Foundations of Investing

5 Core Investment Types (a.k.a. Asset Classes)

1) Stocks (Equities): Ownership in a Company

When you buy stocks, you are essentially buying a piece of a company.

How Stocks Make You Money:

Price appreciation: If the company grows, so does your stock value.

Dividends: Some companies share their profits with investors.

Risk Level: High (but great for long-term wealth)

Best For: Building long-term wealth over decades.

Example: If you had invested $1,000 in Apple stock in 2000, it would be worth over $400,000 today. Stocks outperform most investments over the long run - but they can be volatile in the short term.

2) Bonds (Fixed Income): Loans to Governments & Corporations

Buying a bond is like lending money to a company or government.

In return, they promise to pay you interest at a fixed rate.

How Bonds Make You Money:

• Interest payments: You earn a steady return until the bond matures.
• Price changes: Bonds can be bought and sold before they mature.

Risk Level: Lower than stocks, but returns are also lower.

Best For: Stability, income, and diversification.

Example: Government bonds (like U.S. Treasury bonds) are considered one of the safest investments - but they don’t grow wealth as fast as stocks.

3) Real Estate: Investing in Physical Property

Real estate is not just about owning a home…

It is also one of the oldest ways to build wealth.

How Real Estate Makes You Money:

• Rental income: Earn passive cash flow from tenants.
• Property appreciation: Real estate tends to increase in value over time.

Risk Level: Moderate (can be stable, but requires capital and management).

Best For: Generating passive income and long-term growth.

Example: Buying a rental property can create steady monthly income, but it also comes with responsibilities like maintenance and tenant management.

4) Cash & Cash Equivalents: Safety & Liquidity

Cash is the safest asset, but it comes with a hidden risk:

Inflation.

How Cash Makes You Money:

• Minimal interest: Savings accounts and money market funds pay small returns.
• Liquidity: You can access your money instantly.

Risk Level: Very low, but inflation erodes value over time.

Best For: Emergency funds and short-term savings.

Example: A savings account might feel “safe,” but if inflation is 3% and your bank pays you 1% interest, you’re losing money in real terms.

5) Alternative Investments: Crypto, Commodities, & More

Alternative investments don’t fit into the traditional stock/bond/cash categories, since they have their own unique risks and rewards.

Types Include:

• Cryptocurrency: Digital assets like Bitcoin & Ethereum.
• Commodities: Gold, silver, oil - real-world goods that hold value.
• Private Equity & Venture Capital: Investing in startups or private companies.

Risk Level: Varies widely - can be high-risk, high-reward.

Best For: Diversification and investors with high-risk tolerance.

Example: Bitcoin gained over 1,000% in five years, but also lost half its value in a single year. Alternative assets can be exciting, but they aren’t for the faint of heart.

How Different Investments Fit Different Goals & Risk Profiles

Not all investments serve the same purpose.

Your financial goals and risk tolerance determine which investments are right for you.

Here’s how different assets align with four common investment objectives:

1) Building Long-Term Wealth

Best options: Stock and real-estate.

Why? These investments offer higher returns over time, driven by compounding growth.

Example:

• Historically, the stock market has averaged 7–10% annual returns over decades.
• Real estate appreciates over time while also generating rental income.

Who this is for:

• You’re investing for retirement or long-term goals (10+ years).
• You can handle short-term volatility in exchange for higher returns.

2) Generating Passive Income

Best options: Bonds, dividend stocks, rental properties.

Why? These provide regular cash flow with lower risk than growth-focused investments.

Example:

• A dividend stock pays investors a portion of the company’s profits, which is great for steady income.
• A bond provides fixed interest payments over time.
• A rental property generates monthly rental income.

Who this is for:

• You want consistent income (e.g., retirement, covering living expenses).
• You prefer lower-risk, predictable returns over high growth.

3) Short-Term Safety & Liquidity

Best options: Cash, money market accounts, short-term bonds.

Why? These assets offer stability, liquidity, and minimal risk - but lower returns.

Example:

• A high-yield savings account earns interest while keeping money accessible.
• A short-term bond is safer than stocks and can be cashed out quickly if needed.

Who this is for:

• You need quick access to money (emergency fund, big purchase).
• You want low risk, even if it means lower returns.

4) Diversification & Hedging Against Inflation

Best options: Commodities (gold, oil), real estate, alternative investments.

Why? These assets often hold value or rise when inflation is high.

Example:

• Gold tends to rise when the stock market falls.
• Real estate increases in value as housing prices go up.
• Alternative assets (crypto, private equity) provide additional diversification.

Who this is for:

• You want to protect your portfolio from inflation.
• You’re open to diversifying beyond traditional stocks and bonds.

Imagine rolling a small snowball down a hill. It picks up more snow, and the bigger it gets, the faster it grows.

Money works the same way.

Example:

Invest $100 at 5% interest.

Year 1: $105

Year 2: $110.25

Year 3: $115.76

Now scale that up. Invest $10,000 instead of $100 and give it 40 years instead of 30—now you're talking real money.

Common Mistakes and Misconceptions

Even with the right knowledge, it’s easy to slip up. Here are the biggest mistakes new investors make:

1) Putting All Your Money in One Asset → One bad move can sink your whole portfolio.

Fix: Diversify. Spread your investments across stocks, bonds, real estate, and more.

2) Chasing Trends & Hype → Buying the "next big thing" (hello, crypto in 2021) without understanding it.

Fix: Invest in what you understand. Stick to your strategy, not social media FOMO.

3) Avoiding Risk Entirely → Playing it too safe (all cash or low-yield bonds) might feel good short-term—but you’ll lose to inflation.

Fix: Take on smart risk based on your timeline and goals.

4) Trying to Time the Market → Buying high, selling low—it's what most people accidentally do.

Fix: Invest consistently, regardless of market ups and downs. Time in the market > timing the market.

5) Ignoring Fees → That 1% fee on a fund? It compounds over time and can eat tens of thousands of dollars.

Fix: Look for low-cost index funds and ETFs. Keep your investing costs low.

6) Not Rebalancing Your Portfolio → What starts balanced can drift over time and throw off your risk levels.

Fix: Review and rebalance once a year to stay on track.

7) Investing Without a Goal → Investing without knowing why leads to bad decisions.

Fix: Define your goals (retirement, income, buying a home), then choose investments that support them.