I recently read one lady’s personal goal in the new year, she states, “I want to learn to be an investor”. Oh really? So you want someone to teach you “how to invest”. It doesn’t really work in that way. The best way to approach a goal like this one is for you to identify who you are [first]. It all starts internally, not externally. How about if we help you understand the attributes of what’s out there [in the investment universe] and build a sort of multi-dimensional matrix so you can easily identify that which fits your individual goals and that which does not? And there will be tons that does not, trust me. Since no one stays in a strategy that doesn’t fit inside their own attitudes about money and their personal goals in life let’s consider some factors/characteristics of different investment vehicles; this will be a great way to start your journey [of investor education]. The list of possible things one can invest in is exhaustive, almost unending really so I will cover some of the more popular ones to assist the reader in understanding a little bit of what they’re going to be getting into by calling up these particular investment choices; I will break them down as to how they rank in three important factors –

Liquidity – describes how quickly a particular investment can be turned back into cash; be mindful that an investment either has liquidity, is moderately liquid, or is considered illiquid.

Transaction Fees – some investment choices have zero transaction costs [other than a small SEC fee], or they require larger transaction costs, or even very high commissions to participate. You will be surprised how many investment vehicles require the buyer or seller to pay super-high commission rates… they’re still out there. And factors such as liquidity and transaction costs appear to be positively correlated, the harder it is to find a buyer [or seller], the more the firm or agent assisting in the transaction will want to complete your transaction. Investing money is not free though some retail clients outside of the business of managing money have been led to believe [lately] that they are by some discount brokerage firms.

Risk of Loss [of Principle] – this factor I’ll speak to in general terms only because it is such a broad category, [too many types of risk to name and I may forget one or two]. There are investment opportunities that are well-known [intuitively] on the street as high risk, or moderate risk, or even low risk. U.S. treasury securities still carry some risks. An investor can actually lose money even when an investment instrument carries the much coveted guarantee of repayment of principle from the United States Treasury. Yes, it is still possible to take a loss in these type securities, which is explained below.

Now that I have identified three attributes I believe are important to consider when making investment decisions, let’s find out which instruments fall into which level within each category:
U.S. Treasury Bills, Notes, and Bonds – Probably the most marketable securities in the world, these rank highest on a list of the most liquid investments. The market for these securities is extremely large. Combined with very low risk of default [but keep in mind all bonds contain some default risk, even a U.S Treasury security]. In addition, it is possible that the seller of a U.S. Treasury instrument can receive less than they paid for the security should they need to liquidate prior to its maturity and return of principle, which is usually $1,000 per bond. Bond prices trade on exchanges also, about everyday, so prices move around people almost daily. Transaction costs, or what the investor gives up in yield to own these are pretty small so treasuries rank among the lowest in fees to own.

For the past two decades these instruments [until just recently] paid almost nothing to the investor to participate in them mainly because the Federal Reserve has been artificially depressing interest rates in this country for years! However, U.S. Treasury instruments are now back on the radar screen, they have become more attractive lately given their higher yields combined with a U.S. economic expansion that appears to be in decline.

Municipal Bonds – These have good or moderate liquidity features. You’re loaning money to operate a state government or municipality here. These are unique because most of them offer investors tax-free income but the yields were driven down so low in the past decade, that I don’t know – how bad does someone want to avoid taxes, so bad that they’re willing to earn nothing on an investment return? I mean come on! These haven’t made much sense to get involved in since the year 2011 when some pretty high quality paper was yielding close to 5% tax-free. Not only did those attractive yields disappear, add in the fact that so many American cities and states are poorly run today by Leftist Democrats at this writing, the bottom line is, I don’t see much hope in avoiding future default risk on some of this paper. To sum up this category, I’d rank municipal bonds as higher than the average bond risk for investors, but moderately decent liquidity accompanied by reasonably low transaction costs. [Still about absent from anyone’s list of attractive potential returns, in my opinion].

