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What is a Safe Investment?
Investments are termed “safe” when the financial product offers relatively consistent returns with comparatively little risk.
No investment is absolutely “safe.” No matter what product you select, investing, always carries with it some risk of losing or diminishing your investment. Even savings accounts at your favorite bank come with a level of uncertainty.
“Safe” is different for each investor. Determining the level of risk you’re comfortable with is part of the research and investigation that goes into developing a sound investment strategy.
There are a number of characteristics that can help you identify whether an investment is safe enough for your portfolio. Before classifying a product as “low-risk,” don’t forget to consider these attributes:
1. Elements of a Diversified Portfolio
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2. Low Risk
It can be very difficult to find safe investments with high returns. Safe investments bear low risk, but this does mean that, while the returns are usually assured, they will be modest.
3. Time Span
Safe investments can also be classified by the investment period. Generally, short term stock market investments are not safe, but longer-term investments can be considered safer options.
4. Risk of Losing Your Investment
Finally, the safest investment types keep your principal intact. If you have invested your money in a safe option, the chance of losing your principal is very low.
Why Would You Want Low-Return, “Safe” Investments?
While many of us would love to get rich fast, this isn’t a sound frame of mind in which to develop your investment portfolio.
If you’re looking for the best place to invest money right now, you may be tempted to opt for higher yield options, but these will generally carry a much higher risk.
Some of the best investments in 2021 strategies are based on long term, low-risk products. Although these products offer a low return, there is little to no risk of losing your principal.
Low return, safe investments can also be more appealing if you are creating a strategy to save for your retirement.
Another reason to consider lower return investments is that you run minimal risk of losing your principle. If you’re new to investing or have limited funds, losing your principal can damage your confidence and limit your ability to continue investing.
Many new investors start with a fixed sum and rely on the returns to build a portfolio. So, taking a heavy loss at the outset can easily stunt an investment career.
What Makes a Well-Rounded Portfolio?
A well-rounded portfolio is likely to include three asset classes, stocks, bonds, and cash. This set up creates an environment where the failure of one group of investments will not cripple the others.
For example, if you put all your money in stocks, and there is a market collapse, you could lose everything. Even if the failure is not catastrophic, it could be years before your portfolio recovers.
While you may be able to weather losses in your early twenties, if you’re nearing retirement, major losses could be disastrous. This is why it is crucial to create a diverse portfolio with a mixture of stocks, bonds, and cash.
You could make your portfolio even more well-rounded by further diversifying your holdings in different sectors. For example, you could invest in value stocks, growth stocks, and large-cap stocks.
You can also split your stocks between international and domestic products to enjoy exposure to foreign markets.
It is important to note that selecting individual stocks is one of the riskiest investment maneuvers that exists. Specific companies often fall victim to changing market climates, emerging technologies, scandals among executives, even the day-to-day whims of consumers.
ETFs Vs. Stocks
A safer alternative to picking individual stocks is to invest in broader funds that track market performance. ETFs represent an attractive investment category for those interested in taking on the stock market with a more modest approach to the risk involved.
When a single stock in a fund takes a downturn, losses are insulated by the performance of the total fund. This means that gains in some of the stocks offset losses in others. This characteristic makes funds one of the least risky investment types.
In fact, ETFs are a common choice for retirement plans. Automated investment platforms like Betterment and Personal capital—apps that help users save long term—rely on ETFs to keep returns relatively consistent.
A well-rounded portfolio also includes a variety of bonds to balance the risks associated with investing in move volatile stocks. Stocks, of course, have the opportunity to return larger rewards to investors.
Bonds are typically less volatile and will work in concert with your larger portfolio to smooth out any market downturns. Bonds can do this because they are not correlated directly to stock market returns.
In the Running For the Least Risky Investment Type
There are a variety of products that allow you to enjoy a diverse portfolio, even if you’re looking for a highly conservative investment strategy. These include:
1. Savings Account
A savings account with your bank will probably keep your principal sum safe but provide you with a marginal rate of return. This is the safest type of investment, providing access to your funds and paying a set interest rate.
The average savings account, according to CNN Money, earns just 0.06% per year.
