# The types of investments

When compared to other investments, each individual investment has four possible advantages, but never all at once:

1. Low risk - Less chance you'll lose your money
2. High returns - more money back
3. Low taxes - less money goes to the government
4. Low fees - less money goes to other people

All investment returns only come from 3 possible sources:

1. Dividends - you own something, then receive proceeds that originally came from someone else's [labor](results.md)
2. Price appreciation - the market value of something you own moves upward
3. Lending with [interest](money-2_debt.md) or rent - payment to use something
4. Flipping - providing dividends, price appreciation, or interest/rent to others by using their money

Generally, every trading system goes through a [trend](trends.md) of growth, but becomes less effective over time.

- Frequently, investors will jump in the middle to create additional products that reduce earnings while also mitigating risk.
- At some point, the system will start lagging on its exchange/market updates.

For many of the below, there are also [contracts](people-6_contracts.md) for future investments, called options:

- Call options allow someone the right (but not the obligation) to *buy* something at a future time for a set price.
  - This is most frequent in stock markets, where someone can pay a relatively small amount to gamble on an unlikely situation (e.g., a very affordable call option for selling a stock at 5 times its current value).
- Put options allow someone the rights (but not the obligation) to *sell* something at a future time for a set price.
  - Puts most frequent for startup investors, who have the right later to sell the company stock if they want to cash out.
- Both of them typically have a fixed expiration date, which means they have to exercise those options by that time or the contract is terminated.
- The strike price is the required price the underlying asset has to arrive at to have any legitimate value.
  - An option is in-the-money or out-of-the-money based on its call/put price relative to the market price.
- Stock options are a great way to plan ahead to invest, but without actually investing.
  - Restricted stock units (RSUs) are the most common, and have a certain amount of time to vest before they become like normal stock options.
  - If you're a market maker, buying puts is an excellent way to plan ahead for a market crash.
- Shorting a market (e.g., 2007-2008 housing market collapse, 2021 Gamestop short squeeze) is a specific type of option called a short position:
  1. Send a short order to a broker (often within a margin account) and publicly disclose that desire.
  2. The broker lends you that asset and sells them for you at the normal price.
  3. You gain cash from the sale, but must now pay off the debt.
  4. If the asset drops in value, you can pay less and buy back the same number of assets.
  5. You'll keep the price difference as your profit.

Investing in a market gives more data, but investing in-person allows you to work with your experience.

- However, informally investing all depends on your capacity to judge people:
  - Trusting people too little means you'll miss out on numerous opportunities.
  - Trusting people too much means you'll be exploited and possibly scammed.

## 1. Dividends

In any formal market (e.g., stock market), dividends are the most common type of investment.

- They have *countless* options, features, and opportunities.

Stocks (to receive company dividends) - owning a portion of a company:

- High risk, high returns, moderate taxes, moderate fees.
- Often listed on a stock market, but is often unlisted.
- Pros:
  - High long-term returns of about 10-12%.
  - Good for retirement.
  - Relatively short time to learn enough to invest.
  - Depending on how the company [manages its equity](money-accounting.md), may also appreciate in price and act as a commodity.
- Cons:
  - You can lose everything if you don't know what you're doing.
  - Not diversified unless you own at least 35-50 stocks.
  - If a company goes bankrupt, you lose the entire investment.
  - Not very likely to beat the market's returns (e.g., DJIA, NASDAQ, S&P).
  - Self-managed taxes.
- The most stable equity industries are providing a service everyone absolutely needs:
  - Electric, oil, and gas utilities
  - Consumer [electronics](computers.md)
  - [Cars](autos.md)
  - [Logistics](logistics.md)
  - [Food](cooking.md)
  - [Healthcare](body-4_health.md)
- If it's a foreign stock market, it may be subject to higher fees and more risks of political unrest sabotaging the investment.

