While there are many people out there who thrive off uncertainty, there are some of us who wish to avoid risk at all costs. The individuals who are unwilling to gamble anything more than quarters when they vacation in Vegas are unlikely to go wild with bets on the stock market. For many of us, the less risk involved in investment the better.
That being said, there is no way to invest money with absolutely no risk. While there have been differing opinions expressed by financial analysts on how to go about building an investment portfolio, it is generally agreed upon that all investments have some degree of risk. Even relatively safe investments have the potential to lose purchasing power as time passes.
Despite no-risk investments not being possible, there are still an abundance of low risk investments that could offer a significant amount of stability while giving you the opportunity of impressive growth.
Risk and Reward in Investing
In the world of financial investment, you might hear the phrase: the higher the risk, the higher the reward. This is generally true. When you invest money, the more risk there is the higher the return could be. In this way, investing and the stock market works a bit like gambling in the most basic sense. You need to be willing to lose money to win big.
But just because more risk can mean more reward does not mean that low risk investments are not worth making. Some of the safest investments can prove to make a world of difference in one’s financial portfolio. The best low risk investments will allow you to obtain growth over time while avoiding the worst of volatility in the stock market.
What Risk Is Involved With Safe Investments?
As there is no such thing as zero risk investments, you might wonder what risk there is with the safest investments. While there is little to no market risk to the principal amount (i.e. the money you initially invested) on the most common low risk investments, your money still has the potential to lose purchasing power through inflation.
However, these safe investments make it possible to keep your risk exposure minimal while still receiving substantial long-term growth. A low risk investment like a money market account, treasury security, or preferred stock are as close as you can get to zero risk while still increasing your net asset value.
Best Low Risk Investments
Limiting your risk exposure especially when you first get into investing is a good idea. Most financial experts agree that sticking with minimal risk options is the best course of action for new investors until they are more familiar with financial markets.
When you are just getting started, you don’t want to throw yourself into the deep end with risky stock investments. It’s a better idea to start small with low risk options and work you way up as you feel more comfortable with your knowledge of the stock market.
Luckily, there are plenty of low risk investment options that can get you started. We’ve gathered together some of the safest investments you can make. These low risk investments should be the foundation of your portfolio which you can build upon later when you know what you’re doing.
High Yield Savings Account
A high yield savings account should always be the firm foundation of every financial portfolio. Many people might not think of savings accounts as a form of investment. But a high yield savings account that is left alone for years or decades to grow can provide an significant amount of growth.
The increasing popularity of online banking has impacted the use of high yield savings accounts as a low risk investment. Many online banks offer impressively high interest rates on their savings accounts which could allow a surprising amount of growth in the long term.
High yield savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) which makes them one of the safest investment accounts. The only risk that will come with high yield savings accounts is a possible loss of purchasing power is if the fixed interest rate of your annual percentage yield (APY) is less than the inflation rate.
Money Market Account
Money market accounts function similarly to savings accounts with high interest rate yields. However, unlike a savings account, you can spend directly from a money market account with limited transactions per month. Money market acounts won’t yield as high returns as investments with more risk. You will see similar interest rates to a savings account with a money market account.
Money market accounts are FDIC insured for up to $250,000 so even if the growth similar to that of a savings account, they are still one of the best low risk investments. Additionally, you may be able to find more competitive interest rates for annual yield on money market accounts with online banks.
Certificate of Deposit
Certificate of deposit accounts, also known as CDs, offer higher interest rates than traditional savings accounts by requiring a minimum deposit which you agree to not move for a set period of time. If you need to withdraw money from your CD account before the maturity date, you will be charged a penalty.
If you get a certificate of deposit from a financial institution that offers FDIC-insured accounts, you can benefit from the security you get with savings accounts with an interest rate that offers substantially more growth. But you must be sure that you can wait until the maturity date.
Treasury Securities, Bonds, Notes, and Bills
Another excellent option for lower risk investment can come from the United States government itself. The U.S. Treasury issues Treasury bills, Treasury Notes, Treasury bonds, and Treasury inflation protected securities. All these Treasury investments are highly liquid and can be bought directly or through a mutual fund.
Treasury bills mature after one year or even sooner. Treasury notes can go up to 10 years. Treasury bonds have a maturity date that can extend to 30 years. Treasury inflation protected securities (TIPS) have a principal value that will go up or down depending on the direction of inflation. You are unlikely to lose money with Treasury securities unless you sell them before the maturity date.
Fixed annuities function very similarly to certificates of deposit as you agree to put away your money for a set period of time for a higher interest rate. With a fixed annuity, you get a series of payments through out the period of time you agreed to lock your money away for.
Just like with CDs, there is a penalty for accessing your money before the investment account reaches maturity. The difference with fixed annuities is that you will gain access to a percentage of your money each month.
Preferred stocks are an excellent low risk alternative to a common stock. Preferred stocks can best be described as a hybrid of dividend paying stocks and bonds. With preferred stocks, you can get some of the appreciation potential of a common stock with the reliability of interest income through dividend payments.
Money Market Funds
A money market fund is a kind of mutual fund that focuses on highly liquid and short term investments. Though similar in name, money market funds are not to be confused with money market accounts. Money market funds do not guarantee the principal amount as they are back by an investment fund company and not insured by the FDIC.
Because these mutual funds are not as safe as cash, they offer higher returns than the interest rates available on savings and CD accounts. However, money market mutual funds are still relatively low risk compared to other investments because of their high liquidity and short-term nature.
Never Too Early To Start Saving for the Future
It is never too early to start investing money. The earlier you start, the more likely you are to end up with a comfortable guaranteed income by the time you reach retirement. Starting early on will allow you to take advantage of the organic growth that comes with long-term investment.
If you start investing and saving for the future early enough, even seemingly insignificant interest rate yields will grow steadily on non-volatile investments. The earlier you get started with low risk investments, the more time you will have to get familiar and comfortable with the market so you can get higher returns.
Tips for Building a Responsible Financial Portfolio
You can know everything there is to know about market value, savings bonds, common stocks, and the state of interest rates at any given moment and still be ill-prepared for your financial future. That is because building a strong financial portfolio is not merely about memorizing facts. It’s about preparation, diversity, and patience as well.
Here are a couple of tips for preparing your finances for investing and how to build a portfolio responsibly:
Pay Off Your Debts
Don’t carry your debts with you longer than is absolutely necessary. The interest payments you make on your debt are basically the opposite of investment appreciation. There are even investors who round out their portfolio with peer-to-peer lending and the interest rates charged on loans. You will want to pay down your debt as fast as you can especially those with particularly high interest payments like online payday loans.
When you eliminate your debt, you will have substantially more money to put into your financial portfolio. You are only going to see growth to the extent that you are willing to contribute. If your money is too tied up in debt payments, you will find yourself far behind your peers.
Have an Emergency Fund
Before you start putting money away in various investments, prepare an emergency fund for yourself. If an unexpected crisis comes your way, you want some cash to fall back on without having to dip into your investments before they reach maturity. A hefty emergency fund could save you from being charged a penalty for accessing your investment accounts.
Diversify Your Investments
Diversifying your investments is one of the smartest moves you can make in your financial portfolio. From high-yield savings to corporate bonds to common stocks, invest in a wide range of instruments to make the most of your money.
After you feel comfortable with low risk investments, dip your toes into medium risk ventures and see how they go. Explore your options and keep your portfolio varied to protect yourself from losses.