Corporate Bonds and Preferred stocks – Have you noticed yet, the bond market is bigger than the stock market? It is, that’s why we have yet to mention stocks. 🙂 On corporate bond offerings when you’re only going with one horse vs. a diversified number of horses the risk of default can be a little greater. Still, some of these individual offerings from really stout companies on major exchanges are paying a pretty good yield these days, but best to speak to an expert if you want to get involved in this category. I will say liquidity is moderate to good in corporate bonds. Preferred stocks, on the other hand, can be trickier with their individual caveats about converting, or even being called, or retired. Recession risk and preferred stocks are bitter enemies but that’s beyond the scope of this text. Sorry, I deviated again from the subject at hand. Risk of loss in this category is higher than owning a treasury or a municipal but generally considered moderate [for highly rated paper]. As far as transaction costs go, they should be low in this category but understand that no one works for free… not even the corporate bond desk of a major firm. 🙂

Common stocks trading on major exchanges, Exchange Traded Funds (ETFs), and mutual funds consisting of common stocks – Here’s where one will find most of the retail investors in this country. Large institutions will get involved in this area as well but their commitments will sometimes seem fickle. On the scale of liquidity I would rank these as liquid securities. Exceptions are when an investor owns a ton of shares in a single stock, in this case they may need to wait for a trading desk to find enough buyers to get them out of a large position. I’ve seen this take a few- to- several hours but usually no more than one trading day. The need to liquidate a ton of any single issue usually results in having a negative effect in their own selling price. Regarding transaction costs and other fees I would say trends favor the investor here. Many firms are charging no- to- low commissions on trades in common stock securities these days. This is an area where the SEC has placed considerable attention on firms to reduce transaction costs for their retail clients, and seems as if all the firms have complied.

~ Let me stop right here to remind the reader. All securities markets are Auction Markets. The only way you’re able to sell or liquidate something is because some investor, or even in some cases an investment firm, has decided to take your position off your hands. That’s it! Exchanges are serving one function, they are matching buyers to sellers in a zero sum game. ~

Private equity, Hedge Funds, Limited Partnership arrangements, and Closed-end funds – Unless one has a ton of net worth, that is – more money than they have common sense [sp. “more cents than sense”], I wouldn’t be snooping around in here. There is one caveat though that I like about Private Equity, it can avoid much of the systemic risk that enters a major U.S. stock exchange. You will find that many of private equity offerings have either avoided, or seemed to have avoided, large declines in major stock indexes in the past. But don’t be fooled, one reason for this is these security offerings rank among the lowest in “liquidity”. There exists caveats in these offerings that exclude investors from liquidating their positions prior to some end date. Usually liquidations are allowed only once a quarter, or after some period of time. For example, some limited partnerships and closed-in arrangements end at some stated maturity date in the future, that’s before any investor can cash out. I would rank this category of investment offerings in the lowest of liquidity measures and high in transaction costs. These offerings can be wide in scope so to place all these in the same category of risk might be unfair, but my best guess is this category is somewhere in the neighborhood between moderate- to- moderately high risk [of loss].

Private equity is just that, these are investments in non-public enterprises. Some group has facilitated access for them to receive outside investor capital without an initial public offering, that’s how you are able to participate. Just be cognizant of what share classes you will be issued, some of these offerings do not allow all common stock shareholder rights, such as voting out or in corporate officers, that’s where they get you on these. Now, while these private firms are required to have audited financials, they are not under the same SEC reporting standards that a public company is ever held to, so in my mind there’s a little wiggle room, such as they can experience a bad quarter or even a bad year without many of their investors knowing much about it because again, these aren’t publicly traded enterprises. So, if you want to play in this category, what you give up in not receiving the most up-to-date corporate governance information, could work for you [in market downturns] or even against you anytime in the future by way of risks you were not aware of [in your holding].

Real Estate, Raw land, and Physical commodities such as Gold, Silver, etc. – You’ll find some surprises here! I grouped these together for two reasons. One, this category ranks among the very highest in transaction costs, and two, they ranked the lowest in liquidity. And you once thought of being a real estate tycoon? Think again, what I’m about to tell you will burst anyone’s bubble. Home ownership is a wonderful thing if you use it to live in. On the other hand, purchasing homes to rent out is one of the worst ideas ever – it’s an extremely inefficient use of capital. The cost to carry, known as the ongoing expenses to hold real estate are enough to choke a horse! Property taxes, maintenance, utilities, debt service [if applicable], all these will eat into any rents you’re charging to keep that property occupied. Then once you sell it realtors will carve out 3-6% of your selling price, plus you’ll pay for the transfer of title fees at closing. In many of these cases returns are actually very small once the investor looks into what they paid for the property over time and what they actually netted on income. You can take that same amount of money under management at any major brokerage firm and have someone competent charge you only 1%/per year with no transaction costs on liquid investments and you’ll come out way ahead. Truly there is no comparison here. [I will say that Airbnb has helped investors renting multiple properties keep them better occupied but carry costs still loom large here].

