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The 4 Investment Types You Should Avoid - The Big Investment

The 4 Investment Types You Should Avoid

October 28, 2019

There are a ton of different types of investments out there, each with their own rewards and benefits associated with them. Still, some are better than others in terms of factors such as the amount that you can stand to make from them, how trustworthy and consistent they are, and how much risk is involved.

For those looking into the idea of investing their money, here are four different types of investments, each with their own positives, and some negatives that you might want to avoid.

So, what are the 4 types of investments to avoid? Or at least to be aware of? And what’s the best type of investment? Here are our picks across some of the different types of assets to invest in currently.

What are the 4 types of investments?

Stocks

An investment within a small piece or ‘share’ within a company, stocks are one of the most common investment types that people choose to involve themselves in. With an abundance of different smartphone apps making it easier than ever to get educated and engrossed in the stock market, it can be an attractive way of getting started.

Stocks typically require a fairly hands-on approach, which can be tricky for busy working professionals or those who don’t take it seriously, as you need to monitor the market for tweaks and alterations, selling your stocks when high in order to make a profit. Some larger stocks do pay dividends – regular payments based on the company you invest in’s earnings – but unless you’ve got significant shares in a company, you won’t stand to make that much.

The trade-off here is that having a large share in a company could put you back at risk, as you’ve got all your eggs one basket and could face losses if your chosen company hits a bump in the financial road. It’s certainly a stressful endeavour trying to strike a balance with this investment strategy, and it’s why many opt to go for other asset types that are a little more plain sailing.

While investing in stocks can certainly prove to be lucrative, they require a lot of attention, and are often based on predictions that aren’t set in stone. One crucial factor that you should consider when investing is to consider what your goals are, as if you’re interested in establishing a stable financial buffer for retirement or later life, stock investment might not be for you. Certain stock investments tend to be volatile, meaning that they can fluctuate in value quite drastically, and so if you want to maintain and preserve your capital, you might want to put your money somewhere where you know it won’t disappear.

Managed mutual funds

Don’t want to decide on the individual companies and investments that you’re making, and would rather someone else manage your capital on your behalf? A mutual fund investment involves putting your capital into a pool with other investors into a portfolio, typically paid back in dividends based on the results.

One of the benefits of this investment strategy is that it can help to provide you with an automatically diversified portfolio, as your funds will be allocated to a range of different companies on your behalf. The risks that can occur, however, such as market fluctuation, inflation, and currency exchange (if your mutual fund diversifies to foreign companies, too), are still apparent.

Another risk associated with mutual funds lies in if the company or money manager in control of the fund cannot afford to make the payments required to the different investors. Those concerned about these sorts of risks, and want to have direct control over their own financial future, might want to steer clear from this strategy.

Bonds

The name’s bonds, savings bonds. As an investment strategy that has protections in place, a bond doesn’t come with the traditional worries and concerns that other investment strategies might have. Money that you put in is often protected, and you’re assured to get back what you paid in when it matures.

However, the security and simplicity of bonds can also be their downfall. Due to their low-risk and often fixed-rate, bonds aren’t the most lucrative of investment methods by a long shot, and investors with a significant amount of capital could stand to make a lot more on their investment if they chose to go with something different.

In attempt to diversify their portfolio, some investors choose to put some of their capital into foreign bonds from overseas, alongside their typical ones. The risks that come with this type of strategy are twofold: not only will it be more difficult to understand subtleties and shifts in the market, due to not being local, but unpredictable shifts in the exchange rate can come back to bite when the bond eventually matures.

Index Funds

Similar to mutual funds, Index funds are a great way of getting a diverse look at different types of investments, as they provide many different stocks based on an index of successful companies. Financial planner Jeff Rose advises paying close attention to ‘actively managed index funds’ as one strategy to avoid, as these companies increase the price of what was once a low-cost investment, and ask you to “pay for something for nothing”. There’s nothing wrong with allocating your funds to be invested on your behalf if you don’t have the time, but make sure it’s worthwhile.

What’s the best type of investment?

Types of investing strategies – Property

If looking for a long-term strategy, you might want to look towards the different types of assets to invest in.

Investing in property – once you’ve found the best type of property to invest in – could be a viable option. A tactile asset class that is often regarded among the most secure, it can be a great way to foster long term growth over time, in preparation for later life.

Investing in property, if you have the capital, can benefit you in different ways. First of all, as a long-term strategy, you’ll have control of a tangible, secure investment in an area of your choosing, with the potential of capital appreciation – growth in value on your original purchase price as the area develops. There are a lot of areas across the country at the moment that are experiencing mass amounts of growth, and so providing you select somewhere projected to continue thriving, this could be a great opportunity.

Perhaps the best type of property to invest in at the moment, certainly in the UK, would be student accommodation. In large part due to the vast number of students across cities in the UK, student property typically has low void periods, meaning that you will have a better chance of sustaining a consistent source of income through rental payments. The combination of relatively low purchase prices and high monthly rental payments also means that the yield percentages on student properties are also much higher than average, more so than any other property type.