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.
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.
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.
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
- 7 Best Low-Risk Investments – Experian (Experian)
- About Gilts (Dmo.gov)