What is an investment anyway? | Paul Fain
According to Investopedia, “An investment is an asset or item acquired with the goal of generating income or appreciation.” You can invest in a business, stocks, bonds, real estate, oil, cash, crops and more.
Fundamental investments are oriented around ownership (stock), lending (bonds), and cash equivalents (money markets). From there, we extend into gray zones of “alternative” investments, cryptocurrencies, precious metals, etc.
The gray zones include many speculative investments based on nonproductive assets that are typically quite volatile. Gray-zone investors are often trying to profit from short-term price movements in an underlying asset.
For example, is Bitcoin an investment? Not originally. Bitcoin was created (by a person or group that remains unidentified to this day) to conduct transactions without a financial institution’s involvement. It is computer code. It has no intrinsic value. Bitcoin is not backed by anything.
“Bitcoin’s unstable value has also made it an unviable medium of exchange. It is as though your $10 bill could buy you a beer on one day and a bottle of fine wine on another,” says the Brookings Institution. It has become a speculative investment. Investors rely mostly on market supply and demand to determine Bitcoin’s value.
Brookings adds, “Bitcoin investors seem to be relying on the greater fool theory — all you need to profit from an investment is to find someone willing to buy the asset at an even higher price.”
What about gold? Is it an investment? Well, if we all agree that gold has value, it does. Since the yellow metal, dug out of the ground, produces no income, holders of gold speculate on its future price. Note: about half of global demand for gold comes from the jewelry industry.
What about the argument that investing in gold is a hedge against inflation? “It has a very mixed record in that role historically, and it's been an absolute dud over the past few years as U.S. inflation hit a four-decade high,” cites one article in Kiplinger magazine. It continues, “Don't be fooled by gold. Those late-night infomercials hawking the benefits of gold coins are based on fear, not reality. Your hard-earned dollars will generate far better returns in a cheap S&P 500 ETF than they will in a bag of magic coins.”
In contrast to gold or Bitcoin, owning a stock represents a claim on a company’s assets and future profits. Stocks have outperformed gold over every standardized period going back three decades.
For me, an investment is a vehicle to achieving my long-term financial goals. I strive to understand the investments that I purchase. I expect certain levels of return relative to the inherent risks in a particular investment. I like investment diversification as a risk-management strategy. I regularly review my investments and make changes only periodically.
As you might deduce, I am not a speculative investor or a hyper-conservative investor, and that is OK. I like the middle path. For those who can afford to speculate, carry on.
Paul Fain is a Certified Financial Planner and Chairman Emeritus of Asset Planning Corp., a financial planning and investment management firm based in Knoxville. He welcomes comments and column ideas but cannot offer specific personal financial advice. Write to him at paul@assetplanningcorp.com.
This article originally appeared on Knoxville News Sentinel: Paul Fain: What is an investment anyway?
