As an investor, do you prefer to be a lender or an owner? One of the most basic choices an investor makes is whether they want to invest as a lender or as an owner. Historically, lending and owning have had distinctly different characteristics of return and risk.
People who invest as lenders typically invest in CDs, corporate bonds, government bonds, Treasury bills, and bank accounts. As a lender, investors receive a promise that they will be repaid their principal with interest at a predetermined rate and time. This promise is only as good as the financial strength of the corporation, government, or bank that you lend your money to. There is no upside participation in the future success of the borrower.
People who invest as owners typically invest in shares of corporate stock. As an owner, you participate in the fortunes—both good and bad—of the companies you invest in. There is no guarantee that any of your money will be returned to you. But if the companies are successful, you can receive dividends and potentially appreciation if you sell your stocks for more than you paid for them. The upside opportunities can be great.
Historically, diversified ownership of stocks provides higher long-term returns than ownership of fixed income. Investing in fixed income, on the other hand, typically provides greater certainty and less volatility. Avoid only investing as a lender or only as an owner. Invest in both bonds and stocks to give yourself enough upside participation in the economy to earn meaningful long-term returns. But do this within a level of risk that you can accept. Don’t speculate by just buying stocks. Don’t give in to your fears by just buying fixed income. Most successful investors combine both fixed income and stock investments to earn meaningful returns over their lifetimes.
For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.
