Trade forex or invest in conservative assets? Which is better?

The term “investments” may recall images of different financial markets or trading floors at frenetic stock exchanges. But this could be just a fraction of the whole story.

Investing is absolutely essential for everyone to enjoy a comfortable financial future. But with the world struggling through a prolonged high inflation and other economic challenges, what are the best investments for investors to make this year?

In this article, the international broker OctaFX explores the differences between Forex and conservative investments, such as gold, corporate bonds, real estate, and others. One idea, it says, is to have a mix of safer investments and riskier, higher-return ones.

‘When it comes to investments, one has to decide on how much control over their investments they want to have and how much risk they can tolerate. Conservative options usually belong to the ‘invest and forget’ type of financial instruments, while Forex is the market where one is in charge of one’s own investment portfolio and can manage it any time, any place,’ said the financial and trading expert Gero Azrul.  

Azrul advises potential traders to think of the various types of investments as tools that assist them to achieve their financial goals. Each broad investment type — from forex to conservative investments, such as gold, corporate bonds, real estate, and others — has its own general set of features, risk factors and ways in which they can be used by investors.

Conservative investments vs Forex

Today’s investors have access to a growing number of tradeable assets, from ultra-safe savings accounts to the fast-paced forex markets. Deciding which of these investment vehicles are best to trade can be a daunting task, and many factors need to be considered in order to make the most appropriate choice.

OctaFX explains that tried-and-true conservative investments are usually characterised  by relatively low risk, high predictability, and a long-term approach. On the other hand, investing in Forex has a low entry threshold, favourable conditions, and many instruments to manage and increase investments. 

Depending on your risk tolerance and trading style, there are a couple of scenarios that could play out. However, OctaFX highlights two catches: Low-risk investments earn lower returns than you could find elsewhere with risk; so if you opt for only low-risk plays, you’re likely to lose purchasing power over time.

Again, the choice is up to you. Still, OctaFX has put together the pros and cons of these types of investments.

Savings account

While not technically an investment, a savings account is a deposit account held at a bank or other financial institution that pays interest. Though savings accounts typically yield a modest return, they are safe and reliable in terms of saving money which make them a great option for parking cash you want available for basic needs.  

A savings account is also ideal for creating an emergency fund, saving for short to medium-term  goals, and storing extra cash one does not need in the current account. Saving accounts are pretty  flexible in regard to how often money can be withdrawn, with some banks offering unlimited withdrawals. 

Pros: offers a stable yet modest return on money, safe in the sense of a shallow risk of losing money, most accounts are secured by the government and can be compensated.

Cons: if you opt for only savings accounts, you’re likely to lose purchasing power over time due to inflation.

Gold

Throughout history, gold has always been recognised as one of the best means of preserving wealth. Investors often turn to gold to hedge against inflation and—in times of economic and political instability—to move some of their less-protected assets to this ‘safe haven’. Investors also use gold to diversify their portfolios because it is not correlated to other financial instruments, such as real estate, stocks, and bonds.

Although investors like gold for many reasons, since it has attributes that make it a good counterpoint to traditional securities, there are some disadvantages in this regard. Among other things, the bullion is a volatile asset, and you have to wait for a long time for a return on your investment. 

In a digital age where there are a multitude of ways to invest in Gold, it is possible to gain exposure through stocks of gold mining companies or ETFs (exchange-traded funds). Additionally, you can invest in gold through CFDs typically provided by most Forex brokers, including OctaFX. According to OctaFX clients, this type of portfolio management turns out to be the most efficient and flexible.

Pros: protected from inflation, high liquidity.

Cons: the gold market is volatile, it may take years for it to go up in value.

Fixed annuities

A fixed annuity is a type of insurance product that promises to pay the buyer a specific return. The insurance company, in turn, guarantees that the account will earn a certain rate of interest based on the yields it gets from its investment portfolio, which is mostly invested in government and corporate bonds.

Investors can typically buy a fixed annuity with a guaranteed minimum rate as a measure of protection against declining interest rates. Fixed annuities may also generate guaranteed income for a specified period of time or the rest of the annuitant’s life. 

Although annuitants produce guaranteed and tax-deferred returns, they are typically very low. They also have several fees and commissions that further reduce the returns. In most cases, the payments on fixed annuities are not protected from inflation. There are companies that offer inflation-protected fixed annuities, but they are typically much more expensive.

Pros: guaranteed returns and income, tax deferrals, flexible payout options.

Cons: low returns, commissions and fees, limited inflation protection.

Real estate

Real estate is another popular investment option to put your money in, especially if you plan to hold onto it for an extended period of time. 

Buying and owning real estate can be both satisfying and lucrative. It can generate stable cash inflows when rented out, appreciates in value over time, and acts as an inflationary hedge. However, it has a high entry threshold, requires maintenance, and is not liquid—it is hard to sell off real estate quickly. 

