Investing is the allocation of money across different investment vehicles with an aim to growing the funds. The invested funds, however, are exposed to several risks. Hence, investors undertake a detailed analysis of different instruments to identify the ones with the most appropriate risk-return trade-off.
The various investment vehicles can be categorized as follows:
Investors can opt for an active or a passive investment strategy. Active investors, such as brokers and fund managers, undertake systematic analysis of different investment vehicles. Passive investors put their money into funds, indexes or other instruments developed by a third party. For instance, one could choose to invest in the S&P 500 Index Fund to gain exposure to all the stocks included in the index.
While diversification is good, it is better not to dabble with a lot of instruments in your portfolio. Warren Buffett suggests the strategy of 'KISS' or 'keep it simple, stupid' for an investment portfolio. Find out more with investing for beginners.