Equity versus Debt

When discussing asset classes, it's important to understand the nature of the investment vehicle. There are two main types of this. Equity implies ownership or at least a share of ownership. This can be stock or shares of ownership in a company. It can be a deed in real estate. It can be a certificate of authenticity in the case of art or valuable coins. With all types of equity investments, you are looking for the investment to appreciate, or grow in value. Since you are an owner or have a share of ownership, you usually have some degree of control in making the value grow or being able to sell it when you think the value is declining.

The other main type is debt instruments. This can be a bond that is issued by a government or corporation. It can be a mortgage on a piece of property or a loan. With debt instruments, you are exchanging cash or something else of value for an asset managed by someone else. They have the control on whether the value of the asset will grow. In exchange for the control, they will usually pay you interest or a declared dividend.

So the question is - do you want control of your investments or are you willing to turn control over to someone else? Do you have the knowledge or insight to determine when to keep your investment or to convert it to another asset class if the value is likely to go down? If not, you will likely be more attracted to debt instruments.

Debt instruments, in addition to having less control, usually also have lower returns. The higher returns usually go with the higher risks. If you are the management of a company issuing a corporate bond, you have to make the company successful to be able to pay off the interest on the bond. You have the greater risk to make it happen and to deal with the unknown variables, therefore you also reap the benefits of success. You keep the excess profits and pay the interest of the bond to the bondholders.

Wealth creation revolves around having things that grow in value when you own and control them. If you don't have a lot of wealth, you will always give up control and possible value to someone else. What type do you want?

Do not be a man who strikes hands in pledge or puts up security for debts;
if you lack the means to pay, your very bed will be snatched from under you. Proverbs 22:26-27 (NIV)

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Email: DeltaInspire@panama-vo.com