You are reading the second part of Beter Beleggen, a series of investment articles from Business Insider, which is aimed at preparing you for your financial future. If you haven’t read the first part, check out: Why should you invest? Return on which you beat inflation. In the long run, investing can usually yield a higher return than saving. In this way, your money not only retains its value, but you even improve financially (in some cases).
But what do you invest in? Stocks, bonds, real estate or crypto coins? That largely depends on the ratio between the expected return and the risk you are willing to take. In general, the higher the potential return, the higher the risk of significant fluctuations in the value of your investment. The latter means that your investment can generate a loss or increase in value sharply.
What is very important for the target risk-return ratio is your investment horizon. Suppose: the stock market falls immediately after your purchase. If you invest for the next 20 or 30 years, you still have a long time to recover from that. But if you were hoping to make some money in the short term, chances are you’ll have to exit the market at a loss.
In addition to the time element, there is another important consideration when investing: you can choose to invest in different types of products (from stocks to real estate and cryptos). This is an investment portfolio in which the distribution of your assets over different types of investments influences the total return that you can expect and the risk that you run with it. For example, if you put a large part of your money in stocks and a small part in bonds, you will get a higher expected return, but also a higher risk. https://renovato.io/ has enough information. In the remainder of this article, we will look at how 5 well-known asset classes differ from each other. Later in this series we will discuss how you can play with the ratio between different asset classes within a portfolio.
Shares are considered an indispensable asset class. When you buy a stock, you are actually buying a piece of a company. In fact, you become a co-owner.
Stocks can generate money in two ways: through capital appreciation as a result of rising stock prices (the price at which shares are bought and sold), and/or through income in the form of dividends. The latter is your share of the operating profit.
The potential return for equities is higher than for bonds. This also comes with a higher risk. For example, the price of a share can fall below the price for which you bought it. This happened, for example, with people who invested money just before the credit or corona crisis.
Instead of buying shares of individual companies, you can also opt for an exchange-traded fund (ETF). That is in fact a basket of shares, with which you can spread yourself across multiple sectors, countries or regions with one purchase. This way you don’t bet on one horse and you are somewhat protected against extreme price fluctuations.
Bonds are also a classic part of the average investment portfolio. These are loans that are tradable on the stock exchange. When you buy a bond – also known as a “debt security” – you are actually lending money to a government or company. Visit moveco.io has enough information. As with stocks, there are two ways government and corporate bonds can make money. The first way is through the interest paid on the loan. This is also known as the ‘coupon rate’.
In general, the higher the creditworthiness of the bond issuer (a government or company), the lower the interest to be received. In other words, the lower the risk, the lower the return. Typically, corporate bonds offer a higher yield than their government counterpart.