Your money isn’t growing by sitting in the bank. Inflation will decrease its purchasing power each year. With inflation hitting 40-year highs, your stashed cash will lose purchasing power faster.
Many investors use equity and debt to build their portfolios. Some people staunchly believe in one over the other.
We’ll take a look at the equity investment vs. debt investment argument. We’ll share everything you need to know about these popular paths to wealth.
What Is an Equity Investment?
An equity investment gives you exposure to a company’s performance. Stocks are the most common types of equity.
Equity investors have unlimited upside. Their position will appreciate as the company gains market share.
However, equity investments also come with greater risks. Venture capitalists buy fledgling startups hoping to 10x their money. Most VC-backed startups go bust.
However, a VC can make all of their money back and more on a single startup. Some venture capitalists made early investments in Facebook, Uber, Airbnb, and other corporations.
The sky is the limit for equity investments. You can achieve life-changing returns from this path.
It has greater risks, but the long-term narrative is compelling. Have a look at this equity investment guide from RVW Wealth.
They analyzed equity investment data going back to 1926 for their research. You’ll gain a deeper understanding of how equities can lead to significant appreciation.
What Is a Debt Investment?
A debt investment comes with less risk. Investors make money from interest rates from a collateral-backed loan.
Mortgage lenders make money from interest payments. In the event a borrower defaults, the lender obtains the home as collateral.
Debt investments reduce risk, but they also have limited upside. Your maximum return is the interest payments. If the house doubles in value, you don’t see those benefits in your portfolio.
Investors like the cash flow from debt. Some investors retire from debt investments. Their cash flow eventually exceeds living expenses.
Most people think of US Treasuries, but there’s more to debt investing than those bonds. You can review multiple assets, such as corporate bonds to find higher rates.
These bonds come with a higher risk than Treasuries but lower risk than equities. If a company goes out of business, they pay bondholders first. Equity holders get the rough end of the stick in this instance.
Summarizing the Equity Investment Vs. Debt Investment Debate
Both investments grow your money. Deploying your money into assets can provide long-term growth. It doesn’t take much effort to outperform your bank’s savings account rates.
Equity investment vs. debt investment boils down to your risk tolerance. Investors with high-risk tolerances should concentrate on equities. Investors with lower tolerances for risk should focus on debt.
You can diversify your portfolio, so it has equities and debt. Portfolio diversification mitigates risk and exposes you to more opportunities.
This blog contains more insights on investing. Stick around for more content.