April 15, 2016
The Difference Between an Investment and a Purchase
I was at a gathering recently where I was asked a question, “is a car a good investment?”
According to Webster, an investment is, “something that is purchased with the expectation it will produce income or a profit.” There are three main types of investments: ownership, cash equivalents, and fixed-income.
Ownership investments are the most volatile and potentially the most profitable. All traded securities, from stocks to currency swaps, are ownership investments. Profits depend on how the market values them. Money put into starting and running a business is also an ownership investment. Selling a product or service that people want can result in positive returns. Real estate, artwork, gold, and diamonds are examples of ownership investments when purchased for eventual resale, rather than personal enjoyment.
Secondly, cash equivalents. One of the most common types is a savings account, which is essentially a loan to your bank. The return is pitiful, but the risk is miniscule. Cash equivalents are as good as cash because they can be easily converted. They include money market funds that offer a very low return with equally low risk.
Lastly, there are fixed-income investments such as corporate bonds, which pay a set amount over a certain period, regardless of how high the same corporation’s stock soars in value. On the other hand, if the corporation goes bankrupt, bondholders are in line to get their investment back before stockholders.
It’s important to know the difference between a purchase and an investment, which brings us back to the original question. Of course, there are cases where privately owned cars have been purchased as ownership investments, where the owner buys and maintains a desirable car for the sole purpose of reselling the car for a gain, but the great majority of cars are consumer purchases that will never be worth as much as they were bought for. They naturally depreciate over time and are not intended to provide a return in normal circumstances. Bottom line, cars by default should not be considered as an investment and will more than likely depreciate over time.
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