To understand investment refers to buying something with the intention of acquiring a profit in the near future. Simply put, to invest actually means to buy an entity or an asset with the intention of generating extra income or an improvement in the value of that entity over a short period of time, usually a period of one year to three years. The profit motive is the driving force behind all investment activity and has been the driving force behind economic activity since Adam Smith’s day almost two thousand years ago. But as we have known, the profit motive is not the only driving force behind economic activity. There are many other forces associated with the successful management of the resources available through investment. An understanding of how to maximize the potentials of investment is therefore necessary for an investor to become a highly successful investor.
Many people think that there is one common type of investment that they can make money on-the-money and that is the stock market. While it is true that stock prices have been remarkably consistent over the years, the reality is that stock prices are volatile and extremely sensitive to many factors outside of fundamental factors that would affect the price of stocks in any other environment. Therefore, stock prices are out of a much better position to provide long-term investors with higher returns than bonds. This is because stock prices do not fluctuate significantly for the life of the investment whereas bonds usually follow a more consistent and predictable pattern as a result of changing interest rates, inflation, and other external factors.
Other types of investment opportunities are much better suited for long term investors. An excellent example of this is bond investing. Bond investing is simply buying a portfolio of bonds with the plan of paying them back over time with interest. Bond interest is guaranteed by the federal government which protects investors from rising interest rates causing a default on the federal government’s part.
While a bond generally provides higher returns than the standard stock market investment, it comes with much risk. The greater the risk, the lower the returns. Bond investments also typically come with fixed returns that cannot be affected by economic conditions. However, there are some bonds that pay higher returns based on their maturity date.
An excellent way of diversifying your portfolio is through asset management. Asset management refers to the process of selecting, owning, and investing in different types of assets. These assets vary widely according to risk tolerance. The goal of this investment strategy is to create a portfolio of assets that will provide a higher return while having less risk. Asset management differs from estate planning in that estate planning involves putting together a physical property or real estate portfolio. Asset management involves allocating capital gains from the sale of assets to suit the different types of financial needs of investors.
When an investor invests in safe, low risk investments, they usually benefit from capital gains with little to no risk and maximize the potential return. Safe investments, such as government bonds, are able to increase in value should interest rates fall. When an investor invests in risky ventures, however, they usually lose value. This is because the higher the risk, the higher the investment can lose, which means there is less money in the investor’s pocket when the venture is unsuccessful. A great example of this type of investment is the oil and gas industry.
CDs, otherwise known as Certificate of Deposit, are another popular investment strategy. CDs offer flexibility and long term storage of cash. Unlike savings accounts, which are only good for a specific amount of time, CDs can last for decades. CD’s are perfect for long term savings due to the fact that they always earn positive interest. Some CDs offer additional perks such as additional flexibility, tax benefits, and flexible terms. These advantages allow CD’s to serve a number of different purposes, most notably to provide cash for home and automobile repairs, college education costs, and debt consolidation.
Inflation is always a concern for long term CD holders. As long as inflation continues to eat away at the CD’s value, investors will need to make the costly switch to CDs in order to lock in profits. Because of the uncertain economic outlook, interest rates on CDs are always a consideration for new investors. Knowing which investments offer the best long-term potential is the key to making solid investments with your money.