2. Fixed Deposits (FDs or CDs)
Fixed deposits or certificates of deposits offer a low rate of return but can protect your principal, with virtually no risk.
MoneyRates reports the average one year American CD returns about 1.009% annual interest.
There are three main types of bonds; government securities are considered the lowest risk, as you are effectively loaning money to the federal government. Corporate bonds have a higher risk as you’re loaning money to a corporation, but they offer a higher return. Finally, municipal bonds are issued from state and local governments and may be exempt from taxes.
The returns on Bonds vary widely depending on the type of bond you purchase and the term of that certificate.
These investments fall under the category of Mutual Funds and carry a higher risk profile. They can be a good option if you’re prepared to invest for the long term.
By investing in equities over the longer term (10 years or more) you reduce the risk of short-term stock market fluctuations causing you losses by withdrawing your investment too early.
5. Fixed Annuities
These offer a guaranteed return for entering into a contract with an insurer. Returns only start after a set period, and you cannot access your capital before the period expires.
The average annual return on these investment types ranges from about 3.7% to 4%, based on data collected by Blueprint Income.
How to Decide Which Investment Category is Right for You?
To determine the investment categories for your portfolio, you need to practice asset allocation.
This is just a fancy term for dividing your capital across the different investment categories. Ideally, you should mix and match the different types of investments to establish a balanced portfolio, devoting a little bit of your money to each asset type you have access to.
Diversifying between stocks, bonds, and cash to create an investment strategy will help you to reach your investment goals. According to The Simple Dollar, you will need to assess three factors:
1. The Return Needed
You will need to consider the amount of return on your investment that your goals require. If you’re prepared for a lower return, you will be able to concentrate on conservative investments and lower your risk profile.
2. Your Risk Capacity
Risk capacity is the extent to which risky events could occur without damaging your financial goals.
For example, a twenty-one-year-old planning for retirement has a greater risk capacity than a sixty-year-old. At twenty-one, the investor has a much longer period of time to make adjustments to their retirement strategy than the sixty-year-old.
3. Risk Tolerance
Risk tolerance measures your comfort level with risk. Some people feel comfortable with large stock market movements, but if you’re looking for the least risky investment types, you probably won’t be this comfortable.
As you see returns from safer investments, you may develop a greater risk tolerance. This means you may feel more comfortable investing in higher-risk products in the future.
Questions to Ask Before Making an Investment
Whether you’re considering safe investments or are prepared for slightly more risk, there are several questions you should ask before you commit your capital.
If you’re just getting started, the best advice any beginning can take is to connect with an investment manager.
Personal Capital offers a retirement calculator to help users create a customized investment strategy and a suite of services to help you build your portfolio. Their wealth managers and digital tools an effective and affordable way to break into investing.
1. Do You Know How the Investment Works?
While you can’t expect to understand all of the complexities of a product, you should be able to provide a basic explanation to someone else.
2. What Are Your Investment Goals?
What is your priority; income, growth, or safety? While it can be possible to enjoy some growth with safe investment products, you cannot expect the returns of higher-risk products.
3. Do You Understand the Investment Risks?
Do you understand the risk level, and are you comfortable with it?
4. How Long Are You Planning to Invest?
Is this going to be a short, medium, or long-term investment? Some safe investments are only considered safe when your capital is tied up for a longer-term.
5. Where Are Your Other Investments?
Finally, you need to think about how this investment will fit with the other products in your portfolio. While you may feel comfortable with one type of product, you should aim for a balanced portfolio with a good asset-mix.
So, What is the Least Risky Investment Type?
There are a number of ways to construct a well-balanced investment portfolio, but if you’re concerned about protecting your capital, it is important to look for the safest investment options.
Although safe investments with high returns are not generally available, it is possible to see a decent return with minimal risk. Balancing stocks, funds, and other safer investment-types can allow you to create a balanced portfolio regardless of your savings goals.
Of course, if you’re struggling to decide the best investment options for your financial goals, you can seek the advice of an experienced professional.
Fortunately, there are some fantastic platforms out there that can offer great advice for your wealth management.
Investments aren’t the only way to save. To help get you started, check out this list of 67 ways to save money fast and get a headstart on your financial goals.