High risk typically means that you stand to lose much more money if the investment turns out to be a bad choice. Alternatively, you can choose low to medium risk investments but this will give you lower profits.
In this blog post, I will uncover which investment type typically carries the least risk and my favorites.
Let’s look further into it… 🙂
Table of contents
Types of low-risk investments
Savings accounts are a form of deposit account offered by banks and other financial institutions which pay interest.
The good thing about this instrument is that in most cases, your money is guaranteed by some form of a government scheme.
The insurance is valid for a predefined amount; therefore, make sure that you maintain money up to the guaranteed limit. But, as the risk of losing your money is extremely low.
Keeping money in your savings account allows you to withdraw money when you need it. Therefore, you have the ability to maintain a level of liquidity for unforeseen expenses or purchases while you still earn a return.
If you decide to include a savings account in your portfolio (Eg. for an emergency fund or opportunity money), then you can expect to earn a return from a 1.7% annual percentage yield (APY).
The yield generated can vary greatly from one country to another and also from one financial institution to another. Accordingly, you should go through the offers made by different institutions before you make your final choice where to open a savings account.
I have my emergency fund in a savings account that gives a full 3% (APY). It’s a lucrative deal that I got from my local bank 😎
Which investment type typically carries the least risk? This is the one to go for – if you want extreme low-risk and access to the money – but these returns won’t make you financially free…
Let’s look at the next one:
Certificate of deposits (CDs)
Certificates of deposits are a type of financial product offered by banks and other financial institutions.
You will usually receive a higher interest rate compared to savings accounts because you agree not to withdraw any money for a predefined period.
Nevertheless, the downside is that you can lose a portion of the interest rate and even pay some fees if you withdraw your money before the expiration of the agreed term.
Make sure that you go through the offers from different financial institutions as there could be a difference in the interest rate offered.
When investing in Certificates of Deposits, the return depends on the time period of the CDs. Consequently, you can make around 1% on one-year CDs, and the return increases as the maturity period increases.
Government and Corporate Bonds
You have a guaranteed income with bonds because they represent a fixed-income instrument.
Government bonds from economically stable countries are considered to be a risk-free investment.
The bonds can default when a country bankrupts, which as you know is almost impossible, at least for highly developed countries, such as USA, Canada, Germany, UK, Denmark, Norway, Finland, etc.
Corporate bonds do come with a certain risk, but in general, bonds with a credit rating grade in the A and B range (from AAA down to BBB-), also called investment-grade bonds, are considered to be a low-risk investment, where bonds with AAA grade have the lowest risk.
The negative side when investing in bonds is that you can lose a portion of the principal amount if you decide to sell the bonds prior to their maturity date. The decrease in principal amount can occur when interest rates changes are unfavorable for the bonds you are holding (e.g., When market interest rates increase, the price of your bonds may decrease).
A precise number for the yield earned when investing in bonds cannot be provided because it depends on many factors. But as an illustration, the UK 10-year bond will yield you a 1.42%.
Although investing in stocks can be sometimes considered to have increased risk levels, some stocks do come with lower risk.
Dividend stocks or dividend-paying stocks are considered to be a safer investment because companies paying dividends on a regular basis are viewed as more stable and with smaller fluctuations in their prices.
There is also a category of stocks called dividend growth stocks, which are stocks issued by a company that has a track record of increasing the dividend payout (hence the meaning of growth).
Accordingly, you can decide to invest in stocks with a track record of paying dividends and/or in dividend growth stocks. Holding both types in your portfolio is also acceptable.
The expected return can differ greatly, and it can be from around 2% up to 5%.
Keep in mind that the stated yields should serve as guidance so you could know what to expect, but the yield can also be below 2%, or it can be higher than the stated 5%. Nevertheless, you also have the opportunity to make a capital gain when holding a dividend stock in your portfolio.
I invest every month in index funds that pay dividends. It is between 4-8% annually.
Money market funds
You can also decide to invest your money in money market funds, which are considered to be a short-term investment providing liquidity while bearing a very low level of risk.
Money market funds usually invest in high rated debt instruments. They offer liquidity because you don’t have to wait for maturity as it is the case with CDs since you can convert your holdings into cash swiftly.
When you select a money market fund as your investment, aside from the return earned, you should pay attention to the fees charged by the fund. Because there are different types of money market funds, always check for the terms and conditions.
As it was the case with other investment, the yield generated by the money market funds can be different, and there are funds with which you can make 1.80%. But the overall yield can also be higher or lower as it depends on numerous factors.
Peer to Peer lending (P2P lending)
The P2P lending platforms offer different types of guarantees, such as buyback guarantee or collateral, and also some platforms have developed a secondary market for their loans.
This type of investment can have higher risks involved but you can lower this risk. If you follow certain practices to protect your investment, you stand to gain a satisfactory higher level of return.
I recommend you read my article about how to lower the risk within P2P lending. It’s one of my preferred investment opportunities and I have received some good returns over the years.
The return you can generate by investing your money on P2P lending platforms can vary from one platform to another, and you can earn up to 10-15%. Of course, there are platforms where you can earn even higher returns if you are willing to accept more risk.
Real estate investment
The real estate value can fluctuate in the short-term, but in the long run, it tends to increase.
Real estate is a great and valuable addition to your portfolio if you plan to invest for a longer period of time.
You can buy real estate on your own (a mortgage will increase the risk) and rent it out. You can also look into other opportunities within real estate:
Real estate funds provide the opportunity for the small investor to make a return from commercial and corporate rental properties. By investing in real estate funds, you have the opportunity to reduce the investment risk because the funds hold a diversified portfolio of real estate properties.
Moreover, you can also invest in real estate development through Real Estate Investment Trusts (REITs). You can find REITs that invest in real estate properties by purchasing equity, by holding a mortgage on the property or a combination of both.
It may not be the most secure/lowest risk – choice when you look for “Which investment type typically carries the least risk” but it can have low-risk if you research and learn more about the real estate opportunities.
After you have identified the level of risk you are prepared to accept, what comes next is for you to decide on the composition of your portfolio.
The decision should be made regarding the types of instruments you will hold in your portfolio in terms of their correlation with the market as well as the risk-return relation. You also think about the time horizon.
From the perspective of the risk-return relation of individual assets, you can structure your portfolio as:
- Low-risk portfolio – typically offers the lowest return because the instruments carry low risk.
- High-risk portfolio – offers a high return, but you will have high exposure to risk, and you should be willing to accept the higher level of risk.
- A combined risk portfolio – offers the investor a possibility to earn a higher return while maintaining an acceptable level of risk. This type of portfolio is commonly composed of instruments with different types of risk levels, so a loss in a high-risk investment might be offset by the gains generated from medium or low-risk investments held.
I have a combined risk portfolio in my investment portfolio and I work towards having a maximum of 10% in high-risk investments such as Crypto.
In this way, I make sure that my overall return is good, but at the same time not exposed to excessive risk. This way I can better achieve my goals and follow my 7 steps plan. You can’t become financially free if you only have investments that have low risk and low returns.
That’s it 🙂
I hope you liked this blog post about “Which investment type typically carries the least risk”.
Join the monthly:
Stay Focused Email List
and stay connected 🙂
- Follow my journey and blog updates
- Stay on track
- Learn more during your own progress