A question I am asked frequently is, “Where should I invest my money?”
My typical answer is, to invest in what you understand and lets you sleep at night. A more nuanced answer is:
The investment world is broken into two, liquid investments and illiquid investments.
Liquid investments are investments where a ready market quotes you a price at which you can frequently sell your investment.
Illiquid investments do not have a market, or quoted price, and do not offer frequent opportunities to exit.
The first question to ask yourself when deciding where to invest is, when do I need this money? If the answer to that question is, “less than 10 years”, you should invest in liquid assets.
The world of liquid assets is broken into 3 main categories, Currency (cash), Fixed Income (loans), and Equities (stocks).
If you need your money in less than 3 years, you should stick with cash. Cash could be a time deposit, money market fund, or short-term treasury (T-bill) which historically have returned 0-4% per year.
If you need your money in less than 3-10 years, you can invest in fixed income. This includes corporate bonds, government bonds, and ETFs comprised of these instruments. Fixed income has historically returned 4-7% per year.
If you do not need the money for more than 10 years, you can invest in equities. These could be index funds, ETFs, or individual stocks. Equities have historically returned 8-10% per year.
The key here is that “per year” does not mean every year. Fixed income and equities can be more volatile than cash. However, if you hold for the prescribed time period, historically the annualized returns have materialized.
If you find yourself with a 10+ year time horizon, aside from equities, you may also consider illiquid investments. This could be real estate, private equity, private businesses, etc. I generally recommend at least 15-20 year time horizons for these investments as their illiquid nature can make it difficult to exit the investment.
I will end with how I began, any of these investments should only be made if you understand them and they let you sleep at night. Earning a couple of extra percentage points is not worth anxiety or restless nights.