Robert G. Allen once asked: “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” Benjamin Franklin reminds us: “An investment in knowledge pays the best interest.” With this in mind, let’s have an overview of the pros and cons of investing in stocks, bonds, funds, gold and cryptocurrencies.
The Pros & Cons of Investing in Stocks
The stock market can make you happy when your stocks appreciate and drive you to desperation when your stocks lose value. Thus, you need to choose and invest wisely.
- Easily diversified: You can invest in various stocks in many countries, industries, and sectors, diversifying your opportunities and risks.
- High returns: Historically, stocks are known for their high returns over the long term.
- Highly liquid: You can easily buy and sell most stocks on a major exchange. If needed, the stocks can be converted into cash quite quickly.
- Dividends: Shareholders receive a part of the company’s earnings in the form of dividends, a welcome passive income.
- Thorough analysis needed: It takes time to choose a stock. It can be overwhelming since you can support a small start-up or an established multinational company, you can invest in software companies, miners, banks, media firms, energy providers, telecoms, retailers, etc.
- Volatility: In case of good or bad news, stock prices can rise or plummet. This can make stocks riskier than bonds.
- Risk of loss in value: With the wrong stock, you may risk losing your investment. A poorly performing company can stagnate; the dividends might drop.
- Transaction fees: Stock trading isn’t free. There’s a fee that you have to pay, no matter if you buy or sell.
The Pros & Cons of Investing in Bonds
Companies and governments use bonds to raise or borrow money from investors. Bonds can mature from just a few days (these are called money market instruments) to several years. A fixed interest is typically paid out once or twice a year. The face value of the bond (the principal) is repaid when the bond matures.
- Lower risk: Compared to stocks, bonds are less risky. Besides, in case of liquidation, bondholders are paid first over shareholders.
- Fixed returns: The interest rate is fixed, thus you know your profit precisely.
- Lower volatility: Bonds can fluctuate but are typically more stable compared to stocks.
- Ratings. Bonds are rated by rating agencies, which gives investors more confidence.
- Fixed returns: The higher safety comes with fixed and lower returns compared to what can be achieved with stocks.
- Larger investments needed: Some bonds are available from about $1,000. But most bonds are priced much higher, which might be discouraging for some investors.
- Less liquid: While government bonds might be quite liquid, the bonds from smaller companies might be much more difficult to sell. The same holds true for bonds with high principal (face value), as there won’t be as many potential buyers.
- Interest rate risk: Compared to stocks, the value of bonds is affected by interest rates more directly. This might not be your case, if you intend to hold your bonds till maturity.
- Due diligence needed: When choosing a bond you will still want to take your time to conduct your own thorough analysis.
The Pros & Cons of Investing in Funds
Mutual funds pool money from many investors, investing in a portfolio of assets (stocks, bonds, money market instruments, and other assets). Funds allow you to invest in assets where you couldn’t afford to invest just by yourself.
- Diversification: The fund can invest in dozens of assets, diversifying investment risks.
- Portfolio management: Portfolio managers take care of buying and selling stocks, bonds, money market instruments, etc.
- Reinvestment: You can easily reinvest your income from the fund (e.g. from dividends and other interest income sources) into additional shares in the fund.
- Convenience: Funds can be attractive for busy investors who don’t have time to conduct their own due diligence to buy assets.
- Fees: The fees can be quite high, particularly on funds that are actively managed.
- Tax inefficiency: Capital gains payouts are uncontrollable tax events for investors. When it comes to capital gains payouts from mutual funds, you have absolutely no choice as an investor.
- No control: You give up all the control over your investment to the portfolio managers.
- Management abuse: All kinds of things can be happening without your knowledge, including excessive replacement, unnecessary trading, churning, window dressing, etc.
The Pros & Cons of Investing in Gold
Gold has been traditionally associated with prosperity, safety, stability and luxury. What are the advantages and disadvantages of gold bullion for investors?
- Perceived value: Because of its special properties, gold has been held valuable for centuries.
- Hedge: Physical gold might serve as a hedge in case of inflation of your national fiat currency.
- Diversification: Gold tends to perform well in case of market uncertainty.
- Low historical returns: As an investment instrument, gold performs very poorly. In this regard, the profit from stocks, bonds and cryptocurrencies can be much higher.
- Questionable in crisis: In case of hyperinflation, people tend to resort to bartering goods for their daily needs, rather than buying things with gold or selling for gold.
- No passive income: As long as you own gold, it doesn’t produce any income. You can get money for gold only after you sell it.
- Not easy to sell: It can be a challenge to prove the purity of your gold pieces, which might be true even in case of certified bullion.
- Not easy to store: Storing gold can incur additional costs.
- Not easy to transport: The limits of gold you can declare and carry on a flight can vary from country to country. And these limits can change over time.
The Pros & Cons of Investing in Cryptocurrencies
- Potential for returns: In 2010, 1 Bitcoin was still under $0.01. As of June 2020, 1 BTC is around $10,000. Litecoin, Ethereum and other cryptos saw similar appreciation. There are new cryptocurrencies with desirable features that add value and promise high appreciation of such assets. You can start investing with a very low amount of money.
- High liquidity: You can buy and sell cryptocurrencies in a matter of minutes. You can easily sell just a fraction of your portfolio.
- Transparency: All transactions are transparently recorded in a blockchain – an immutable public ledger.
- Anonymity: While each transaction is available on a public ledger, the process itself is anonymous. There are cryptocurrencies that allow absolute anonymity.
- Accessibility: Transactions can be done peer-to-peer, without any international borders.
- Speed: Transactions can be verified in a matter of minutes.
- Trend and price: You can see it any time, instantly.
- Fees: Zero fees for management of your assets, and very low transaction fees.
- Autonomy: You are always in complete control, from how you decide to earn your cryptocurrency, where you choose to spend it, and to whom you will send it.
- Staking: You can get an interesting interest for locking and holding your crypto assets at an exchange. This is similar to term deposit on your bank account, but with much higher returns.
- Tokenization: Instead of stocks or bonds, businesses issue their own digital tokens. This is a new form of crowdfunding for companies and a new opportunity for investors to participate in promising projects at an early stage to benefit from their growth and future profit.
- Volatility: As a relatively new investment asset, cryptocurrencies are known to be way more volatile than all the other traditional investing methods.
- Security concerns: Some uninformed users keep their cryptocurrencies in online wallets where they don’t own private keys to their assets, making these open to hackers.
- Requires learning: With over 5,400 cryptocurrencies as of June 2020, you will need to put in some time and energy to learn about this new technology, safe wallets, safety measures, etc. You will also have to conduct due diligence to tell quality cryptos from outright scams.
What to Choose
This was just a brief overview of the pros and cons of the most common investing methods, and it was by no means exhaustive. We have not touched bank accounts with their very low interest, typically below 1%, term deposits, and saving accounts. Real-estate business usually requires much higher capital than any of the above-mentioned methods. Some of these questions can guide you in the right direction:
- What can be the best in a year or two?
- Which assets can appreciate the most in 3 to 5 years?
- Where is the highest potential for retirement?
No matter what, none from the above should be construed as an investment advice, though. It is probably clear that diversification is the key here. Smart investors will have several types of assets in their investment baskets. Well-chosen cryptocurrencies might be in this basket as well, since these bring in features unavailable in any other types of assets. Volatile as they are, cryptocurrencies can provide extremely interesting gains in a surprisingly short time. Staking can be a source of good passive income. Tokenization offers exciting possibilities to both companies and investors. In any case, it is a good idea to always carry out due diligence before you make a final decision for any investment.