Investing 101: Top 3 Traditional Assets to Invest in

Investing doesn’t have to be as complicated as many claim it is. While owning a diversified portfolio – one with numerous asset classes – brings many benefits, you only really need a handful to reap rewards consistently.

Nowadays, you hear and see investing hype around everything from stocks to cryptocurrency and digital art (NFT’s).

While it is in your best interest to consider and research as many as possible, most experienced investors will tell you that you are better off building a foundation of a few traditional, proven assets.

The 3 asset classes we will explore today are stocks/equities, bonds and real estate (investment properties).

Once you have these in your pocket, you’ll be ready to expand into more exotic options.

Stocks/equities

Stocks, also known as equities, are probably the most well-known assets. After all, stock indices like the S&P 500 are generally used as a proxy for a nation’s (and the world’s) entire economy. A stock’s price, more specifically, is what stock indices are built on.

In simple terms, you profit from stocks by selling them at a higher price than what you paid for them. In addition, dividend-paying stocks will pay out dividends regularly, usually quarterly.

Historically speaking, stocks have proven to be a lucrative long-term investment with consistent returns. Bear in mind that this is in the context of a “buy and hold” strategy, meaning that you purchase shares and keep rather than sell them immediately i.e. you don’t trade them.

Stock trading is a different, riskier ballgame with volatile returns.

The average annual return of US stocks over the 70 years following the 1929 Great Depression is near 9.60%. This is a solid 4 percentage points above the average annual return of US long-term bonds over the same period.

On average, this means that a hypothetical stock portfolio of $100 would be worth $110 the next year, $121 the year after that, and so on.

Even accounting for inflation, these returns remain strongly positive. In Europe, the average annual return of stocks hovers around 6% across those 70 years. Let’s look at the pros and cons of equities to recap:

Pros:

● Strong, reliable returns

● Easy to acquire through (online) brokers

● Low maintenance

Cons:

● Can be volatile with huge downswings during economic crashes

● Price of stocks tend to be heavily influenced by investor sentiment rather than fundamental value of the company

● Takes time to build wealth

Bonds

Essentially, bonds are loans made to a borrower by an investor. The principal amount of the loan is paid back at the end of a certain term. In addition, the investor may receive periodic payments called “coupons” throughout that term. Both governments and companies can issue bonds, but government bonds are more common with individual investors since they are considered safer. This is because, in general, a company is more likely to fail and default on debts than a government is. In fact, 10-30 year US Treasury bonds are virtually risk-free since the US government can print money at will to pay back any debts. You may have heard the “Low risk, low return” mantra of investing, and it’s somewhat true in this case. As seen in the image above, the average annual return of US long-term bonds since the Great Depression is about 5.60% - notably lower compared to the almost 9.60% for stocks. Despite this lower return, bonds remain integral in many investors’ portfolios for various reasons.

Pros:

● Coupon-paying bonds provide consistent income stream

● Can rise in value, or at least stay constant, when stock market is down

● Safe alternative to riskier assets like stocks; balances portfolio

Cons:

● Lower net returns, especially after accounting for inflation

● Value drops when interest rates rise

● Credit/default risk, particularly for lower-rated corporate bonds. This means an inability to repay the principal and/or coupons when a company goes bankrupt

Real estate (Investment properties)

For many individual investors, real estate is the most valuable asset and comprises the largest portion of one’s net worth. The global real estate market is currently worth about $326.5 trillion, which is larger than all worldwide equity and debt securities combined. It should come as no surprise that it makes the list of top investments. If you are fortunate enough to be able to invest in multiple properties, there are numerous ways to turn them into income-producing assets. The most basic is buying and subsequently selling at a higher price. This can be done over the course of years, as properties often appreciate in value over time. Renting out homes for short-term overnight stays on peer-to-peer platforms like Airbnb and Vrbo is another option. If you don’t use one of your homes for many months of the year, why not rent it out to others and earn income from it? In fact, you can even rent out your primary residence when you’re away for a business trip or vacation, for example. If that seems too invasive and high-maintenance for you, you can also rent out properties – or specific rooms/areas – on an hourly basis. On a freshly-launched platform, Viewnary, you can rent out your balcony/terrace, rooftop or indoor space on an hourly basis provided that it has a great view or unique setting. If you prefer a more traditional approach, you can of course rent out property to long-term renters.

Pros:

● Source of consistent long-term income when rented out

● Value appreciation over time

● Potentially more profitable than other assets like stocks (annually)

Cons:

● Illiquid; cannot be bought and sold rapidly

● Requires maintenance which costs time and money

● Significant (upfront) capital required to purchase properties

Categories: : Investment