In this article, we have selected four financial instruments that can become assets in your investment portfolio. Let’s take a closer look at what each of the assets represents.
Currency — is the national currency of the country, which is used as a payment method. Currency exists in cash — banknotes, coins and treasury tickets, and in non-cash — bank accounts or bank deposits. There are many fiat currencies that are quoted in different ways in the world market. Therefore, currency cannot be classified as a risk, risk-free, or protective asset — it falls under all classifications. Let’s analyze the example of the most famous fiat currencies.
US Dollar (USD) — is considered a protective asset. All transactions in the world market are conducted in dollars, all dollars are considered. It also remains the most convertible currency in the world. Therefore, during a crisis mood, investors prefer to stockpile USD, which, if it will suffer, compared to other currencies is very slight.
Euro (EUR) and pound (GBP) are considered as risk assets. It’s accepted that if the exchange rate of these two currencies is increasing, then shares are also growing, due to the availability of funds from investors and their willingness to invest.
Swiss franc (CHF) and Japanese yen (JPY) are considered as safe assets. In investments, these currencies are called “safe haven” — investors prefer to invest in them during unstable financial situations in the world.
Other currencies have a reputation for risk assets, due to the unstable economic situation in the issuing countries: Zimbabwe, Lebanon, Tehran, etc.
There are several ways to invest in currency:
1. The most uncomplicated of them- is to go to the bank and to buy the currency you need. I’ll add right away that it’s not too safe to keep your stash at home. It can be stolen, as well as a fire, flood, etc. in the place of storage.
2. Open a deposit in a bank. Annual yield will be about 3–6%, which will cover inflation for the past year, but certainly not earn.
3. Just open an account and engage in speculation, that is, buy cheaper and sell at a higher price. It’s already a more risky option, but it’s also more profitable. At its use, it’s possible to count on the income in 3–6 %, but already in a month, and it at a conservative approach. However, it sounds easy, but in fact, it will be necessary to learn the basics of technical, fundamental, and candlestick analyses, to learn how to use indicators and oscillators, as well as to interpret the obtained information correctly.
4. Invest in government bonds, which we will talk about later.
Cryptocurrency — is a digital or virtual currency that has no material embodiment. It’s accounted for through the decentralized payment system, which is supported by peer-to-peer (p2p). In other words, in most cases, transactions are carried out with the help of network members, but there are exceptions. The main cryptocurrency is Bitcoin, which was widely known in 2017–2018 when it reached its price maximum of $20,000. The rest of the cryptocurrencies are called altcoins. Cryptocurrencies are risk assets and there are good reasons for that:
- Lack of fundamental factors that could allow analysis of cryptocurrency. In the crypto industry, there are such notions as pump and dump — a sharp jump in price in any direction, for no apparent reason. Sometimes they try to disguise this phenomenon with info tricks, but it feels like they couldn’t produce this effect. With the popularization and scaling of cryptocurrencies, such reasons begin to appear, for example, MasterCard has announced the release of cards with support for cryptocurrencies, although previously representatives of the company sharply responded in the direction of digital assets. But these factors are still not enough to make a competent assessment of an asset, so we have to be satisfied with only technical analysis.
- Volatility of crypto. Everyone probably remembers March 12, 2020, or “black Thursday.” That’s when the world’s financial markets collapsed after the World Health Organization declared a coronavirus pandemic. Bitcoin then lost more than 50% of its value in a day, followed by all the altcoins. Such cases in the crypto market didn’t happen frequently, but they were and didn’t happen because of events in traditional markets. Volatility on a smaller scale is regularly observed: on August 27, 2020, the price of Bitcoin rose from $9,875 to $11,065 in 12 hours. Therefore, this market is a cause for concern for many traders because of its high volatility, as it’s easy to earn here, it’s also easy to lose everything.
- The status of crypto is not marked by most countries in the world. Cryptocurrencies belong to different categories: products, money, computer code, securities — they are not generally recognized, so it’s difficult to talk about a clear mission that they carry.
The last point will be discussed in more detail. It’s clear that cryptocurrencies, blockchains, and smart contracts are technologies that bring new opportunities for the financial sector and for everyone else. For example, social institutions in China resort to the use of blockchain and smart contracts to optimize and store data. And there are many such examples around the world. We can consider cryptocurrencies as a separate world: bitcoin- is gold, ether- is stocks and stock indices, and stablecoins- are government bonds. At the same time, all assets are managed by the community, not companies and countries, which makes management decentralized and less susceptible to various types of collusion and manipulation. Still, the main purpose in cryptocurrency trading -is speculation, so this type of asset is considered risky.
An exchange-traded fund (ETF) is a basket of securities you buy or sell through a brokerage firm on a stock exchange. Exchange-traded funds are one of the most important and valuable products created for individual investors in recent years. ETFs offer many benefits and, if used wisely, are an excellent vehicle to achieve an investor’s investment goals.
Briefly, an ETF is a basket of securities that you can buy or sell through a brokerage firm on a stock exchange. ETFs are offered on virtually every conceivable asset class from traditional investments to so-called alternative assets like commodities or currencies. In addition, innovative ETF structures allow investors to short markets, to gain leverage, and to avoid short-term capital gains taxes.
After a couple of false starts, ETFs began in earnest in 1993 with the product commonly known by its ticker symbol, SPY, or “Spiders,” which became the highest volume ETF in history. In 2020, ETFs are estimated at just under $4.5 trillion with nearly 2,177 ETF products traded on US stock exchanges.
An ETF is bought and sold like a company stock during the day when the stock exchanges are open. Just like a stock, an ETF has a ticker symbol, and intraday price data can be easily obtained during the course of the trading day.
Unlike a company stock, the number of shares outstanding of an ETF can change daily because of the continuous creation of new shares and the redemption of existing shares. The ability of an ETF to issue and redeem shares on an ongoing basis keeps the market price of ETFs in line with their underlying securities.
Although designed for individual investors, institutional investors play a key role in maintaining the liquidity and tracking integrity of the ETF through the purchase and sale of creation units, which are large blocks of ETF shares that can be exchanged for baskets of the underlying securities. When the price of the ETF deviates from the underlying asset value, institutions utilize the arbitrage mechanism afforded by creation units to bring the ETF price back into line with the underlying asset value.
Bonds- are securities issued by a country or a large company. By purchasing government bonds, the investor is lending money to the state, and after a certain amount of time, he gets the funds back with interest. Countries issue bonds in the following cases:
- To close the financial “holes” in the budget.
- To raise funds to develop any government projects.
- For crediting, i.e. to close the debt on previous government bonds.
Bonds are issued for several terms, e.g. foreign bond:
- Short-term — bonds to be redeemed over a period of 2 to 5 years.
- Medium-term — bonds that will be redeemed over the period from 5 to 10 years.
- Long-term — bonds that will be redeemed over a period of 10 years.
When filling the investment portfolio with the assets presented above, on the principle “70/30”, it will turn out as follows: 15% — cryptocurrencies, 15% — euro and pound, 15% — corporate bonds, 25% — ETF funds, 15% — government bonds, 15% — US dollar. It turns out that cryptocurrencies, euro, and pound, corporate bonds are risk assets; ETFs are risk-free assets; government bonds and the U.S. dollar are protective assets. If the distribution of assets within a portfolio is similar, it will be sufficiently balanced and diversified.
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