The Investment Enigma: Unraveling Mary's Financial Strategy

An investment is an asset or item acquired to generate income or appreciation in value. Mary's purchase will be considered an investment if it meets these criteria. For example, if Mary buys stocks, bonds, real estate, or commodities, her purchase will be considered an investment. The purchase of a second-hand car, on the other hand, is not considered an investment as it is a purchase of used equipment.

Stocks or equities

Stocks, also known as equities, are a type of security that gives stockholders a share of ownership in a company. Investors buy stocks for various reasons, including capital appreciation, dividend payments, and the ability to vote shares and influence the company. The two main kinds of stocks are common stock and preferred stock. Common stock entitles owners to vote at shareholder meetings and receive dividends, while preferred stockholders usually don't have voting rights but receive dividend payments before common stockholders and have priority in the event of bankruptcy.

Stocks are considered a risky investment, but they offer the greatest potential for growth over the long haul. Investors willing to stick with stocks over long periods, generally 15 years or more, are usually rewarded with strong, positive returns. Stocks are also highly liquid, making it easy to buy or sell shares at any time. Additionally, it is easier to diversify a portfolio of stocks compared to real estate, as it requires less time and money to invest in a broad range of companies and industries.

However, one of the downsides of investing in stocks is the potential for emotional decision-making. Stock prices can be volatile, and investors often sell when a buy-and-hold strategy might produce greater returns. It's important for investors to take a long-term view and avoid making impulsive decisions based on short-term market fluctuations.

When considering investing in stocks or equities, it's crucial to understand the risks and potential rewards. Diversification, a long-term perspective, and a well-thought-out investment strategy can help maximize the chances of positive returns.

Bonds or fixed-income securities

Bonds are a type of fixed-income security, which are investment products issued by corporations and governments to raise funds for financing projects and operations. They are considered a form of lending investment, where investors lend money to the issuing entity in exchange for periodic interest payments and the eventual return of the principal amount at maturity.

Fixed-income securities are characterised by their fixed periodic interest payments, known as coupon payments, which are typically distributed semi-annually. The principal amount, also referred to as the face or par value, is repaid to the investor when the bond reaches maturity. The maturity dates of bonds can vary, with some having short-term maturities of less than three years, while others may have medium-term (4-10 years) or long-term maturities (more than 10 years).

Bonds are assigned credit ratings based on the financial viability and creditworthiness of the issuer. These ratings help investors assess the risks involved in investing in a particular bond. Bonds can be classified as investment-grade or non-investment-grade, with the latter also known as junk bonds or high-yield bonds due to their higher risk of default.

Fixed-income securities are considered to have lower returns and lower risk compared to stocks. They provide a steady stream of income for investors, making them attractive for those seeking a more conservative investment strategy. Additionally, they can help stabilise investment portfolios by offsetting the risk associated with more volatile investments, such as stocks.

Some common types of fixed-income securities include:

• Treasury bills (T-bills): Short-term securities issued by the US government, maturing within one year and purchased at a discount to their face value.
• Treasury notes (T-notes): Intermediate-term securities with maturities between 2 and 10 years, paying fixed interest rates and sold in multiples of $100.
• Treasury bonds (T-bonds): Long-term securities with maturities of 20 or 30 years, sold in increments of $100.
• Municipal bonds: Issued by states, cities, or counties to fund capital projects, and often offering tax-free benefits to investors.
• Corporate bonds: Issued by companies to raise capital, with varying prices and interest rates based on the company's financial stability and creditworthiness.
• Certificates of deposit (CDs): Offered by financial institutions, typically with maturities of less than five years and providing higher returns than traditional savings accounts.

Real estate

There are several ways to invest in real estate, each with its own level of risk and potential reward. Here are some of the most common methods:

Rental Properties

Owning rental properties is a good choice for individuals with do-it-yourself skills, the patience to manage tenants, and the time to manage the property. Rental properties can provide regular income and potential appreciation. Many expenses associated with rental properties are also tax-deductible. However, managing tenants can be tedious, and unexpected costs and vacancies can eat into income.

