Equity investments are those products in which you hold a partial ownership. Investments such as mutual funds, stocks and real estate are examples of equity investments that provide you income. Fixed-income investments provide you an opportunity to loan money, usually in the form of bonds or cash, to an institution, government entity or corporation and receive interest on the loan. A balanced portfolio contains both types of income investments.
The balance of equity versus fixed-income investments in your portfolio depends on your level of risk tolerance. Fixed-income investments provide the lowest risk, because your interest payments are determined at the time of the purchase. While all investments carry some inherent risk, equity investments are the most susceptible to market changes. At the same time, you collect the greatest rewards when the equity investments do well. While your money is safer, you reduce the odds of achieving greater rewards when you rely solely on fixed-income investments.
Even the most risk-adverse investor needs to carry a diversity of investments. Fixed-income investments add predictability to your portfolio and help with long-range financial planning. You know you can count on a certain amount of income from those investments. The equity investments provide an opportunity to increase your financial worth and take advantage of higher payoffs. Both fixed-income and equity investments usually follow trends. As interest rates fluctuate, you could lose money if you have to sell fixed-income investments, while a lagging economy almost always lowers the value of your equity investments.
With fixed-income investments, you have little or no involvement in the operations in which you place your funds. As an equity owner, however, you can exert various levels of influence on the company’s performance. For example, as a stockholder, you can vote for the board of directors that governs many of the decisions the company makes. You control many factors in your real estate investments, such as making improvements to increase the value or raising rents.
Generally, you earn higher interest dividends from fixed-income products when you invest at higher levels. You’ll see higher returns on your investment when you purchase fixed-income investments for longer periods of time as well. Additionally, you receive your initial investment back when the product matures. With equity income investments, the more you invest, the more you risk losing. At the same time, you can spread your risk out over a variety of higher- and lower-risk equity investments instead of placing all your funds in one basket.
Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."