The value and rent price of real estate can also decline over time or even abruptly when a property bubble bursts. Real estate income is subject to taxes, which can be substantial. It also requires costly maintenance and looking for responsible renters who would not inflict damage on your property. Apart from that, there is no way to hedge against risks associated with the property market and political situation in the country, over which real estate owners have no control.

Pros: provides regular income, property usually grows in price over years.

Cons: high entry threshold, renovation, maintenance, and taxing expenses, dependence on the real estate market and political situation.

Corporate bonds

Corporate bonds are debt obligations issued by companies. It is a relatively low-risk, fixed-income instrument made up of debt securities, which companies issue to raise capital. 

Investors who buy corporate bonds are lending money to the companies issuing the bond to raise capital. In return, the company makes a legal commitment to pay a  fixed interest on the principal. The investor also gets back his principal when the bond comes due, or matures. 

On average, corporate bonds are less volatile and less risky than stocks. The corporate  bond market is one of the most liquid markets in the world.

There are several types of risks associated with bonds: credit risk, interest rate risk, and market risk. Due to their low-risk nature, corporate bonds bring lower returns. In addition to that, many of them have to be bought over the counter.

Pros: relatively stable profit from large trusted companies, high liquidity.

Cons: low returns, credit risk, interest rate risk, and market risk. 

Mutual funds

A mutual fund is a financial vehicle that pools money from many investors to invest in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are operated by professional money managers, who allocate the fund’s assets to generate capital gains or income for the fund’s shareholders. In return, investors pay a management fee for portfolio managers responsible for matching the investment objectives stated in its prospectus.

Some fund companies charge high expense ratios and sales charges. Management abuses are also quite common in mutual fund investing. Portfolio managers may abuse their authority and make ineffective decisions, which leads to mutual fund investors losing their money.

Pros: portfolio managed by professionals, reduced risks, dividend reinvestment, favourable pricing.

Cons: high expense ratios, tax inefficiency, possible management abuses, sales charges.

Forex

The forex, or ‘foreign exchange’ market, is the largest and most liquid market in the world. In short, it is a marketplace in which currencies can be bought, sold, and exchanged with participants in this market ranging from banks, individual retail traders, and even tourists.

Exchange rates are changing every day depending on things such as world events, news as well as other (sometimes even unknown) factors, though changes on a daily basis are generally very small.

Forex has some distinct advantages of its own compared to conservative investments.

• Investing in Forex requires much less money than conservative investment options. The minimum recommended investment in Forex starts at $100, whereas conservative investments require a minimum of $1000.
• Using leverage, traders can open positions with volumes far exceeding their initial investment capital, allowing for a much lower barrier of entry into the Forex market. A deposit of $100 with a leverage of 1:500 will allow opening market orders worth $50,000. However, leverage is a double-edged sword. While increasing trading capital and profits, it also increases losses when the price moves in the ‘wrong’ direction. It is important to learn to use it wisely, together with risk management tools.
• Forex market is the largest and most liquid market in the world. This creates opportunities for traders preferring to use short and medium-term strategies, as they will always find enough liquidity to open and close orders at their desired price and when they think it would be most profitable.
• In Forex, various trading strategies can be used, from long-term with orders  spanning weeks and even months to scalping ones, where orders  may last minutes before they are closed with a small profit. There are various types of short-term and medium-term strategies that use all kinds of technical and fundamental analyses to inform trading decisions. Strategies can also be more aggressive or  more conservative, but all of them abide by risk management rules to limit losses and maximise profits.
• Transaction costs in Forex are much lower than the fees usually charged in conservative investments. Forex brokers with the most favourable conditions win over more clients and offer accounts with no trading fees or swaps but only spread fees, which are typically quite small.
• With the global Forex brokers, traders can engage in the market anywhere in the world, twenty-four hours, five days a week, as it operates completely online. All investors need to have is a phone (iOS or Android), a tablet, or a laptop.
• Forex is not only about currency pairs. Many brokers provide CFDs (contracts for difference) on commodities, stock indices, and even cryptocurrencies. This helps investors build a diversified portfolio.

OctaFX, a global broker with over 11 years of experience, has everything they might need to begin their trading journey, including a wide range of assets, educational materials, and analytical tools for quality market forecasting and research. OctaFX has managed to receive more than fifty international industry awards for its services worldwide.

About OctaFX

OctaFX is a global broker providing online trading services worldwide since 2011. It offers commission-free access to financial markets and a variety of services already utilised by clients from 150 countries who have opened more than 12 million trading accounts. Free educational webinars, articles, and analytical tools they provide help clients reach their investment goals.

The company is involved in a comprehensive network of charity and humanitarian initiatives, including the improvement of educational infrastructure and short-notice relief projects supporting local communities and small to medium enterprises.

In the APAC region, it managed to capture the ‘Best Global Broker Asia 2022’ award and the ‘Best Forex Broker Malaysia 2022’ by International Business Magazine and Cfi.Co, respectively.