Inspired by Krishnan's article about investment strategies in old times, I decided to write an overview of this topic. It seems that building your investment strategy can be tricky now, as there is a whole range of investment instruments to consider. What are they?
I. Deposits (savings)
This is the easiest way to invest money, and it's sometimes underrated. Firstly, it can give you a great habit of saving x% of your earnings and putting them in a deposit account. Secondly, it compounds. And thirdly, deposits on frontier markets can have very attractive interest rates (although we now see them also in the US because of the Fed's policy) - you can easily and pretty safely make 4-5% on USD deposits in countries such as UAE, Uzbekistan, Egypt, or Cambodia, or even more (10-12% in USD) on local currency deposits (these returns are calculated considering the weakening of the local currency against the dollar within the time) in countries such as Georgia, Uzbekistan, and Sri Lanka. So, deposits are not as simple as they seem!
Average returns (long-term): from 1-2% in "safe" markets to 10-12% in frontier markets (again, all returns are in dollars).
II. Financial market
I see four major parts of the financial market:
a) Stocks
b) Bonds
c) Derivatives
d) ETFs
This is the most common way to invest your money beyond just giving it to your bank. But if you don't want to treat the financial market as a casino, you should stick to some investment strategy. There are different strategies, and you can find the most popular and working ones here. I like the idea of a three-fund portfolio: ETF for American stocks + ETF for American bonds + ETF for emerging markets stocks. I think it can capture the overall growth of the global economy, and it's perfect! Of course, there are more complex strategies, like investing in high-tech or socially important companies. However, statistically, index investing is still the best way to invest money in the financial market.
Average returns (long-term): 10-12%.
III. Crypto
Crypto is high-risk, high-volatile, and a half-legal speculative thing. I still believe that some crypto projects have true tech value, such as Ethereum, but let's be honest, crypto has become a game for financiers and traders. Nevertheless, I think it's still useful to play this kind of "casino" with small amounts of money because sometimes whales come to play on your side, and it can boost your investments to the f-ing $MOON.
Average returns: unforeseeable.
IV. Commodities
I'm bad at these things, so here are my simple observations. First of all, I define commodities as things like gold and other precious metals or diamonds and other jewelry or art. Secondly, these things usually have the same problems - you need big savings to buy them, and often you need a taste (or the effort to obtain this taste) to buy the right things or sometimes luck, so they may not be for everyone.
Average returns: very different.
V. Property
I see three major property-related schemes:
a) buy earlier - sell later
b) buy-to-let
c) buy - rebuild - sell
As advantages of property investments, they are tangible and useful - you can live there, rent it, and so on (of course, if some earthquake or just bad developers don't destroy your home). But as disadvantages of these kinds of investments, they are effortful and can be pricey (or, in the case of a mortgage, there is no mobility). And returns are not so high; statistically, they are about 10%.
Average returns (long-term): ~10%
VI. Land
I think it's a very specific investment, so I'll skip it but just include it in my list.
VII. Businesses
Also, you can invest in different businesses in different forms:
a) Private Equity (buy and manage companies)
b) crowd-investing (crowdsourced model of investing in real businesses) like StartEngine ot OTC Markets
c) own business (investing for future gains from the business)
As we can see, all types of these investments demand some business and management knowledge + efforts to execute or apply them. And returns here are unknown because businesses' performance is very different. So as usual, these investments are more suitable for ex-entrepreneurs or managers.
Average returns: depends on business skills and the overall economy
VIII. VC
a) angel investments
b) VC funds
These investments are also more suitable for ex-startuppers because they demand a large amount of investment (to create a pool of deals) and some startups' intuition.
Average returns (long-term): 10-30%
IX. Mutual funds (public investments)
A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. In comparison to mutual funds, they are available for daily trading to the public. Despite their commitment to risky strategies, mutual funds earn less than ETFs in the long run!
Average returns (long-term): <~10%
X. Hedge funds (private investments)
Hedge funds are like mutual funds but not for the public. They can afford riskier strategies, but despite it, their average returns, in the long run, are also not outperforming ETFs.
Average returns (long-term): < 10%
1. Diversification - if the financial market collapses, some things such as commodities or real estate will remain valuable.
2. Exceeding average - some funds or stocks can sometimes return 30% or even 60%, so people crave this alpha.
3. Just interest - it can be just interesting to invest in art or cool startups.
a) 30% - deposits, especially in frontier markets
b) 60% - a three-fund portfolio
c) 5% - crypto to capture some miracles
d) 5% - cash for emergency situations (in dollars / euro / rubles)
Yep, this should give me ~10% annual returns, but I claim that it is the best strategy in the ratio of effort and risk on returns. Want more? Welcome to the finance world! But keep in mind that in the finance market, your money is good, so everybody will try to sell their highest returns to you to gain % from your money. And statistically, we can see that returns greater than 10%, in the long run, are an act of finance genius, so how many real geniuses do you know?