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I have studied investing for a short while and would like to test my knowledge by asking a question about this ordering from lowest risk to highest risk of investment opportunities:

Government backed bonds >> 
    Gold (/Solver/Platinum ??) >> 
         Coke / (other 100year + companies) >>
             Real estate >>
                  S&P 500 (Google, Amazon, Apple) >> 
                      P2P lending >> 
                           Tesla / SpaceX >> 
                                Cryptocurrencies >> 
                                     Angel Investing / A/B startup investing.

Question: Would you agree that the items are in order of risk? How would you change it or extend it?

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The general order of asset classes by risk, as most would agree on is government bonds - corporate bonds - stocks - commodities.

Within stocks, large caps (such as your Coke example) tend to be less volatile and therefore considered less risky, as they have more established, time-proven business models and cash flows than smaller companies or younger growth companies such as your Tesla example. Yes, even a long established business model can become obsolete, but if you were to bet on which company has higher risk of going out of business in the next 5 years, most would consider Coke much less risky than Tesla. Industry also plays a role - a utility or telecoms company will most likely have a much more stable business (more immune to economic downturns) than an industrial or consumer discretionary company.

That said, diversification is a huge factor. If you invest in a single stock (like Coke) or just a small number of stocks, you will expose yourself to company-specific risk (a company may, for some reason, fail even when the broad economy is doing well). With broad market indices like S&P500 you diversify this company-specific risk away and you are left with the systematic risk of the broad economy. Therefore, I would put Coke more risky than S&P500 in your list. Comparing Coke with a single stock from the index, Coke may be safer than most. Tesla goes below them as more risky, as you have it.

Question is where to put real estate and it really depends on how you invest in it. If you buy a single property it will be much riskier than a diversified portfolio of properties or a REIT. Moreover, leverage is often used in real estate, and it affects the risk of your investments - if you buy property with 100% cash, it is a much safer investment than if you buy it with 80% debt. Furthermore, like stocks, real estate is not a homogeneous group - you have residential vs. commercial, various types, and location location location. The least risky, cash financed, diversified real estate investments can be placed above (safer than) stocks in your list, but the riskier, leveraged, non-diversified ones go below.

Diversification also plays a role with P2P lending (or credit instruments in general). If you lend to one or just a few people, it is very risky - below S&P500 in your list as you have it. If you lend to 1,000 people, some will default, but overall these losses should be covered by the interest gained from those that won't default, and the investment can be safer than stocks.

Gold has a reputation of being "safe haven", because it often goes up when stocks go down, but there have been many occasions in history when gold lost a lot in a relatively short time. In other words, it is not as safe as many people believe. Using volatility as a risk measure, gold is actually not far from S&P500 long-term. It is certainly safer to invest in gold than most other commodities though.

Cryptocurrencies are new thing and most people don't fully understand them and all their technicalities (myself included). In any case, something that can be worth $3,000 today, $5,000 tomorrow, and $3,000 the next day is not what I would call an investment. It may be a good vehicle for speculators (those who understand it well), but not for investors. Furthermore, there is substantial political/regulatory risk that many fans ignore - what if the government(s) ban them, regulate them, or take other actions that would hurt those markets? As an investor, you have no protection against these things. Perhaps when/if cryptocurrencies become more established, banks and governments are involved, their risk as investments may approach gold or even standard currencies, and they can climb in the list.

Angel investing is in fact a form of equity investing (like stocks), just another level beyond the Tesla kind. Highly speculative and diversification is key, with similar implications as in P2P lending. A diversified portfolio of venture investments would be safer than a single stock like Tesla.

In sum, if I were to sort the exact items from your list, it would be:

1) Government backed bonds

2=) P2P lending

2=) Real estate

2=) S&P 500 (Google, Amazon, Apple)

3) Gold (/Solver/Platinum ??)

4) Coke / (other 100year + companies)

(If S&P 500 was meant as single stock like Google, Amazon, Apple, it would go here)

5) Tesla / SpaceX

6) Angel Investing / A/B startup investing.

(If diversified, angel investing goes to place 3 right behind S&P500, before all the single stock investments)

7) Cryptocurrencies

The exact order of the 2= items would depend on the details, as discussed above.

To some extent the order is subject to personal opinion and what exactly one understands behind the individual items.

