The Four Types of Investments

Before you can invest, what do you need to know? You first need to understand what you can invest in. There are four main kinds of investments. All investments can be boiled down to these four categories, but not all investments are created equal. Let’s look at each one through the lens of safety, liquidity, and return. (We defined these here.)

1. Financial Institutions

The first investment is financial institutions—otherwise known as banks and credit unions. They make money via arbitrage. This means they take someone else’s money and loan it to their neighbor for a higher interest rate. Then they make money off the difference.

• Safety: Banks have safety. They’re backed up by FDIC Insurance. They’re backed up by the ability of the government to print money and protect your deposits.
• Liquidity: You can usually get your money from the bank pretty quickly by just making a withdrawal.
• Rate of Return: Sadly, there aren’t many rich bankers because bank accounts like savings accounts, money market accounts, and CDs typically don’t earn a high interest rate. Money in the bank barely keeps up with inflation—if at all. However, it is important to keep your emergency fund there because that money needs to be liquid and safe.

Proverbs 21.20 says, “Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.” This means that the wise man saves for the future, and he keeps it safe. But when you look at investing funds beyond that emergency amount, financial institutions are not the best place to get rich.

2. Insurance

The next investment is insurance companies. Insurance companies make profits by taking safe investments from investors and investing them in larger investments that can only be made as a conglomerate with other investors pooling their resources together.

• Safety: Many times, insurance companies are safer than financial institutions because they typically don’t make loans, so they are considered safe.
• Liquidity: Insurance companies are notorious for not having liquidity and tying up your money for a longer period of time than you intended so they can make a return on your deposit for you and the insurance company. So beware of your time because you don’t want to make a three-year investment for a one-year need. That’s a recipe for disaster.
• Rate of Return: Typically, returns on insurance company investments can be more beneficial than a bank’s and have higher interest rate potential.

3. Stock market

The next investment is the stock market—or Wall Street—where you participate in buying and selling shares of publicly held companies.

• Safety: Wall Street is not known for having a lot of safety. Many investments have investment loss. Investment risk is inherent to the stock market—that’s why there are so many disclosures on what I and other investment professionals say because you can and sometimes will lose your money. From time to time, that is the nature of the stock market.
• Liquidity: Your investments are typically liquid such as stock exchange-traded funds which can be sold during the day.
• Rate of Return: Historically, the stock market has generated superior returns above nearly every investment out there. However, historical return does not necessarily translate to personal return. Just because history says that the market has historically made 10% doesn’t mean you will make 10%.

Solomon, the wisest man in the world, once said, “Give a portion to seven, or even to eight, for you know not what disaster may happen on earth” (Ecc. 11.2). This means that life is uncertain, so spread out your wealth. Diversify your stocks to mitigate risk. You may be on the wrong side of history when you invest in Wall Street—but I will add that there are very few investments that can beat the stock market for 10 years.

4. Real Estate

Finally, real estate is another investment option, which is where you purchase property consisting of land or buildings.

• Safety: Real estate is not a safe investment. Historically, many people have lost fortunes in real estate because of foreclosure, bankruptcy, and unwise investments.
• Liquidity: A house or commercial piece of property can be sold at any time—as long as a buyer and a seller can come to an agreement. Many people would say yes, then real estate has liquidity—but liquidity is the ability to convert an asset to cash quickly. As anyone who has sold a house can tell you—a sale doesn’t always happen quickly, especially if you need the funds right away. You may have to sell for a loss to sell it at all.
• Rate of Return: Just like Wall Street, real estate has superior returns over time. Historically, many fortunes have been created in real estate. But historical return may not translate to personal return.

Proverbs 31 mentions a woman who invests in real estate: “She considers a field and buys it; out of her earnings she plants a vineyard.” So she carefully evaluates the property before she buys it to see if it is a good investment. Then after she buys it, she plants a crop so she can further earn a profit from it. She shows that it takes time, prudence, and dedication to treating real estate like a business. It’s the only investment that requires blood, sweat, and tears to be successful. Anyone who tells you otherwise has fallen in love with this investment world—and that’s playing a dangerous game.

Summary

So those are the four kinds of investments you can make, each with its own benefit and drawback:

• If you speak with a banker, a banker will tell you about the safety and liquidity of their investment because they want you to feel good about your savings.
• Insurance professionals will tell you that time is only important if you need your money right away.
• Stock brokers will always tell you that the market will recover.
• A realtor’s job is to sell real estate and will tell you that location is an important detail at the end of the day—and they often have agendas for financial gain.

The key to investing is to have a little of all four types of investments. That way, you have safety, liquidity, and return in good supply. Never fall in love with a certain investment. All investments have merit, and what’s right for someone else might not be right for you.