If there were a single best investment, then everyone would flock to it and then it would no longer be a sound investment. Who would not like promises of high returns on their capital without having to do any research or work for it. Not only is there no perfect single investment, what rings most true in investing is the golden rule of investment: do not put all of your eggs in one basket. Let’s debunk the concept of single best investment!
Is there such a thing as the single best investment? Let’s find out!
What is Single Best Investment?
Single Best Investment does not exist! Even a book by Lowell Miller entitled “The Single Best Investment” did not directly point out that you should only invest in one thing. Miller only wrote that you do not need thirty different equities in your stock portfolio in order to create wealth and investment growth. Furthermore, he advocated that all those thirty equities should be of equal weight with each other.
Why Should You Not Engage in A Single Best Investment?
The market usually fluctuates and there is a heightened uncertainty if you are to invest in a single thing. This is the reason why the financial strategy called “hedging” can be your good friend!
Hedging is usually considered as an advanced investing strategy. However, the concept are fairly simple. With the rising popularity of this strategy, the practice of hedging become pretty mainstream. You might not even realize that you are already hedging in your activities in your daily lives. Most often, these activities do not have anything to do with the market.
What is Hedging?
The best way to understand hedging is to think of it as a form of insurance. When people practice hedging, they are just insuring themselves against a negative event that can impact their finances. But, you should note that it does not prevent negative events from happening. What happens when you are able to properly hedge your finances is that the impact of that negative event is reduced.
You probably won’t believe but hedging occurs almost everywhere, and you can see it every day. For example, if you purchase a homeowner’s insurance then you are already hedging yourself against probable fires, break-ins, and other unforeseen disasters.
Many people such as portfolio managers, individual investors, and corporations are using hedging techniques to reduce their exposure to various risks. In the case of financial markets, hedging is not as simple as just buying insurance to protect you from losses. As a matter of fact, hedging against investment risk means that you are using financial instruments strategically to offset the risk of any adverse price movements. In simple terms, this means that you hedge your investments by making a trade-in another.
On a more detailed note, to hedge means to take an investment to give you some kind of protection against negative price movements on a given asset. Just like any other insurance, this is not free and you would also have to pay for this whether through cash, credit or another suitable way for your case.
An example of how hedging can give you protection is this: suppose you are a major shareholder of ABC company, you can purchase a put option so that negative price movements of ABC stock would barely affect you. This option however comes with a price, often called premium just like how payments are called in a life insurance policy.
Hedging, however, is not a sure-fire way to increase your profits. In fact, it also lessens your potential profits as it lessens the risk you have on your investment, and gives you some kind of protection against potential losses brought about by significant price movements on your assets. After all, investments with reduced risks tend to give reduced potential profits as well.
5 Best Investments That You Should Try
If we have already convinced you that there is no such thing as the single best investment or if there is, it may probably the wisest decision, then you should check out these five best investments that you should try!
High-yield Savings Accounts
There are high-yield online savings accounts that you can access. This is a platform where you can earn an amount just like your regular savings account at your brick-and-mortar bank.
Oftentimes, online banks offer much higher interest rates with fewer overhead costs. You can find platforms that pay above 1.5 percent. You should keep in mind that having a savings account is a good thing if you need or aim to have access to cash in the near future.
Moreover, the banks that offer these high-yield savings accounts are FDIC-insured. So you have nothing to worry about the risk of losing your deposit. However, you have the risk of earning less upon reinvestment due to the impact of inflation. Having a savings account also means that its very liquid as you can add or remove your funds anytime.
Certificates of Deposits
These are certificates issued by banks after a “time deposit” has been made by a client, and they generally offer a much more attractive interest rate than those that can be found on a savings account.
Unlike other investment instruments, these time deposits cannot be claimed or withdrawn almost immediately. They have a maturity date that generally spans a month up to several years, depending on the agreement between the bank and the depositor. If a depositor decides to withdraw their time deposit without waiting out the maturity period, they must pay a penalty to the bank.
Certificate of Deposits or time deposits are considered to be relatively safer, but still profitable, investment instruments compared to the others. These are highly recommended for investors who are not looking for an immediate return on their investment, not risk-tolerant, and can afford to store their money away for a while. Be sure to understand first which type of time deposits you need before getting one so you can get the most out of your investment on it.
Money Market Account
A money market account is also FDIC-insured so you don’t worry about losing your money. Moreover, it is an interest-bearing deposit account. This account usually earns higher interest than savings accounts. However, this requires a higher minimum balance. This is a great option for your emergency savings as it is relatively more liquid and earn higher yields.
As a trade-off for better earnings, you should accept that there are more restrictions on withdrawals and limitations on how often you can access your money.
Treasury bills or more commonly known as T-bills have a maturity of one year or less. However, they are not technically interest-bearing. You can buy this at a discounted price from their face value and when the time comes that it matures, the government will pay you the whole amount of the face value.
Government Bond Funds
These are mutual funds that invest in debt securities issued by the United States government and its agencies. To be specific, government bond funds invest in debt instruments such as T-bills, T-notes, T-bonds, and mortgage-backed securities issued by government-sponsored enterprises.