchange-traded fund that contains a basket of commodities.
· Real estate: This is typically about the purchase of real estate that you either occupy yourself or rent out. You can also invest in these asset classes by purchasing a corresponding ETF or a real estate fund.
Money secret No. 20: Cash, stocks, and bonds are the three main types of investments. It’s to your advantage to understand how they work and how you get your hands on them.