Human Capital: The Investment In People

Investing in people is often referred to as human capital investment. This term is used to describe the process of investing in the skills, capabilities, and knowledge of individuals to enhance their productivity and overall value. It involves providing resources, such as education, training, and development opportunities, to improve an individual's ability to contribute to an organisation or society. Human capital investment is a long-term strategy that aims to develop talent, foster innovation, and drive economic growth. It is based on the understanding that people are a valuable asset and that investing in their potential can lead to significant returns.

Ownership investments

Entrepreneurship is another form of ownership investment, where individuals invest their money, time, and effort into starting and running a business. This type of investment can be highly rewarding but also carries significant risks. Real estate is also considered an ownership investment, as individuals can purchase houses or apartments to rent out or resell for a profit.

Precious metals, collectibles, and other valuable objects can also be classified as ownership investments if they are purchased with the intention of reselling them for a profit. These types of investments can fluctuate in value over time, and they often come with additional costs such as insurance and maintenance.

It is worth noting that ownership investments do not include purchases that are expected to decline in value over time, such as cars, mobile phones, or televisions. These are considered expenses rather than investments.

Lending investments

Lending money is considered a category of investing. The risks are generally lower than for many investments, and consequently, the rewards are relatively modest. For example, a bond issued by a company or a government will pay a set amount of interest over a set period. The primary risk is that the company or government will go bankrupt and be unable to pay back the loan.

A regular savings account is an example of a lending investment. The investor lends money to the bank, which pays interest to the account holder. The bank then lends the money to businesses at a higher rate of interest. The return on savings accounts is quite low, but the risk is essentially zero. In the United States, savings accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC).

Bonds are another common type of lending investment. When you purchase a bond, you are essentially lending money to a company or government, which will pay you back with interest. The risk with bonds is that the entity you are lending to goes bust and is unable to pay back the loan. Generally, U.S. Treasuries are considered the safest option, followed by state and city government bonds, and then bonds issued by companies.

Money market funds are similar to savings accounts but offer a slightly higher rate of interest. They are more liquid than other investments, but writing checks on a money market account reduces its value as an investment.

Peer-to-peer lending is another form of lending investment that has become a multibillion-dollar industry. These platforms connect individual investors with borrowers and offer competitive returns. However, investors should be aware of the risks involved, including the possibility of default by the borrower.

Active investors

One of the main limitations of active investing is the cost. Active investors may incur substantial transaction costs due to frequent buying and selling, and they often have to pay management fees to investment managers. Additionally, active funds often set minimum investment thresholds, which can be quite high.

In contrast to passive investors, who adopt a long-term buy-and-hold strategy, active investors are more dynamic and seek to exploit short-term opportunities. They are willing to spend time on research and enjoy the challenge of outguessing other investors.

Passive investors

Passive investing is a long-term investment strategy that aims to maximise returns by minimising the buying and selling of securities. It is a "buy-and-hold" strategy, where investors purchase securities with the intention of holding them for the long term, rather than seeking to profit from short-term price fluctuations. This strategy is often implemented through index funds or exchange-traded funds (ETFs) that track a broad market index, such as the S&P 500 or Dow Jones Industrial Average (DJIA).

Some of the key benefits of passive investing include ultra-low fees, transparency, and tax efficiency. Passive funds do not incur the same level of transaction costs as actively managed funds, as there is no need for constant research and adjustment of the portfolio. Additionally, the buy-and-hold strategy typically results in lower capital gains taxes.

However, passive investing also has some drawbacks. One of the main limitations is the lack of flexibility. Passive investors are locked into specific indices or predetermined sets of investments, regardless of market conditions. This can result in smaller potential returns, as passive funds rarely beat the market. Additionally, passive investors rely on fund managers to make decisions, which may not align with their specific investment goals.

Overall, passive investing is a hands-off approach that can be attractive to investors who want to see returns with less risk over a longer period. By minimising buying and selling, passive investors can keep costs low and focus on long-term gains rather than short-term market timing.

Institutional investors

In 2019, the world's top 500 asset managers collectively managed $104.4 trillion in assets under management (AuM). Sovereign wealth funds are very important institutional investors in oil-exporting countries, while pension funds play a more significant role in developed nations.

Some examples of prominent institutional investors in the United States include:

• Alaska Permanent Fund
• Ensign Peak Advisors
• CalPERS
• CalSTRS
• Harvard University endowment
• New York State Common Retirement
• Princeton University endowment
• Stanford University endowment

The role of institutional investors extends beyond investing, as they can influence corporate governance by exercising voting rights. They also contribute to the diversification of investment portfolios and the reduction of capital costs for entrepreneurs.

Frequently asked questions