Quora Answer: What are the Best Things to Invest In if I Have Room for Risk?

The following is my answer to a Quora question: “I just turned 18 and want to invest.  What are the best things to invest in, if I have room for risk?”

In deciding on portfolio and investment strategy, it is important for you to understand your risk tolerance, which pertains not only to your temperament, but also your financial limits.  Secondly, it is important for you to have goal, since that helps you focus.  What do you want to achieve?  Do you have a specific target for wealth accumulation?  Are you looking to raise funds to get involved in a particular venture?  Do you want money to travel the world?  Or, are you concerned about rising healthcare costs, for example, and want some form of liability protection?  It is quite likely that there are several goals, but they need to be qualified and quantified, as well as given an order of precedence.  Understanding your investment goal helps you determine your investment horizon as well as your likely portfolio of financial instruments.  Another factor that relates to this is where you are based, since there are issues of accounting and taxation that shape your options.

That all being said, there are three classes that you should generally look at: equity instruments, debt instruments and insurance policies.  Equity instruments would be stocks, whether direct purchase of specific counters, or through a form of collective investment scheme.  Debt instruments would be bonds, also direct from the issuer or through a fund.  Insurance policies are used to create an immediate estate in the event of an inclement event such as critical illness all the way to death, or to mitigate losses through some form of liability protection.

For a beginner, it would be safer to buy stocks and bonds through collective investment schemes, or funds.  This is a relatively cheap way of diversifying your portfolio across industries and regions, mitigating currency exposure, political exposure and slowdowns specific to industries or economic sectors.  Beginners should also avoid any form of derivatives such as warrants, forward contracts and credit swaps.  If it is complicated or exotic, it is also very risky.  Even experienced investors get burned to the tune of billions of dollars.  The difference is that these major investors have some sort of insurance policy that covers this loss, major credit lines and the financial depth.  In most markets, it is better to avoid penny stocks because there is little to no movement in the secondary market to offload non-performing stocks at a minimal loss, or to sell on at a profit.

Unless there is a thorough understanding of the property market, it is better to avoid property, particularly forms of land banking in overseas locations.  If there is a dispute, it is very difficult to get a legal resolution that is affordable.  If the cost of legal action is more than the amount that can be recovered, it is not worth it. An alternative would be an investment in REITs.  However, in considering REITs, avoid REITs whose portfolio is heavily into retail and residential.  The housing market goes through cycles, and as areas develop, changes in the law and other factors sometimes make it more speculation than investing.  The problem with retail REITs is the fact that more people are shopping online, and there will be a more pronounced shift in shopping habits.  This means more brick and mortar shops will continue to struggle, there will be a glut in the market, and yields will drop.

In creating a portfolio, it is safe to begin with a 60% weightage towards equity instruments, and 40% weightage towards debt instruments.  Bonds do not give spectacular returns, but they provide a foundation of stability should there be a drop in the market.  As your understanding of the market grows, you can deviate from this according to your needs and taste.

When it comes to insurance, it is important that the hospitalisation and accident plans are up first.  Medical costs, otherwise, can wipe out wealth very quickly. Inflation may vary in a healthy economy from just over 1% to perhaps 3% or 4%.  Medical inflation is close to 20% in some parts of the world.  It is important to have coverage up when you are healthy, and it is cheap.  The next step is to have some sort of life coverage that covers loss of income due to disability, and critical illness.  The death coverage creates an instant estate, but that is a legacy issue.  However, investment-linked insurance plans are an excellent means to store funds and move them legally, whilst mitigating fund movement costs and taxation, particularly in certain parts of the world.

Once you have your investment portfolio up, and it has some value, the next step is to look into the creation of a vehicle, such as a holding company or a trust, to manage your investments.  The sole purpose of this is to legally mitigate your tax liability . Investment is not just about how much you can make, but how much you can keep as well.  There is no point having spectacular returns is a large percentage is lost to personal income taxes.  An investment vehicle pays taxes on net income, whereas an individual pays on gross income.

In summary, there is no real “best thing”.  What is best depends on your investment philosophy, your needs, and your style, which will develop as you get more experienced.