By Kevin Judge | April 30, 2019
According to a professor I had in graduate school, most of what you need to know about investment can be illustrated by two very old proverbs:
A bird in the hand is worth two in the bush: This actually illustrates two critical concepts in investing, the time value of money and risk premium. Money you have today is worth more than money that you will get in the future because you have use of the today’s money now and there is always uncertainty about what will transfer in the future.Despite what you hear on cable television, nobody has invented a truly reliable crystal ball!
Don’t put all your your eggs in one basket: The lesson here is there is safety in diversity, a fundamental principal of investing. With a diverse portfolio of investments and investment classes, you are much less likely to have all of your portfolio decline at the same time. A bad performance in one stock in a particular industry will be offset by better performance in another stock in a different industry.
Conversely, investing heavily in stocks in one particular industry runs the risk of industry specific issues effecting all of your stocks.
In addition, it can be important to diversify your investments across different types of investments referred to as “Asset Classes”. It is very rare that all classes have bear markets (decline) at the same time.
NOTE: This did happen in the 2008 Financial Crisis. All asset classes except Cash declined significantly, however if you went all to cash you missed an awesome recovery in all asset classes.
TYPES OF INVESTMENT ASSETS
There are hundreds of types of investments and thousands of choices, but only two categories to choose from
- DEBT: These are investments where you are owed interest and your money back.
- EQUITY: These are investments where you own something and hope for one or both of two things: earn income (dividends) from it and/or have its value rise (appreciation).
Each one of these types of Assets is divided into more specific asset classes, such as corporate bond debt and real estate asset equity.