Mutual funds - multiple investors combine their money, then a fund manager buys and sells securities to increase returns:

- Medium risk, medium returns, moderate/high taxes (depending on political climate), high fees.
- When picking a fund:
  - Each trade will likely incur fees or commissions, so avoid actively managed funds.
  - The expense ratio will tell you how much the fund operator makes each year.
  - Pay more attention to what the fund manager is investing *toward* than their rate of return.
- Pros:
  - Decent long-term returns of about 7%.
  - Built for more diversification than stocks.
  - A great fund manager will stay with the market's trends.
  - Relatively short time to learn enough to invest.
  - Has very few limits to how much money you need.
  - Index funds that track the stock market have a [geometric average](math-algebra.md) of 6.9% per year.
- Cons:
  - An inept fund manager will create many risks.
  - Rises and falls more closely with the stock market than individual stocks.
  - An actively investing fund manager will incur more fees than if you simply invested into a generic fund.
- Mutual funds have many types:
  - Index Fund - follows a stock market index's ups and downs closely (e.g., NASDAQ or DJIA).
    - Usually the safest and most reliable funds.
    - Can be inexpensive and are often well-diversified.
  - Growth and Income Fund - big, boring long-time companies which sell staple goods and services.
  - Growth Fund - made of higher-risk growing medium/large company stocks.
  - Aggressive Growth Fund - very high-risk, high-return.
  - International Stock Mutual Fund - made of international companies' shares.
    - The Vanguard Total World Stock Index I (VTWIX) is one of the broadest international funds.
  - Bond Fund - made of bonds.
  - ETF (Exchange Traded Fund) - a mutual fund that can be traded on a public exchange.
    - The Vanguard Total Bond Market ETF (BND) is one of the most popular broad bond index funds.
  - REIT (Real Estate Investment Trust) - a fund, but with real estate investments.
  - Hedge Fund - uses complex trading and risk management techniques.
    - Historically, hedge funds were designed to short the market and "hedge" risk, but can now apply to anything outside conventional investment activities.
- A fund can have a group of essentially *anything* the fund manager wants, and some ETFs are entertainingly odd:
  - Columbia EM Core ex-China ETF (XCEM) - non-China regions that serve what China serves (e.g., Korea, Taiwan, Brazil).
  - iPath Bloomberg Livestock Subindex Total Return ETN (COW) - specifically in live cattle and lean hogs.
  - The Obesity ETF (SLIM) - obesity and health issues.
  - Global X Millennials Thematic ETF (MILN) - millennial consumer habits.
  - Buzz US Sentiment Leaders ETF (BUZ) - social media's most frequently mentioned stocks.
  - ETFMG Video Game Tech ETF (GAMR) - [electronic games](0ttwip_game-dev.md).
  - AI Powered Equity ETF (AIEQ) - run by an [AI bot](computers-ai.md).
  - Becky ETF - tracks white American teenage girls' consumer habits.
  - The Inverse Cramer ETF (SJIM) and The Long Cramer ETF (LJIM) - tracks everything *against* Jim Cramer's Mad Money TV show recommendations.
- Investing for returns across the market is much easier than obsessing over it:
  - You don't have to pay attention to financial media or mountains of [conflicting information](information.md) from [self-proclaimed experts](education.md).
  - The fees are less expensive and the results are dramatically superior.
  - You won't need an advisor or broker, and it takes 90 minutes or so per year to work directly with brand-name mutual fund families.
- For tax reasons, be careful with mutual funds.
  - Some funds are taxed *several* times, especially if they're foreign (e.g., Vanguard Total International Fund).

Business startup (investing) - investing in someone else's [business idea](entrepreneur-2_idea.md):

- High risk, high returns, moderate/high taxes (depending on political climate), low fees.
- Pros:
  - Possible chance of tremendous success.
  - Your skills at [reading people](people-5_conflicts.md) will pay off.
  - Can be done online.
  - You can contribute to a [meaningful idea](entrepreneur-2_idea.md).
- Cons:
  - Profoundly connected to that [business leadership's](mgmt-1_why.md) character and work ethic.
  - It takes a bit of research to find whether a business is viable.
  - There are many unknown factors, and *nobody* can predict a high probability of a startup succeeding in its early stages.
- Always review the last 3 years' Schedule C tax forms (filed with their annual 1040) and pull the balance sheet before investing.
- Crowdfunding, specifically, rarely gives significant financial returns on your investment.

Business startup (building) - building a [profitable business](entrepreneur-1_why.md):

- *Very* high risk (as well as lots of labor), very high returns, low/moderate taxes, low/moderate fees.
- Pros:
  - Opportunity to convert a [passion](mind-feelings-happiness.md) into a stream of [income](money-1_why.md).
  - Chance to [successfully](success-1_why.md) build something rewarding and [meaningful](meaning.md).
  - You need marketable skills instead of severe risk tolerance.
- Cons
  - Long hours, low-paid for a long time.
  - Must have the right [personality](personality.md) to handle the rejection and hard work.

