Six common investments options and how to get started

Would-be investors often fall into a trap that can have serious consequences for their long term finances and it can be a hard habit to break.

Investing is the key to building another income and not being forced to work forever.

But there are so many options; ETFs, shares, managed funds, micro investing, property, and the rest – it’s enough to make your head spin.

Unfortunately for many would-be investors, this can lead to analysis paralysis and ultimately getting stuck in the inaction trap, missing out on your ability to get ahead and start building your money momentum.

In this piece I cover the six most common, and in my view most effective investments and what you need to know to choose the right investment for you.

Direct Shares

Buying a share is essentially buying a tiny slice of a company. Even if the slice you own is only a small fraction or percentage of the entire company, you’re entitled to that percentage of the increase in value of the company (growth) and the same percentage of the distribution of any company profit (dividends).

Advantages of shares are that you can invest into a specific company you think will perform well. Disadvantages of buying shares is that you often have to pay a ‘brokerage’ cost, and the fact that your entire investment is linked to the performance of only one company.

Direct shares is one investment option. Picture: Gaye Gerard/NCA NewsWire

Cryptocurrency

Cryptocurrency has been getting a lot of attention in recent years, and is more and more being accepted as a mainstream investment and form of payment. There are a bunch of different types of crypto, from straight ‘coins’ like bitcoin, tokens, security tokens, NFTs and the rest.

The advantages with the majority of these digital assets is their link to the success of blockchain technology and the limited supply of cryptocurrencies.

The disadvantages of crypto is that there are so many blind spots it’s hard for investors to understand what’s driving the market, as well as the risks around buying, selling and holding digital assets.

RELATED: What are the risks of investing in cryptocurrency

Bitcoin prices have been on a rollercoaster ride. Picture: Ozan Kose/AFP

Managed funds

A managed fund is a pool of money that’s invested into a bunch of different shares by an investment manager with a specific investment strategy. The strategy might be something like investing only into tech companies, real estate, or could be something less common like renewable energy.

The advantages of investing into managed funds is that you often get exposure to a lot of different investments, which can reduce investment risk, and that managed funds don’t charge a brokerage fee, allowing you to invest small amounts without racking up big fees.

Exchange traded funds (ETFs)

ETFs are similar to managed funds, in that there is a pool of funds invested in line with a specific investment mandate. The technical details of the difference between ETFs and managed funds gets complex, but the main difference is that managed funds aren’t listed and traded on the stock exchange but ETFs are, so with ETFs you can enter and exit more quickly and easily which is their main advantage.

The disadvantage of ETFs is that because they’re traded on the stock exchange you have to pay the same brokerage you pay on direct shares.

Micro investment platforms

Micro investment platforms are becoming more and more popular, allowing investors to start with amounts as low as $1, often without the same trading and brokerage costs of their alternatives. Different micro investing platforms give access to different investments, some direct shares, some managed funds, others ETFs, and others even to residential and commercial property.

The advantages of these platforms are that they make it easy to get started investing for people without large sums of money, and they generally have a pretty slick user experience avoiding the annoying paperwork needed by their more traditional competitors.

The disadvantage is that depending on the platform, fees can be higher for smaller account balances.

Residential property

Property is no doubt a big part of the Australian dream, helping many of our parents’ generation having created significant personal wealth.

And it’s no wonder, the ASX long term investing report looks back over the last 20 years and shows residential property as the best performing investment with a total return of 10.2 per cent vs Aussie shares at 8.8 per cent and international shares at 7.4 per cent.

But the significant advantage of property is most people use a deposit to cover only part of the value of the property and borrow the rest.

The implication is that your total investment amount is significantly higher. This borrowing amplifies the upside return, but the flip side is that if you buy a poor performing property or there’s a property market downturn, your losses are also magnified.

The big disadvantage of property is that saving enough money to get into the property market can be seriously hard work and take a long time.

The other disadvantage of property is the fact there are significant purchase and sale costs, meaning it’s expensive to buy and sell property

RELATED: Biggest money mistakes of millionaires

Investing is the key to building another income and not being forced to work forever. Picture: iStock

The wrap

When you invest, take the time to understand your options and make the right choice for you. There are also different downsides and risks with each of these options and if you don’t understand what they are, you can get caught short and pay the price.

Each of the types of investments covered above have the power to help you create substantial wealth and ultimately financial security. If you start small and be consistent over time, compound interest can create serious results.

But there are big differences, and making the best choice over an OK choice will have a big impact on how quickly you get ahead. It can be a complex area to navigate, so do your research and get some good support behind you before you jump in.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth and Author of the Amazon Best Selling Book Get Unstuck: Your guide to creating a life not limited by money

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.