Varieties of investment and their implication for investment of attention

Investing Attention Essential to Viable Growth (Part #5)

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Types of investment: As framed by Wikipedia, investment is the time, energy, or matter expended in the expectation of future benefit. This may have distinct meanings:

• In economics, investment is the accumulation of newly produced physical entities, such as factories, machinery, houses, and goods inventories.
• In finance, investment is putting money into an asset with the expectation of capital appreciation, dividends, and/or interest earnings. This may or may not be backed by research and analysis. Most or all forms of investment involve some form of risk, such as investment in equities, property, and even fixed interest securities which are subject, among other things, to inflation risk. It is indispensable for project investors to identify and manage the risks related to the investment.

The process of investment (namely "investing") may be conflated with what is acquired or achieved by that process (namely an "investment"). The concern here is the process of investing attention (as a resource) -- irrespective of the terminology by which what is acquired thereby is distinguished. Clearly it is appropriate to be attentive to the consequence of conflating the process with what is acquired by the process.

As presented by Wikipedia, there are various clusterings of types of investment.

• Traditional investments, namely referring to bonds, cash, real estate, and stocks and shares.
• Alternative investments, as contrasted with traditional investments, may be held to loosely include:
  • tangible assets such as precious metals, art, wine, antiques, coins, or stamps
  • some financial assets such as commodities, private equity, distressed securities, hedge funds, carbon credits, venture capital, film production and financial derivatives.
  • investments in real estate and forestry are also often termed alternative despite the ancient use of such real assets to enhance and preserve wealth.

The Investopedia summary (Investing 101: Types of Investments) distinguishes:

• Bonds (debt)
• Stocks (equity)
• Mutual funds of different types (equity funds, fixed-income funds, money market funds). These may be clustered otherwise as: money market funds, fixed income funds, mortgage funds, growth of equity funds, balanced funds, index funds, specialty funds, real estate funds.
• Alternative Investments: options, futures, FOREX, gold, real estate, etc

However a second clustering by Investopedia (Defining the 3 Types of Investment) distinguishes:

• Ownership investments: stocks, businesses, real estate, precious objects
• Lending investments: savings accounts, bonds
• Cash equivalents: money market funds

Other clusters distinguish:

• asset classes, namely as: bonds, shares, property, cash.
• bank savings, term deposits, bonds, shares, property, managed funds, alternatives
• bonds, stocks, mutual funds, money market accounts (offering a competitive interest rate), Exchange-Traded Funds ("baskets" or portfolios of securities) that trade like stocks on an exchange

One seemingly comprehensive clustering is suggested by Gaurav Akrani (Types of Investment, June 2011):

• autonomous (or government) investment: unchanging with change in income generated
• induced investment: changing with the change in income level
• financial investment: through purchase of financial instruments with fresh funds
• real investment: as with investment in new tools or infrastructure
• planned investment: undertaken with a conscious objective
• unplanned investment: undertaken spontaneously without any coherent plan
• gross investment: funds expended on capital assets
• net investment: as a consequence of deducting depreciation of the value of capital assets

Classification of investments: Whilst terminological variants are to be expected, it is striking to note the variety of ways in which the variety of investments can be distinguished at the most general level. Many more detailed distinctions are made amongst those variants, as documented by Investopedia. Different institutions and disciplines appear to claim good reason in variously clustering investments.

More troubling is the sense in which the variety of distinction and terms may be partly a consequence of opportunistically repackaging financial instruments in the competitive quest for financial opportunities. This is exemplified by the complexity of the investments repackaged as derivatives -- intimately associated with the sub-prime mortgage crisis of 2008 which triggered the recent financial crisis.

It is unclear who is expected to have comprehensive understanding of the array of investment possibilities and of how that array might be best presented in the interest of potential investors. How might the array of opportunities for investment of attention be clarified by that insight? It is useful to ask how progress in the classification of investments might be compared with classification in other domains (species, chemical elements, astronomical objects, etc).

The "classification of investments" is understood somewhat differently between the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS). As clarified by Nathan Holcombe (Classification of Investments, 31 July 2012):

GAAP and IFRS differ in many ways about how to record investments.... Investments can range from stocks to bonds to money market accounts. When a company buys a security for the purpose of an investment, they must classify that security at that time. There are three types of classifications: trading, available for sale, and held to maturity. Trading securities are ones that you plan to sell within three months. Available for sale are usually short-term, between three months and a year, and held to maturity are long-term. GAAP states that these three classifications be only used for securities. On the other hand, IFRS allows all assets to be classified as one of the three types. Also, GAAP states that once a security has been classified as trading that you cannot change it to any other classification later. IFRS allows you to keep switching your securities between the three classifications.

Accountants distinguish two broad categories of investments:

• Passive investments are made in order to earn a return, either in the short or the long term, with no view to control or influence the investee (entity that issued the instrument). These can be voting or non-voting instruments.
  • Debt investments:
    • Held-to-maturity investments (HTM, amortized cost): securities with fixed or determinable payments and payment dates, and a maturity date to which management has positive intent and capability to hold securities. The objective is to hold investments to collect contractual cash flows.
    • Fair-value-through-profit-and-loss (FVTPL) investments: a debt investment that is held for the purpose of resale
  • Equity investments:
    • Financial-Assets-Liabilities-Fair-Value-Through-Profit-Loss (FVTPL, held-for-trading or HFT) investments. These are held for the purpose of resale (so market value is important); or subject to certain accounting rules (e. g., hedges).
    • Fair-value-through-other-comprehensive-income (FVTOCI) investments (also Available-for-sale or AFS): irrevocably designated by management at time of acquisition; not acquired primarily for resale
    • Cost investments: Investments for which fair value cannot be reliably determined
• Strategic investments are made in order to influence or control the investee company. Typically, these investments are in voting instruments.
  • Controlled investments (subsidiaries): give "continuing power to determine strategic operating, investing and financing policies of investee without cooperation of others." (usually, more than 50% of voting shares)
  • Significant influence investments (associates): give influence over investee management but not control (usually between 20% and 50% of voting shares)
  • Joint ventures: two or more venturers jointly control the entity (one venturer cannot decide without consent of other venturers)
• Classification by stage (as distinguished by venture capitalists): seed (startup) stage, early stage, expansion stage, later stage

One study of approaches to classification (Anatoliy H. Semenov and Volodymyr O. Vasylyev, Classification of Investments as an Economic Category, Business Inform, 2013, 10, pp. 43-49) endeavours to systematize the main classification features and identify those that facilitate identification of investments as an economic category. It considers the most frequently used, from the point of view of revelation of economic essence of the "investments" category, classification features: by the object of investment, by the term of investment, by regional features of investment, by forms of ownership on investment resources, by the degree of risk and by the character of participation in investment.

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