Investing Money is the 3rd step in The Financial Engineer's Money Management Workflow. I want to reestablish the difference between saving money and investing money. Investing money is when you put your money into motion (Kinetic Energy) with a goal of achieving a profit. This is achieved by putting it into financial ventures, shares, or property. I also consider knowledge an investment, which requires it's own post to be discussed in depth.
With any investment comes a grade of risk. There is always the risk of losing your money. I like to think of risk in three levels: high, moderate, and low. The higher the risk, the more potential for higher returns. Also the higher the risk the greater losses. As I run through the three ways of investing money, I will state which risk level I believe each investment vehicle resides.
1. Mutual Funds, ETF’s, Stocks
Investing money in mutual funds, ETF’s, and/or stocks is the most commonly known way of investing money. This is a good portion of my portfolio (90%). Most (84%) of my stock investments are in an index fund, which is constructed to match a particular stock index (S&P 500). I consider my money invested in index funds to be moderate risk, due to the diversity. An index fund can be thought of as owning a portion of the entire stock index market. In my naive days I dabbled in day trading ETF’s and individual stocks (high risk). I was smart enough not to put a ton of money into it, but I did not do particularly well. I thought I could catch a black cat running around in a coal cellar.
A second way for investing money would be in bonds. When you buy bonds you are essentially loaning a business, municipality, government entity, etc. money. Businesses use bonds to grow their business through numerous ways (i.e. buy equipment or property). Municipalities will use bonds to finance infrastructure projects. The borrower will pay back the debt (bond) over a time period (maturity date) with interest. The bond principal amount must be paid back in full by the maturity date. I invest in bonds, similarly to how I invest in stocks, through a Total Bond Market Index Fund. A bond's value is directly related to how interest rates change. There are numerous bonds with varying degree of risk levels, but in general I would say that they are low risk investments.
3. Real Estate
Investing money into real estate can be done in numerous ways. One of the most common ways is to invest in real estate investment trusts (REITs). A REIT allows anyone to invest in portfolios of real estate assets similar to how you invest in stocks or bonds. Again, I invest in mutual fund REITs and avoid individual company stock. If I do not have control of managing all aspects of real estate, than I avoid relying on another single individual or corporation to produce returns. Investing money into a Mutual Fund REIT fits in the moderate risk category.
Real estate investing can be achieved through crowdfunding. Crowdfunding uses small amounts of money from numerous individuals to finance a new real estate development. There are some crowdfunding websites that brings investors to real estate projects such as Fundrise. I would classify crowdfunding in the high risk category, as this is a new concept.
Another way to invest in Real estate is through the gig economy. The gig economy is considered to be the online platform that connects peers to each other to perform "gigs". This new digital economy can be utilized with real estate through short-term rental agreements. There are various rules, ordinances, and regulations with this, but it can be very lucrative. I would consider this a high risk category, but is manageable.