  • Excellent. Having read your reasoning behind "... Coke more risky than S&P500 in your list." and the importance of diversification I definitely agree that you are right. Coke is more risky than S&P500. On crypto: I agree that it can be hardly called an investment, however I would point out, that China has banned bitcoin and it did not destroy it. – Mindaugas Bernatavičius Dec 5 '17 at 18:27
  • However, bitcoin lost quite a lot on that China ban. The fact that it recovered and reached new highs since then is another part of the story. But it is a good illustration of the high level of risk. What if the US & EU take similiar stance as China did? I wouldn't want to hold bitcoin at that moment. That said, I'm not anti crypto (I even attended a bitcoin meetup once). Not saying it's a bad "investment", just that it's a very risky one and there are many things that can go wrong. It's still a very early stage innovation, with high return potential if things go right, but high risk. – Petr H Dec 5 '17 at 19:20
  • Agreed, it's very risky. I'm still unsure if bitcoin is riskier than investing in 1 company, angle style, since 95+ of startups fail. I would counter the diversification argument in the angle investment world with diversification argument in the concurrency world. – Mindaugas Bernatavičius Dec 5 '17 at 19:30
  • I agree, they are hard to compare, hard to say a single cryptocurrency is more or less risky than a single startup company. However, I think diversification in the venture capital world is more effective to reduce risk than in the cryptocurrency world. In venture capital, you can invest across a range of industries and business models. On the contrary, all cryptocurrencies are more or less the same industry, same business model, and many potential risk events would hurt all of them the same. – Petr H Dec 5 '17 at 19:45
  • If we consider investment risk to have 3 components = systematic (the economy), industry-specific, and company-specific, then with venture capital diversification can eliminate the last two, and you are left with systematic risk only, while in cryptocurrencies diversification can only eliminate the last kind of risk, as all the cryptocurrencies are the same "industry". – Petr H Dec 5 '17 at 19:49
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Few points of note about your assumptions on risk:

  • S&P 500 aspires to cover the whole spectrum of the market as such its is very diversified. Investing in singled out companies carry the risk of that single company not performing well or going under. Investing in a S&P 500 ETF means you re essentially investing to the US economy as a whole. So long as you have a positive outlook for that and having a long-term mindset it really shouldn't be that down the list.

  • Coke / (other 100year + companies),that the company is around for 100+ years doesnt mean anything. Huge robust corporations went bankrupt, downsized or became shell of their former selves as technology and demand for their product/services was simply phased out as relics of the past. Exposure to singled out companies like that are dangerous for that matter. Again, diversification is the key to investments.

  • Precious metals & Cryptocurrency* I personally see it as very contradictory to have placed those on opposite sides of the risk assessment spectrum. Both are stores of value, both have an inverse relation to the economic outlook of the monetary system. That gold is a 6000 years old bubble doesnt make it a bubble nonetheless. Its only value is based on the consensus it has value and scarcity/total supply, both of which apply to crypto assets as well.
  • Real estate risk factors depend on the overall outlook of the economy, the period of time you can afford to tie your capitals to assets, the specific market you re looking to buy in etc. For instance, you may need to liquidate your capitals in a downturn period actually losing money or you re may be based in a area where housing bubbles are ongoing. Overall a tangible, purpose backed investment like real estate is a solid one,since it can also yield average ROIs of ~10% that outperforms most other investment vehicles, that is ONLY with very careful consideration of the factors going into this market. Meaning depending on specifics it can end up on either side of the risk ladder.

*Assume we speak of cryptocurrency that primary purpose is value storage(like bitcoin) and not tokens or similar function-based purpose crypto (Ethereum, ERC20 tokens etc).

  • Great, thanks for the answer. I think I do agree on the point about Coke - this was definitely misplaced. On Gold - do you think that the price of gold can be diminished as cryptocurencies and potentially 1 leading cryptocurency rises? – Mindaugas Bernatavičius Dec 5 '17 at 19:35
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    @MindaugasBernatavičius they compete for the same target group as stores of value so I can definitely see the emerging trends towards crypto(& bitcoin in particular) to weaken positions in gold. That along with the overall economy (seemingly) moving past the 2008 Crisis and faith in markets being restored which hurts stores of value as a whole, then yes I definitely have a negative outlook to the price of gold, especially considering its still over the pre-Crisis benchmark, even after corrections. – Leon Dec 6 '17 at 8:08

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