The investment world is very dynamic with ever-evolving opportunities. But with every new chance to invest and grow your finances, there’s always a risk introduced that you have to take into account. Only those who take their time to understand how the basic principles of investing compare to the risks gain significantly in the long term.
When the topic of making smart investments comes up, the first thing that comes to mind for most people is the risk ladder. It acts as a tool for identifying different asset classes and categorizing them based on their ability to make you profits over losses. In the typical traditional setup, cash is the most stable asset class on the risk ladder, while all other investments gradually become less stable.
Cash
Cash isn’t just the easiest, and most understandable investment asset, it’s also the safest. It gives investors exact values of the interest they expect to earn while also guaranteeing they get their capital back. The only problem with this asset class is that when your cash is stored away in a savings account, it rarely beats inflation.
An alternative way to invest in cash and grow your finances is by using Certificates of Deposit (CDs). Unlike with savings accounts, they are less liquid and provide higher interest, but the money invested is locked for a specified time. The fixed period spans a few months or years and early withdrawals could be penalized.
According to Brad Stark, co-founder of a wealth management firm called Mission Wealth, one of the best brokerage firms to help with CDs is Fidelity. It has relationships with different banks, meaning you get the chance to spread your money in different pools from one central account. In the unlikely event of a bank failure, the company also insures your CD so you don’t have to worry about losing your money.
Bonds
A bond is like a loan an investor gives the borrower who could be a government agency or a corporation. The borrower will give you a fixed interest rate in exchange for using your capital for purchases and projects. Bond returns rely on the prevailing interest rates, usually determined by the Federal Reserve or any other central bank.
You can choose from different types of bonds, including fixed-rate, floating-rate, subordinated, and convertible bonds. With fixed bonds, the issuer will pay your interest at predefined dates, and with floating-rate bonds this payment date might vary. On the other hand, subordinate bonds have a lower repayment priority than other bonds in the event of bankruptcy of the issuer.
Though they present the highest risk to the investors, subordinate bonds are preferred by most because they pay the highest returns. The last type of popular bond is the convertible one, and it works by allowing the issuer to convert your bonds into company stocks or shares if the conversion criteria are met. Oftentimes, it pays lower rates than ordinary bonds since they are extremely attractive to investors due to the conversion feature.
Exchange-Traded Funds (ETFs)
Since their introduction in the mid-1990s, Exchange-Traded Funds (ETFs) have only continued to gain traction in the investment world. They work like a basket of assets which you can trade on an exchange just like you would with stocks. Companies that facilitate this investment set an expense ratio that measures how much you’ll be expected to pay over a year to own a fund and start earning.
There are many companies offering ETFs for investment. For instance, consider the example of an online gaming company. That’s simply because online casinos and betting sites are rapidly growing in popularity, with more states and countries legalizing them. As a result, the industry revenues shot to over $9bn in 2023 and are projected to grow up to over $15bn by the end of 2024.
Investing in Gaming ETFs
For those seeking diversified exposure to the gaming industry beyond traditional gambling, consider investing in a gaming ETF. Unlike playing a hand at the casino, where luck is paramount, a gaming ETF allows you to profit from the increasing popularity of online gaming platforms, including casinos online. Among the standout options in this arena are the Roundhill Sports Betting and iGaming ETFs, offering an opportunity to capitalize on the industry’s growth trajectory.
It’s important to note, however, that investing in such assets entails a notable expense ratio of 0.75%. This percentage represents the annual fee associated with holding shares in the ETF, a factor to consider when evaluating the potential returns of your investment.
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How to Use the Risk Ladder to Invest Sensibly
Many veterans know how to diversify their portfolios using the asset classes given above, with their investments reflecting good risk tolerance. What’s common about their strategies is that their investing journey started with simple assets before climbing the risk ladder. Specifically, cash, bonds, and ETFs are the best first steps to try before moving on to private equity funds, hedge funds, and real estate.
When you get good with investing you can mix your assets to fit your risk tolerance, financial goals, and time constraints. That way you get to maximize your returns by leaning your portfolio weight to favor different asset classes depending on the changing economic conditions. Throughout all this, avoid investing in assets you don’t fully understand and take advice from only trustworthy sources.