So you want to invest but not risk losing all the money you’ve worked so hard to earn? Well, investing does come with its risks but fortunately there exists certain assets that allow you to have your cake and eat it too by combining lower risk levels with moderate returns which I want to share with you now but before I get into the types of investment that have low risk, I want to briefly discuss what risks you face when investing.
Investment risk is the likelihood that losses will occur relative to the expected profit from any investment. That simply means that investment risk is the measurement of the uncertainty that exists with each investment.
Generally, investments that have high risk have the potential to pay more interest while investments with low risk have the potential to pay lesser interest. Some common risks include market risk, interest risk, liquidity risk, concentration risk, and inflation risk among many others.
Market risk is the risk that exists because of events that take place and affect the entire market. For example, government policies can affect the market either positively or negatively. When such happens, the value of your investment can either become high or low. Another type of risk that exists is the interest rate risk. This is the potential for an investment to change in value because of a change in the interest rate. This means that if an investment has a fixed interest rate and another similar investment has a higher interest rate, the value of the one with the fixed-rate may drop because of the alternative.
The final type of risk is inflation risk. When there is inflation, money loses value and the purchasing power of money reduces. That is, $100 before inflation is worth more than the same amount after the cost of living increases and it’s possible for the value of your investment to fail to keep up with inflation resulting in portfolio devaluation.
Now, you may be wondering that makes an investment high or low risk and that’s a great question. In fact, you need to understand the difference between the two to be able to make low-risk investments that can make you rich. Risk means different things to different people but when it comes to investing, the risk is usually measured as the value of the potential loss in monetary terms. High risk means that there is a high probability of losses.
For example, investing in a new pharmaceutical company can be said to be a high risk. The chances of any new drug making it to the market are very low. That means investing in such a company is high risk. Low risk means that the investment is fairly stable and the probability of losses is minimal. An example of such is government-regulated investments such as treasury bills. Now, let’s go over 5 low risk investments that build real wealth!
Investment #1: Preferred stock
If you are looking for an investment with low risk that has the potential to make you rich then you should consider preferred stocks. Preferred stock is a low-risk investment that can be said to be in between bonds and stocks in terms of risk. That is, it has more risk than bonds but lesser risk than stocks and it combines some features of both bonds and stocks. Most investors who are interested more in the safety of their money would rather choose bonds with a lower interest rate than stocks. However, investors who want a higher interest rate and are willing to take more risks to invest in preferred stock. Preferred stock has more risk than bonds but the risk is lesser than common stocks and that is why it has some added advantage that bond does not have. For example, preferred stock pays regular dividends just like bonds but it has a higher payout.
When a company wants to liquidate its assets, people who invest in bonds are considered first for payout before other people. The next people that will be considered after that will be the preferred stock investors. Investors in preferred stock are paid higher interest rates because the level of risk that they are willing to take is greater than those who invest in bonds.
Another reason that makes it less risky than common stock is because it is regulated like most fixed-income investments. They have an inverse relationship with the market interest rate and the value may not increase suddenly like common stock. Also, people who buy the shares of a company as preferred stock may not have voting rights. Some preferred stocks are convertible into common stocks where you can enjoy the benefit of unlimited growth and voting right just like when you invest in common stocks.
Investment #2: Utility stocks
Another low-risk investment that you can use to build wealth are utility stocks. Utility stock is the share of utility companies that provides basic utility services like power, electricity, water, and waste management among others. They are an important part of our daily lives and without them, life will be very different. For example, try to imagine life without electricity or clean water supply. Utility companies serve a major role and it has made them valuable and often realize consistent growth.
Utility stock remains one of the low-risk investments that can make you rich because there is always a demand for the service. People will always want to have clean water, electricity, and gas. The comfort that these utility companies offer makes utility stocks ever profitable.
