In this episode of the Get Rich Slow Club, we explore the different asset classes you can invest in—cash, bonds, shares, and property. We then cover the most popular types of investments so you can make informed decisions that will set you up for financial independence.

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What can you invest in?

When you think of investing, what comes to mind? Maybe you think it's only for rich people who have extra cash to spare. Investing is not just for the wealthy; it's for anyone who wants to achieve financial freedom.

When it comes to investing, people often think of shares and property as the only option. However, there are several types of investments to choose from, each with their own risks, returns, and costs. Before diving into it, let's first talk about some important investment concepts.

First off, risk tolerance is the level of risk an investor is willing to take. There is always a trade-off between risk and return. The more risk you are willing to take, the higher the potential return. Conversely, the lower the risk, the lower the potential return. While there is risk involved in investing, you can manage it by diversifying your portfolio with other asset classes. This way, if one asset or investment performs poorly, it won't impact your entire portfolio.

Another concern people - especially young investors - often have is the returns they can expect. There are two ways to make a profit on an investment: capital gains and income.

Capital gains are the profit you make when you sell an asset for more than you paid for it. Income is the profit you receive from an investment in the form of dividends, rent, or interest payments. It's important to note that both capital gains and income are taxed. Lastly, investing involves costs and fees that can eat into your returns. It's essential to understand the costs and fees associated with different types of investments. Costs include brokerage fees, management fees, transaction fees, and other similar fees. When choosing an investment, be sure to consider the costs and fees involved, as they can impact your overall returns.

Most popular types of investments

Cash

First, let's start with cash. Cash is the safest out of these investments, but it’s also the one that generally yields the lowest returns.

Cash investments include your savings account and term deposits. In Australia, deposits are guaranteed up to $250,000 through an ADI, which is an authorised deposit-taking institution.

How can we actually invest in cash though? The accounts typically used for cash are:

• A high-interest savings account
• An offset account which is to offset property interest

Cash is good for shorter term goals and to reduce risk in an investment portfolio. Often you can use it for emergency funds, paying down debt, or short term goals. In short, you won’t get rich off cash, but you also won’t lose your money quickly.

Bonds

The next type of investment is bonds, which are loans made to companies or governments. When you buy a bond, you’re essentially lending money in exchange for regular interest payments. Investors can use bonds to reduce overall risk in a portfolio thanks to the power of diversification, but they are not entirely risk-free. The risk can vary from low to medium.

Unlike cash, the money you invest in bonds may go up and down. Bonds have a slightly higher return than cash, but this will often depend upon counterparty risk. This is, for example, when the government or company you lent your money to defaults and doesn’t pay up. The good news is that loans to stable governments, such as Australia and the US, are almost risk-free.

The potential return on bonds is lower than shares, but the risk is lower. Investors can purchase bonds as an ETF or as part of a managed fund. The best thing here is you probably already own some in your super fund.

Shares

On the other hand, shares are a form of investment where you essentially buy a small part of a company. By investing in shares, you become a shareholder in that company. As the company’s value grows, so does the value of your investment.

You can directly own or indirectly own a company through something like a managed fund or ETF. Shares can be two-dimensional assets, which means you can make money in two ways.

• Dividends: This is when the company pays you as the shareholder some of its profit. Dividends are similar to the income you receive when renting out a property (More on this in our ultimate guide to dividends for Australians).
• Capital gains: This is the difference between the price the share was initially bought for and the price it was sold for. Capital gains are when you sell the asset, which is similar to the payment you receive if you sold a property.

Let’s say you buy a share for $10 and sell it for $15. You’ve made a capital gain of $5. If you also get a dividend of $1, your total return is $6. Both of these are taxed.

The long term returns in shares are generally higher than cash and bonds. However, shares are best suited to investors with a high risk tolerance and a longer time frame to ride out fluctuations in the market. If you’re looking for lower risk, consider a managed fund or ETF instead of individual shares.

But what are ETFs, you ask?

We love to talk about ETFs, which are just shares in a bundle. ETFs are a popular way to get started in investing; they provide instant diversification to spread out the risk across multiple companies. They can either be active or passive and are bought through a broker.

Most ETFs are passive index-tracking ETFs, which means they track an index such as the ASX200 or S&P 500. Active ETFs are managed by a fund manager trying to actively outperform the index and usually have higher fees.

However, over the long term, passive investment funds have historically performed better. More than 80% of Australian fund managers under performed the index over 15 years. In the US, 92% of them delivered lower returns than the S&P 500 index. To put it into perspective, think of ETFs like buying chocolate. Just as there are various brands and stores where you can buy chocolate, different brokers have different features and prices. What matters more than where you buy it is what you buy depending on your circumstances.

For first-time investors, ETFs are a great option because they’re passive and easy to manage or understand. ETFs also offer diversification and more consistent income through dividends.

Property

In Australia, property investing is apopular investment strategy for achieving FIRE. Property is a two-dimensional asset where you can earn income through rent and capital gains. You can invest in property by buying a rental property or commercial property, such as office spaces.

Property is medium to high risk as property values can fluctuate greatly. This level of risk depends on the type of investment, location, and tenancy risk.

For example, you're exposed to risks such as interest rate changes, which can increase the cost of your mortgage. Your property may also remain vacant for some time. Another risk to think about is possible exposure to natural disasters such as fires and flooding.

While property is higher risk than cash and bonds, it also means you may be able to expect higher returns over the long term. Property may have less liquidity, though - meaning that buying and selling of it takes time. You can invest in a property fund such as a REIT if you don’t have enough savings or you want to convert into cash more quickly.

Summary and key takeaways

There are many different types of investments to consider, each with its own set of risks and potential returns. Remember: cash is the safest but offers the lowest return. Shares and property are the highest risk but have the potential for higher returns. Bonds are somewhere in the middle, and ETFs are a popular way to invest in a diverse range of assets.

It’s important to do your research and speak to a financial advisor to create a well-balanced investment portfolio. If you're new to investing, start with a small amount and add more later when you feel more confident.

While you listen to this episode, write down your assets and investments and their values. This will help you calculate your net worth. Look up any terms that you don’t understand, such as ETF, broker, tenancy risk, or counterparty risk. Check your super or ETFs to see what you’re invested in.

And send us a question you want answered or tell us what your favourite investment is and why.

Happy investing!

Tash & Ana