This article is part of our guide on how to invest 1 million dollars for income, available here.
Investing your money can be confusing. You may ask yourself, where should I invest my money? How do I manage risk while maximizing returns? What’s the difference between real estate and stocks? Is crypto safe? The most important thing to understand about investing is that there is no one-size-fits-all solution. Different investors have different risk tolerances, time horizons, and objectives.
A low risk investment in past decades like a simple savings account is no longer a viable place to store capital if you want to avoid mass erosion of your purchasing power due to virtually non-existent savings accounts rates vs a high inflationary world.
In this article, you’ll learn about the four types of investments and which is the safest investment with the highest return, depending on your risk tolerance.
What are the 4 Types of Investments?
For most investors, four different investment vehicles balance risk and return at acceptable levels. These are stocks, bonds, REITs, and private real estate.
Of course, there are many more types of investments, such as gold and cryptocurrencies. However, the four investment types listed above have been able to generate a consistent return for decades, sometimes even centuries, with limited risk and relative stability.
1.) Stocks & ETF’s
Almost all American adults have stock market exposure. Whether you realize it or not, you almost certainly have your money in the stock market if you participate in a retirement account like a 401(k) or IRA. Most companies who take retirement contributions out of employees’ paychecks invest that money in managed funds, which in turn invest into publicly traded companies.
Most private money in the financial markets comes from these retirement plans. There are many companies whose largest single owner is a retirement fund. Pensions are also heavily invested in the stock market. Your pension is also invested in financial markets if you work for a government agency or certain companies.
These funds also invest in bonds to hedge their stock positions.
Bonds have traditionally been considered an essential part of a balanced investment portfolio. Bonds are loans to governments or corporations that generate a monthly return over a fixed period. US treasury bonds are considered risk-free because the United States government backs them. Corporate and local government bonds are generally a bit riskier, with higher returns indicating a higher risk of default.
While bonds have historically helped hedge a stock portfolio in a recession, United States treasury bonds no longer keep up with inflation. Even though the I bond (a bond that keeps up with inflation) is available, consumers can only purchase $10,000 worth every calendar year. While your principal is safe in this scenario, the returns are not competitive.
Many savings bonds also do not allow investors access to their capital until expiration. It’s possible to overcome this by selling the bond on the market, but as bond values fluctuate, it is possible to sustain a loss.
This takes us to a more liquid investment backed by real estate but does not involve the purchase of real estate itself.
REIT stands for real estate investment trust. This is essentially a publicly traded company whose business is investing in and managing real estate. Investors purchase shares of the trust like any other company. These funds purchase real estate using financing just like private real estate investors allow for a leveraged return.
These funds are almost always well diversified, owning thousands of properties in the US and foreign countries, depending on the REIT.
The main advantage of these funds for investors is their passive nature; you just invest your money and receive your share of the property’s rent.
A huge disadvantage of these funds is their volatility and also the fact that you don’t own direct interest in the LLC that owns the real estate, unlike private real estate, which in turn passes down all the tax advantage benefits of owning commercial or residential real estate. When the stock market moves or the Fed adjusts rates, these funds will move immediately, just like any publicly traded security. And unless you own a significant stake in the company, you have no say in its investing decisions. You’re entirely at the whim of the REIT’s directors.
Returns for REITs are generally lower than those of private real estate ventures, as the former are less risky investments. And, like any publicly traded security, they are bound by SEC reporting requirements and must publicly disclose their financial results and other elements of their business.
4.) Private Real Estate
Finally, there’s private real estate. You can purchase a piece of real estate with cash or by financing part of the deal with a bank or other private partners, like investing in a private real estate syndication. The primary advantage here is the ability to purchase property with financing, which isn’t possible in the stock market for most people. Since real estate can be used as collateral and its value doesn’t fluctuate as much as stock, this can be done safely.
A disadvantage, however, is that most people only have access to real estate deals on the open market. The best deals are often kept quiet between brokers, owners, and certain high-level investors with access to large amounts of capital.
Alternatively, you can passively invest in a private deal managed by others, like a private real estate syndication. This allows you to access exclusive investment opportunities, access all the tax advantages of real estate, and not have to deal with all the day-to-day headaches of operating a large commercial property.
The disadvantage of this kind of passive investing is a lack of control. It is important to vet potential sponsors for this kind of investment. However, having access to the right private deals from competent sponsors provides some of the best risk-adjusted returns.