## 2. Price Appreciation

If you're young, consider investing a significant percentage of your portfolio to price appreciation.

- Derivatives are pegged to the value of an underlying asset, which is why they're sometimes called an underlying (e.g., corporate stock is attached to the value of that corporation).
- Hold on to appreciating assets for at least five years.

Real estate (flipping):

- High risk, very high returns, low taxes, moderate/high fees.
- Pros:
  - A fantastic investment vehicle both as [rental property](home-maintenance.md) and in trades.
  - Researching and applying various skills can give tremendous returns.
  - Inflation-resistant, and yields high returns.
- Cons:
  - You must know the area and the market well.
  - It takes *years* to see returns.
  - Maintaining real estate is expensive.
  - Unless you're very wealthy, you can't diversify.
  - Your assets are geographically confined to a location.
- Many people buying real estate only look at their monthly payment, so its asset value and interest rate are inversely correlated.

Collectibles - objects of unique value:

- Medium risk, low returns, moderate taxes, low fees.
- Pros:
  - Makes hobbies profitable.
  - An easy [side hustle](entrepreneur-4_freelancing.md).
- Cons
  - Not typically very profitable.
  - The esoteric nature of most collectibles can make scaling for more profit very difficult.

Commodities and futures - literally *anything* mass-produced:

- Low/medium risk, low returns, moderate taxes, low fees.
- Commodities are things people can use now, futures are prepaid commodities.
- Pros:
  - Generally resistant to inflation.
  - Typically fulfills something people need, meaning no risk of a complete loss.
  - More boring, meaning less publicity around them.
- Cons:
  - Can be high risk, especially in unfamiliar materials.
  - They don't usually give returns unless you're buying or selling them.
- Commodity cycles tend to represent themselves in a few patterns:
  - Some are used regularly year-round (e.g., petroleum, timber).
  - Most are seasonal and cycle based on routine needs (e.g., corn, Christmas trees).
  - Some are based on [trends](trends.md) and buying frenzies (e.g., gold, [tulips at one time](https://en.wikipedia.org/wiki/Tulip_mania)).

Stocks (for trading):

- Very high risk ([as shown here](https://www.bloomberg.com/features/2015-stock-chart-trading-game/)), very high returns, low-to-high taxes ([depending on how you do it](money-accounting.md)), low fees.
- Stock trading, especially day trading, is the scope of risk-taking usually within a casino, but with much better odds.
- Pros:
  - An extreme rush from the frenzy of activity.
  - Can quickly make tremendous wealth.
  - While you're holding them, you may receive dividends.
- Cons:
  - Can be exhausting.
  - Can quickly *lose* tremendous wealth.

Currencies - any means to store or transfer wealth, including [cryptocurrency](computers-blockchain.md):

- High risk, low-to-high returns (depending on timing), low taxes, low fees.
- Pros:
  - At the right timing, geopolitical events can wildly swing its value and give remarkable gains.
- Cons:
  - At the wrong timing, geopolitical events can wildly swing its value and create losses.
  - Unless you're buying or selling them, they don't usually give returns.
  - More of a personal [insurance policy](money-insurance.md) than an investment vehicle.
- Cryptocurrency is semi-regulated as a security, and semi-regulated as a product, so it's very murky what it actually *is*.

[Intellectual properties](legal-ip.md) - ideas protected by copyright/trademark/patent law:

- Low risk, low returns, low taxes, moderate fees
- Not typically a "market" for them, but can be purchased individually from people.
- Pros:
  - Ownership of a property that permits royalties and commissions.
- Cons:
  - Ethical implications of owning someone else's [created work](creations.md).
  - Risks of publicity issues.
  - Expensive to enforce, especially with aspects like [open-source licenses](legal-ip-floss.md).
  - Once it expires, it becomes public domain.

Web domains - the URLs that could be used to [host websites](computers-sofware-webdev.md):

- Medium risk, high returns, low taxes, high fees.
- Often traded publicly on a web domain market.
- Pros:
  - With the right buyer, can become very valuable.
  - Useful if you make websites yourself.
- Cons:
  - Maintenance fees can be expensive ($2-20 annually per domain).
  - They may never appreciate in value, and it's often impossible to tell.

