Low-Risk Investment

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What is a Low-Risk Investment?

Low-risk investment is an investment that’s perceived to offer less chance of losing all – or some – of your money.

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The first golden rule is that there are no such things as completely safe investments. Even the term low-risk investment must be used with caution. The best you can hope for is finding a lower-risk investment, which is an asset that’s perceived to be less likely to lose you money.

What is a Low-Risk Investment?

Key Takeaways

  • Low-risk investments should be less likely to lose you money.
  • You can expect lower returns with low-risk investments.
  • Low-risk investments might not generate enough to achieve your financial goals.
  • Investors have more idea of likely returns from low-risk investments.
  • Many people combine low and high-risk investments in their portfolios.

What is Risk?

Before we look at the low-risk investment meaning, let’s start with the definition of risk. It’s best described as the likelihood of your chosen investments making losses rather than returns.

It’s also important to understand your attitude to risk. This includes your willingness to endure periods of volatility and your financial ability to withstand losing money.

For example, investors who are only risking a small percentage of their overall wealth will be less affected by stock market fluctuations.

Types of Low-Risk Investments

Making a decision as to what is the best low-risk investment will depend on your personal situation, objectives and attitude to risk. The types of low-risk investments available will also depend on where you live and the products on offer from financial institutions.

Remember also that the names given to low-risk investments could differ depending on whether you’re a UK or US-based investor, for example.

Savings accounts/bonds
Putting your money into savings accounts offered by financial institutions is seen as being one of the safest types of investment.

For example, in the UK, there are a wide variety of easy-access accounts, as well as fixed-term offerings, that pay an agreed rate of interest to savers.

In the US, meanwhile, there are certificates of deposit that offer a fixed interest rate for periods ranging from one month to several years, according to Experian. “You’ll know what your return is from the start, and your annual percentage yield (APY) won’t change during the CD’s term,” it stated.

Government bonds
Different countries will issue their own bonds to raise money. Bondholders will be paid a fixed rate of interest and their original investment returned on a future date.

In the UK, for example, they are known as gilts or ‘gilt-edged securities’.

This refers to their qualities as a safer investment, as the British Government has never failed to make interest payments.

Municipal bonds
These will be issued by a state, city, county or other local authorities in order to raise money. The yields – and the ways in which they work – will depend on the issuer.

For example, general obligation bonds are backed by the issuing government agency. This makes them less risky.

Revenue bonds, meanwhile, tend to be backed by income from a specific project that the original investment is being used to help finance.

Corporate bonds
These are issued by companies to raise money for either their general needs or to help finance particular projects and expansion plans.

They will work in the same way as government bonds. The holder gets paid an agreed amount of interest and their original investment returned on a future date.

While they are generally riskier than government bonds, corporate bonds will be rated to give would-be investors an idea of how likely they are to default on the agreement.

Preferred stocks
While equity investments are generally volatile, preferred stocks operate a bit differently, according to Experian. “Preferred stocks are a hybrid investment that combines elements of both debt and equity from the issuing company,” it stated.

As a result, preferred stocks tend to be riskier than bonds but less risky than common stocks.

Low-Risk Investment vs. High-Risk Investment

Low-risk investments

  • Less chance of losing your money
  • Generally lower returns
  • Less volatility
  • More idea of likely returns

High-risk investments

  • More chance of losing your money
  • Possibility of higher returns
  • More volatility
  • Less idea of likely returns

What to Consider Before Making a Low-Risk Investment

Your first task is to decide your short and long-term financial objectives. How much of a return do you need to meet these needs?

If you need your investments to generate double-digit returns over the next five years, low-risk investing may not enable you to hit your targets.

Conversely, if you’re looking to retire soon, putting your money into (hopefully) low-risk investments is a wise approach, as you won’t have as much time to recover any losses.

Low-Risk Investment Pros and Cons

There are lots of positives about low-risk investments.

Pros

  • They are assets that you can hold in your portfolio and still sleep safely at night because there is less chance of them losing you money
  • Often, low-risk investments involve lending money to stable governments or well-established companies with a good reputation for not defaulting on payments
  • Returns generated by low-risk investments are also more predictable, which helps people plan for the future with more confidence

Cons

  • Returns generated are likely to be lower than those from high-risk investments for obvious reasons
  • Higher-risk asset classes reward potential investors for accepting the possibility that they may lose some – or all – of their money
  • A low-risk investment might not generate enough to even beat inflation, which is the annual rate at which goods and services rise.

    The Bottom Line

    A low-risk investment meaning is putting your money into an asset or fund that is expected to have less chance of losing your money. However, low-risk doesn’t mean no risk. There’s still a chance of losing some – or all – of your money, even in lower-risk assets.

    Your decision about what type of investment suits your needs will depend on your personal circumstances, financial objectives, and attitude to risk. For most people, a mix of low and high-risk investments within the same overall portfolio probably makes the most sense.

    FAQs

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    References

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    Rob Griffin
    Financial Journalist
    Rob Griffin
    Financial Journalist

    Rob is a seasoned journalist with over three decades of experience spanning across business and finance journalism. Before embarking on a freelance career in 2002, he contributed his expertise to the business desks of notable publications such as The Guardian, Yorkshire Post, Sunday Business (now Business Post), and Sunday Express. Throughout his freelance journey, Rob has been a regular contributor to a wide range of national newspapers, consumer magazines, trade publications, and websites. His work has appeared in titles such as The Independent, Citywire, Daily Express, FT Adviser, and Sunday Telegraph, covering an array of subjects from market trends to…