One of the reasons why utility stocks are an example of low-risk investment is because the industry is a highly regulated one. What this means is that cash flow is predictable and the chances of being paid are very high. They pay investors strong dividends because of the huge profit that the utility companies make. Another reason why utility stocks can make you rich is that they serve the basic needs of humans and that means that they will always be a demand for their services. Utility companies have built strong networks and infrastructures and they have continued to expand and develop. Therefore, as the human population grows, the need for their service will continue to increase.
During economic hardship, investors are always looking for the safest place to keep their money in order not to run at a loss. Most companies may not be able to cope in the face of bad economic situations such as a recession. However, utility companies remain safe because people cannot do without them. People do not stop requiring clean water or electricity because of bad economic situations. People tend to have the needs for these basic resources during such a period. There may be a slight reduction in the value for some time but it will always become normal again.
Investment #3: Fixed annuities
Fixed annuities are considered a good investment for those that are looking for low-risk investments that guarantee a constant return. Fixed annuities offer a safe way to save money and also guarantees a higher interest rate than normal bank savings. Fixed annuities are like an agreement between an insurance provider that guarantees a certain fixed interest rate on the contribution of an individual to the annuity. They are simple and straightforward and also guarantee a predictable source of income.
The payment on annuities can either be immediately where you start receiving annuity payments after a year. These payments can also be deferred and such type usually starts paying you out at retirement. The good thing about this type of investment is that it has low risk and payment can be guaranteed for life or a number of years depending on the terms of the contract.
The first advantage of fixed annuities is that they are very simple. There are no complicated formulas for calculating how much you are going to earn like some other types of investments. The amount you will receive as income payment is specified clearly in the contract. The rate of the investment is clearly stated in the contract and any changes made are spelled out in the contract.
Another advantage of fixed annuities is that they are very predictable because the terms are clearly stated in the contract and you know what to expect. You don’t need to know anything about how the market is performing. The interest rate is spelled out in the contract and the payment is guaranteed. Because of this, a fixed annuity is a low-risk investment and you need to worry about how stocks are performing before you get paid. This is a good investment for retirement because you can’t afford to lose money at that time.
Investment #4: Certificates of deposit
A certificate of deposit is a type of savings account issued by commercial banks. It is different from a normal savings account because your access to the money is usually restricted and because of that, it has a higher payout than the conventional savings account. The account gains value over time and it is subjected to certain types of fees when you withdraw it before the agreed time.
The way a certificate of deposit works is that a customer deposits a certain amount of money and interest is paid at regular intervals until the maturity of the investment. The customer will receive the amount they deposited together with the interest that the amount has accrued. Investing in certificates of deposit for the short term will offer a decent return but it is usually more profitable to invest for the long term.
A certificate of deposit is a low-risk investment because you don’t need a deep understanding of investing to succeed when holding this asset type. The money you deposit in a certificate of deposit is also insured up to $250,000 and that makes it one of the safest investments available. A certificate of deposit is a low-risk investment and it pays you for deciding to forgo spending your money for a particular period making it another asset you can add to your wealth building arsenal.
Investment #5: Mutual funds
Mutual funds are made up of a pool of money collected from investors and invested in low-risk investments such as stocks, bonds, and other assets. The purpose of a mutual fund is to minimize risk by investing money in securities and also to maximize profit by diversifying the portfolio. Professionals allocate the fund to different investments to maximize profit and reduce losses. Moreover, these professionals monitor the performance of each investment. The advantage is that the professionals can use their experience to monitor the market and make decisions that will give the fund the greatest chance of turning a profit.
A mutual fund combines different classes of securities to provide a higher payout with lesser risk. Investors who do not have much money may not be able to diversify their portfolio but with mutual funds, they can invest in multiple securities at the same time. A mutual fund saves you the time of monitoring the market by yourself. And if you are a new investor looking to make some profit, a mutual fund is a great option for you.
In conclusion, there will always be risk involved when investing however this shouldn’t deter you from investing at all as you now are aware of 5 investing options that pair lesser risk levels with appreciable returns!