REIGs are ideal for people who have some capital and want to own rental real estate without the hassle of managing it themselves. REIGs are similar to small mutual funds, where a pool of money from multiple investors is used to invest in rental properties. A single investor can own one or multiple units, while the company operating the group collectively manages all the units, handling maintenance, advertising vacancies, and interviewing tenants. REIGs provide income and appreciation potential with a more hands-off approach, but they are susceptible to unscrupulous managers.

House Flipping

House flipping involves finding undervalued properties and quickly selling them for a profit, often after renovations. This strategy can offer significant returns but requires deep market knowledge and carries the risk of losing money if properties are not sold quickly. Flipping can be done without making improvements, by simply identifying properties with intrinsic value, or by adding value through renovations.

REITs are ideal for investors who want exposure to real estate without the traditional real estate transaction. REITs are created when a corporation or trust uses investors' money to purchase and operate income-producing properties. They are traded on major exchanges like stocks and tend to pay high dividends, making them attractive for investors seeking regular income. REITs also provide access to non-residential investments such as malls or office buildings, which may not be feasible for individual investors. However, investors in REITs do not benefit from property appreciation, and there is a risk of a real estate market downturn.

Online Real Estate Platforms

Online real estate investing platforms allow investors to join others in investing in large commercial or residential deals. These platforms, also known as real estate crowdfunding, offer the opportunity to diversify into real estate without putting up a large stake. However, these investments tend to be illiquid, with lock-up periods, and management fees can reduce profits.

In conclusion, real estate investing offers a range of options, from hands-on approaches like rental properties and house flipping to more passive strategies such as REIGs and REITs. Each method has its own advantages and disadvantages, and investors should carefully consider their own skills, risk tolerance, and investment goals before deciding on the best approach for them.

Commodities

How to Invest in Commodities

There are several ways to invest in commodities:

• Owning physical commodities, such as bullion bars of gold or silver.
• Futures contracts, which are agreements to buy or sell a specified amount of a commodity at a specified price and date in the future.
• Individual securities related to commodity processing or production, such as extraction companies in mining and energy.
• Mutual funds, exchange-traded funds (ETFs), and exchange-traded notes (ETNs).
• Commodity-based mutual funds, ETFs, and ETNs can provide exposure to commodities. These pool investor funds to combine capital in a commodity pool.
• Alternative investments, such as bullion coins and jewelry, are closer to collectibles than investments.

Benefits of Investing in Commodities

• Commodities provide diversification to an investment portfolio.
• They can act as a hedge against inflation as commodity prices tend to rise with inflation.
• Commodities have the potential for large returns due to their sensitivity to production forecasts and global events that impact supply chains.

Downsides of Investing in Commodities

• Investing in commodities does not generate yield income like bonds or dividend-paying stocks.
• Commodities can be highly volatile due to their susceptibility to global events, regulatory and political risks, and supply chain issues.
• There are external risks associated with commodities that are beyond the control of investors.

Examples of Commodities to Invest In

Some of the most commonly traded commodities include:

• Precious metals such as gold, silver, and platinum.
• Oil and gas.
• Base metals such as aluminum, zinc, and copper.
• Agricultural products like corn, soy, pork, beef, and wheat.

Factors to Consider

When considering investing in commodities, it is important to keep in mind that this type of investment carries risks and may not be suitable for all portfolios. Commodities are influenced by basic factors such as supply and demand, as well as global events and market sentiment.

Additionally, investing in physical commodities may come with issues of storage, insurance, and liquidity. It is also important to understand the specialized knowledge required for successful investing in certain commodities, such as feasibility studies for extraction companies.

For those interested in investing in commodities, it is recommended to consult with a financial professional to determine if this type of investment aligns with your investment goals and risk tolerance.

Collectibles

Some examples of valuable collectibles include:

• Rare artworks
• Vintage cars
• Antique furniture
• Historical memorabilia
• First-edition books
• Rare comic books
• Unique historical artifacts

Before investing in collectibles, it is important to consider the maintenance costs, the need for proper insurance, the risk of counterfeits, and the potential for lower returns than other investments.

Frequently asked questions