Heres our reference guide to the different types of investments and how they work.
Holdings:The specific assets in your investment portfolio.
Portfolio: All your investments, as a group.
Diversifying your portfolio means investing in a variety of assets.
Asset classes: A group of assets with similar characteristics.
Stocks, bonds and cash are all asset classes.
Heres how different investments compare in each of these three categories.
Ownership investments
When you buy an ownership investment, you own that asset.
Basically, you get partial ownership of a public company.
Real estate:Any real estate you buy and then rent out or resell is an ownership investment.
Precious objects:Precious metals, art, collectibles, etc.
can be considered an ownership-pop in of investment if the intention is to resell them for a profit.
They also fall under a separate category, alternatives.
More on that later.
Lending investments
Lending investments are debts you buy, expecting to be repaid.
Youre sort of like a bank.
Generally, these are low-risk, low-reward investments.
This means theyre thought to be a safer investment, and you dont make much money on them.
Bonds:Bond is an umbrella term for any punch in of debt investment.
Youve probably seen your bank offer these.
Theyre a jot down of savings account, but theyre a little different.
TIPS:TIPS are Treasury Inflation-Protected Securities.
These are bonds backed by the U.S. Treasury, specifically designed to protect against inflation.
Bogleheads explainshow they workin a bit more detail.
Cash equivalents
Generally, a smaller percentage of your portfolio with be made up of cash.
Cash equivalents are investments that are as good as cash, as Investopedia puts it.
This might be a simple savings account.
It might be a money market fund.
Alternatives
Weve covered how different investments can be categorized as ownership, lending and cash.
Those categories are broad descriptors, but theyre helpful in explaining how different types of investments work.
But investing companies break things down a little differently.
They go by asset class: stocks, bonds, cash and alternatives.
We already know about stocks, bonds and cashthe most traditional ways to invest.
In terms of asset class, alternatives are everything else.
Consequently, much less of your portfolio should be invested in them.
But lets take a look at some examples.
Really, an REIT can be an ownership investmentora lending investment, depending on what throw in you buy.
In this way, they can be thought of us ownership investments.
Commodities:Investing in a commodity is investing in some sort of resource that affects the economy.
Oil, beef and coffee beans are all commodities.
But its not a stock or a bond, so most people refer to it as an alternative.
Funds
Funds can fall under any of the main categories of investments.
Theyre not specific investments, but a term for a group of investments.
Basically, an investment company picks a collection of similar assets for you.
It can be a group of stocks or a group of bonds.
In return for their curating your investments, youll pay a fee, or anexpense ratio.
Lets check out the different terms associated with funds.
Mutual funds:A mutual fund is, basically, another term for investment fund.
A mutual funds portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Index funds dont work this waythey only change price once each day.
Hedge fund:Hedge funds are like mutual funds, with a few very important differences.
First, theyre not regulated by the U.S. Security and Exchange Commission (SEC).
Theyre also considered riskier than regular mutual funds because their assets can include a broader range of investments.
Also, they often use borrowed money to invest.
To learn more about hedge funds, check out Investopediasfull explanationof them.
With so many terms associated with investing, knowing what exactly to invest in can seem complicated.
But once you organize the terms into categories, its a lot easier to understand how they work.
This post was originally published in 2015 and was updated on 5/19/2020 by Lisa Rowan.