## 3. Interest

Banking (having accounts) - a bank arranges to use assets, then pays interest for it:

- Nearly zero risk, Dismal returns, low taxes, low fees.
- Includes many varieties of products:
  - Checking Accounts
  - Certificates of Deposit (CDs)
  - Money Market Accounts
- Pros:
  - Very high liquidity.
  - Allows as a "holding tank" for other investments.
  - Practically zero risk.
- Cons:
  - Depressingly small returns.
  - *Horrible* idea for long-term investing, even savings accounts.
- The bank should be [insured](money-insurance.md) by the government (e.g., member FDIC for the USA).
  - Make sure to never surpass that insurance amount in any given account (e.g., $250,000).
  - Your bank *account* will be insured, but not your *stock ownership* of that bank.

Bonds - an organization borrows money, then pays it back after a specified number of years when it matures:

- Low risk, low returns, no/low taxes, low fees.
- Often traded publicly on a bond market.
  - The aggregate value of the bond market is *much* larger than the stock market.
- Can be treasury bonds from a government entity or corporate bonds from a company.
  - Treasury bonds (I Bonds) are very low risk and a very low return.
- Pros:
  - Regular interest income of about 5%.
  - Potential appreciation in value.
- Cons:
  - Not diversified unless you own at least 35-50 bonds.
  - To get a decent return, your money is typically tied up in a bond until it matures.
  - If a company goes bankrupt, you lose the entire investment.
- Interest rates have a generally inverse relationship with bonds, so bonds are popular when interest rates are down.
  - If interest rates drop too much, your bonds may have a call provision and the organization may prepay them.
  - This means you'll have to re-invest in a low-interest environment.
- Compared to corporate bonds, government bonds are tax-exempt but provide significantly lower returns.
  - They also give less anxiety, which may be important depending on your [personality](personality.md).

Microloans - a mutual fund, but with loans:

- Medium/high risk, medium returns, low taxes, moderate fees.
- Often traded publicly on a microloan market.
- The borrower's credit history determines the risks and returns.
- Pros:
  - Provides the opportunity to issue loans without assets.
  - Many types to choose from, including student loans, consumer debt refinancing, and startup loans.
  - Easy to invest across international borders.
- Cons:
  - The money is locked in until they've paid it off.
  - Depending on what the loan is for, you may not see all your money returned.

Real estate (renting) - lending out space for someone else to borrow:

- High risk, moderate/high returns, moderate taxes, moderate fees.
- Pros:
  - Your skills in maintaining a property can be useful.
  - There's always a rental market available.
- Cons:
  - Inability to successfully frame or manage [contracts](people-6_contracts.md) can involve bad tenants you can't get rid of.
  - When the market goes down, you won't be able to get great returns.
  - Constant maintenance on the property.
- If you're purchasing a secondary property, never own it farther than an hour's drive from your home.

## 4. Flipping

Generally, the only people who can safely flip investments have been *very* involved in investments already.

- The math for running a successful two-sided investment operation is *twice* the calculation, meaning twice the ways to fail.

Fund management - operating a mutual fund:

- High risk, any number of returns, high taxes, high fees.
- Pros:
  - Operating a fund allows access to markets with a minimum balance.
  - Can be done with as little as a few people.
- Cons:
  - May require licensing, depending on the region.
  - Your fees may make the returns too low for your clients.

Insurance - owning an insurance company:

- High risk, low/moderate returns, low taxes, high fees.
- Pros:
  - Providing a valuable service for people who need to transfer risk to you.
  - Able to invest without much public attention toward it.
- Cons:
  - Requires a lot of overhead through a substantial collection of lawyers, claims adjusters, and underwriters, as well as a few [actuaries](math-stat.md).
  - Highly scrutinized by a government's insurance division.
  - The only investing you can do is the remainder after the loss ratio and expense ratio.
  - If you don't make sufficient claim payouts, insurance clients will find out and you'll lose premiums.

Banking (owning) - using others' assets to invest more:

- Moderate risk, moderate returns, high taxes, high fees.
- Pros:
  - Providing a valuable service for people who want to store or transfer their wealth.
  - Able to invest into just about anything.
- Cons:
  - Requires many filings and legislation to become established.
  - Difficult to compete on fees compared to larger banks without [unique branding](marketing.md) to appeal to specific demographics.
  - Operating in the USA requires approval from *multiple* government [bureaus](bureaucracy.md) (FDIC, SEC, et al.).
  - If people don't trust you, even slightly, you're about to go out of business.
  - To stay insured with the FDIC, you'll always need reserve currency available.