Investing can be easy! We can help you make better financial decisions. Here are 5 investment types with the lowest risks.
Which investment type typically carries the least risk?
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.
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.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.
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.
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.
That’s all for our guide to the 5 investment types that carries the least risk. We hope you learnt something and start investing today!