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Most investments are made up of these three basic factors: Safety, Income, and Capital Growth. However, it is imperative for any successful individual investor to find the right balance among these three valuable objectives.
# Safety
With safety comes a price. The returns may be very modest compared to the potential returns of riskier investments. This is called “opportunity risk.” However, those who choose the safest investments may be giving up making big profits.
Most highly safe investments are also found in the money market. In order of increasing risk, these securities include Treasury bills (T-bills), certificates of deposit (CDs), or commercial papers.
There is also what we call interest rate risk. Here, you could tie your money up in a bond that pays a 1% return, and then watch as inflation rises to 2%. You have just lost money in terms of real spending power.
# Income
Most Investors who have their priorities towards income are looking for assets that guarantee a steady income supply. And to get there, they may have to accommodate a bit more risk.
This is often the priority of retirees who want to generate a stable source of monthly income while keeping up with inflation.
# Capital Growth
You often get to achieve capital growth by selling an asset. For example, stocks are capital assets. There are many other types of capital growth assets like real estate, gold, diamonds investments etc. Usually, what they all share is some level of risk to the investor.
The stock markets offer some of the most speculative investments available since their returns are unpredictable. For those who can cope with certain levels of ups and downs, growth stocks may be your way out. Most of these companies are the fast-growing young companies that may grow up to be like Facebook, Zoom etc. Or they might just eventually crash. Whereas, the dividend stars are established companies that may not grow in leaps and bounds but pay steady dividends year after year.