Want to invest in raw land? It’s a bet on the come. Sometimes this can work out but how long will you have to wait is the question as you’ll be paying taxes on something just sitting there – you’re not using; which can make little sense unless you’re planning to build on it in a couple years. I mean why add more property taxes to your life, right? As far as the aforementioned three attributes go, an investment in raw land is perhaps worst on the scale of illiquid investments that I can think of, better hope a developer happens along and wants to take that piece of property off your hands for more than you paid to acquire it. You think finding a buyer for property with an existing house on it is hard, try investing in raw land. On a risk scale though, since they’re not making very much of it I’d say a risk in raw land is fairly low, I mean unless you bought over a nuclear waste site? While risk might be lower transaction fees are like any other purchase in real estate. Most of that is probably embedded in the buyer’s cost per acre so he/she won’t realize what has been paid to any real estate firm handling the transaction, just know it’s in the price paid. Many people holding raw land own cattle, horses or both and have an interest in farming/ranching, that sort of thing. It’s very hard work so I respect them for their way of life… why not add a wine vineyard right? Looks like wine grapes can be grown everywhere in the U.S. but inside the Capitol building in Washington, D.C. these days. 🙂

Investing in physical commodities such as gold and silver are associated with the highest transactions costs of all listed categories, and could easily top the 10-15% range. I know that smelters charge a customary 10% fee just to take something in to melt it down. The next highest transaction costs are found investing in real estate. And not coincidentally, both of these offerings rank among the most illiquid of investments. As far as overall risk, I would have to rank commodities as the riskiest investment discussed herein whereas real estate would rank more in the moderate risk category, just in my opinion. Please note that one could lose their ass in both though! 🙂

Whole Life Insurance and Annuity products – Insurance products from major carriers will rank within the lowest risk potential on this list. [There are reasons for this which is beyond the scope of this text]. But do many people need to pay for a super-high priced insurance product most of their life? Transaction costs are extremely high in some of these products but as an investor you may not notice unless you attempt to get out [before some required length of time]. I’ve seen surrender periods on some contracts make investors wait for up to 10, even 12 years, just to avoid a hefty surrender charge. That’s a long time to wait plus all the fees the insurance company is taking quarterly from your investments and deposits. Annuities and other insurance investment products can make sense but only for a small portion of society. On fees these products rank among the highest, the worst; it’s almost as bad as renting out investment properties. And liquidity is poor due to the fees the insurer would charge to liquidate your invested money back out. Still, there are times when an immediate annuity can make sense for an elderly client who needs a guaranteed income stream they can never outlive [as stated within an insurer’s contract].

Crypto-currencies [and other esoterics] – I’ve never owned or even sold a crypto-currency so I can’t be named an “expert” in this category of investment offerings other than to say “buyer beware”. I can’t honestly say investors own anything when they buy into this asset class category. Plus, this category has proven not to be an inflation hedge. However, they did out perform momentum-wise when interest rates in this country were zero, so I’ll give them that. But then a ton of stuff sprang up when interest rates were zero in the United States but now those days appear to be over. So the question becomes, “Crypto, what else ya got?”

The Security and Exchange Commission has been way late on this subject as far as releasing an official opinion on this new category of “virtual commodities”. There’s two agencies involved, the SEC and the CFTC (Commodity Futures Trading Commission). It seems that neither of these two agencies wants to speak much on the subject. Meanwhile, of course we have seen some large scandals uncovered, there was widespread money laundering associated with deposits of crypto at some firms in the past and of course the upcoming Sam Bankman-Fried fraud trial begins this Fall.

I have heard that transaction costs charged to buyers in this category were “reasonable”. However, liquidity in my mind would be a major concern at this writing for anyone getting involved in crypto, especially since the federal government hasn’t decided which category these investments actually belong in. I believe they are a new class of security known as “virtual commodities” but again, this still has yet to be determined [officially]. Risk would no doubt be very high getting involved in anything like this just from a 50,000 ft. level view of things. It’s rather difficult for me to see how current crypto offerings belong in anyone’s portfolio, they are not only virtual but they are virtually “nothing”. Maybe a young investor who has substantial time to see how things play out? And at the snail’s pace these federal agencies are going, perhaps that someone won’t need their money for the next 50 years or more? 🙂

Foreign Securities – I purposely did not discuss investments outside the United States. See your advisor for these as they can exhibit different risk factors than owning securities trading in U.S. dollars. Then of course there’s always foreign governments to consider before you park money outside the United States, and on and on.

[Once you’ve read this material my hope is, at minimum, you’ll be able to decipher some of the important characteristics that distinguish the wide world of security offerings. My best advice is always consult with a licensed professional who can save you time and point you in the right direction toward your individual goals.]

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