Investing: Understanding the Market Beyond Mystery Doors

I loved watching game shows growing up. Especially older ones I could catch rerunning on TV Land, where hosts were known to wear polyester suits and carry around long corded microphones. One of my favorites was called Let’s Make a Deal.

Many of you probably remember this classic show. Usually dressed in ridiculous costumes, audience members would be asked to make choices. The results were always unknown until after they made their decision. The most famous examples were mystery doors that might contain a brand-new car or a literal goat chewing on hay.

It was entertaining to watch, but the stakes were high. Contestants either won big or lost it all. It was a gamble.

To some, investing can feel like this. Everyone has choices with their money, and I have heard before that deciding what to do with long-term savings feels like choosing between safe, unwavering cash in the bank or taking a chance on one of those mystery doors called “The Market.”

Fortunately, that is not the case if we understand the market. With a bit of education, we learn that the modern investment choices available today are actually quite astounding.

The market can mean many things, but it usually refers to any type of investment that can be held in an investment or retirement account. Most of these, even if packaged as funds, are typically comprised of four categories: stocks, bonds, real estate, or cash.

Kinds of Investments

Let’s examine what exactly each of these investments is.

Stocks

Stocks are real ownership in some of the best companies in the world. A stockholder, just like any business owner, is entitled to their share of company profits through dividend payouts and share price appreciation.

It is an innovative wonder that this is possible. Ordinary people living in 1900 would have loved to have gotten their hands on shares of Standard Oil or US Steel. That wasn’t an option. Today, it is easy to take for granted that a stake in almost all the companies we use and enjoy daily can be purchased easily.

Bonds

Bonds are how the government and companies borrow money.

Bondholders are entitled to the full-face value of the bond (your share of the amount borrowed) plus interest. They are a great way to preserve wealth while earning income and are typically much less volatile than stocks.

Real Estate

This is exactly what it sounds like. It is possible to own property inside of an investment account. These typically come in the form of rent-earning commercial buildings owned by Real Estate Investment Trusts (REITs), where the profits flow through to the investors that own them. Today, some of the most sought-after properties in the world, such as The Empire State Building and Madison Square Garden, are owned by publicly available funds.

Cash

That’s right, plain, stable cash can be held, and often is, in every investment account. This can come in the form of FDIC-insured cash, as we see in banks or money market funds backed by US treasuries issued by the federal government.

A combination of these can be used to create a portfolio tailored specifically to your personal goals, timeline, and risk tolerance/appetite.

Diversifying across multiple categories can give investors the freedom to live the life they want, regardless of headlines or short-term volatility.

The market is not a mystery door at all if we understand it. It is a modern marvel that allows ordinary investors the same options and long-term opportunities that historically only belonged to the wealthiest and most well-connected.

Being educated allows us to see behind the doors offered and choose the one that best fits—no funny costume required.

Chase Kerby, CFP®, AIF® is a Senior Advisor with Rather & Kittrell.