Which Would be Considered the Highest Risk Investment Type?
Of the investment types discussed above, stocks likely have the highest short-term risk due to their volatility. No matter how well a particular company or fund performs, the price will be immediately affected if there is negative market sentiment. While this isn’t a tremendous concern for a long-term investor, someone who is holding for 30 years, it is a concern for someone who relies on income from equities, such as a retired person or someone about to retire.
The 2020 stock market crash showed many people just how volatile and easy it is to lose money in the stock market. People who retired at the beginning of 2020 were selling stocks at more than a 30% loss compared to prices at the beginning of the year (Davis). While the market recovered, those who sold at this time lost money.
The market is very emotional, and bad news can seriously affect the stock market in the short term. It is important not to sell in a reactionary manner to get the maximum return from stocks. However, life circumstances can get in the way, forcing investors to sell.
Some people do not have the mental toughness necessary to deal with these fluctuations. Real estate is a better investment for those people.
Which Would be Considered the Highest Risk Investment Type in Real Estate?
These highest-risk real estate opportunities are usually development deals that start from scratch and are built on a speculative premise. One example might be a high-density housing project in a distant suburb that is projected to grow in the next few decades but doesn’t yet have much demand. It sounds like a good investment because population growth trends seem inevitable. However, nobody can predict the future. An unforeseen war or recession could have serious adverse effects on projects like these, which is why as an investor, you have to be aware of the real estate investment risks.
Projects like this often pay off in the long run, but it could be many years before there’s any cash flow and investors begin recovering their principal. These investments are best for large investors who only use a small percentage of their overall capital for these high-risk, high-return investments.
Which Investment Typically Carries the Least Risk?
Low-risk investments like a treasury notes, which are bonds issued by the US government, are perhaps the safest investment. Many believe that the money is risk-free because of the economic significance of the US government.
If the US government defaults on its debt, this signals a significant problem in this country and the world. Therefore, despite the problems in the modern world, the US isn’t going anywhere, and thus these bonds are extremely safe.
What is the Safest Asset to Own?
After a brief overview of the different types of possible investments, multifamily real estate is likely the best balance of return and safety. Unlike a single-family property, which depends on the revenue of one tenant, a multifamily property allows for diversification in one property.
If your single-family tenant stops paying, your property, and thus your capital, is not generating any income. Furthermore, if you can’t resolve the problem with your tenant and are forced to evict them, you will be stuck without revenue for at least several months.
With a multifamily property, if one tenant stops paying, you have several other tenants that are. You’re able to spread default risk and not get stuck without revenue. You’ll also be able to better keep up with inflation with a multifamily property since rents are generally adjusted and raised annually, and different tenants likely moved into the building at different times, meaning you’re constantly raising rents a bit at a time.
The United States is experiencing a housing shortage, so people are looking for more affordable housing, but fewer units are available for occupancy. As a result, apartment demand will continue to increase in the foreseeable future.
What is the Safest Investment with Highest Return?
All things considered, look into investing in multifamily real estate. With its solid track record of generating good returns on invested capital and beating inflation, this investment vehicle is a great way to build wealth over time. In addition to the benefits listed above, owners of multifamily properties can make money immediately through cash flow from rent and other services provided to tenants.
There’s also the opportunity to add value with multifamily. If you purchase a multifamily property that needs improvement, you can add more value than the renovation cost. Not only will the building’s value increase due to these improvements, but the cash flow will increase to reflect a higher quality product provided to tenants, ensuring cash flow for many years or decades to come.
Frequently Asked Questions About The Safest Assets to Own
Buying the stocks of a company with poor financial performance is a very high-risk event without proper investment portfolio diversification.
You should avoid speculative investments with a spotty track record, such as investing in commodities like gold. You should also avoid investments with a lot of “hype” like cryptocurrencies and certain companies, as these investments are speculative. Avoid investments that don’t beat inflation.
Safest Investment With the Highest Return - Conclusion
Now that you’ve learned about the different types of investments, you likely think that real estate is the way to go. Real estate is perhaps one of the best ways for people to build wealth, and with the proper knowledge and capital, you too can take advantage of this time-tested asset class.
If you want to learn about how multifamily/commercial real estate investing works, consider joining the investor club here at Willowdale Equity. There you’ll be able to network with other investors and get access to exclusive multifamily investment opportunities. It’s hard to invest alone, and building your network today will help you later in your investing journey.
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- Our Private Investor Portal
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