6 Methods to Investing with Low Risk
Investments and Risk go Hand in Hand
No broker or investment advisor would (or should) ever tell you that they have the just the investment for you that carries no risk. All investments incur some level of risk regardless of past history or projected earnings. Most offerings will carry the well-known disclosure that “past results are not a guarantee of future performance” or similar representation of the risks involved with investing including lack of performance and loss of initial capital.
But there are steps and safeguards you can take to minimize your risk exposure. This is of course not a promise of some “hot tip” for an investment that can’t lose – it’s more of a common-sense approach to investing wisely and conservatively to reduce the likelihood of significant financial loss.
Risk can present itself in many forms that impact investors. This is not simply a case of a particular stock asset losing value whether short-term or over the long haul. Risks can materialize in several forms and for several reasons:
- Anticipated company earnings not being achieved
- Demand for a particular good, service, or commodity dropping
- Supply for the same good, service, or commodity increasing
- Political unrest in regions or countries that may result in economic impact
- Government actions or decisions by regulatory agencies
Today’s global economy benefits investors through the opportunity to participate in markets and segments never available in years past. By the same token their investment results are subject to a wider range of factors that can influence financial results. Aberdeen Asset Management summarizes some risk considerations in a recent publication for potential investors.
Minimizing Your Investment Risk
Once you’ve come to the realization that all risk cannot be avoided it becomes a challenge to the investor on how to best minimize the exposure to as much risk as possible. Here are some tips to reduce risks inherent in your investment strategy:
- Diversify – this is a time-proven strategy to safeguard your portfolio from impact of loss from any particular asset. Through a mix of financial instruments you “hedge your bets” against a downside that severely impacts your overall capital.
- Bank savings accounts and CDs – probably one of the safest financial instruments available to you, these products also produce returns which to many investors are almost painfully low – today typically returning only 1% to 2%.
- Invest in bonds – to be sure, bonds carry a very low return and to profit from their low return you need to retain them to maturity. But the risk is undeniably about the lowest among investment products.
- Mutual funds – mutual funds typically provide good returns in good times and minimal loss in bad times. They vary in their risk exposure to investors, so a good guideline is to evaluate funds that Morningstar rates at 3 out of 5 stars and demonstrates consistent returns.
- Fixed Annuities – the benefit of such annuities is a guaranteed, predictable return. You are buying annuities from an insurance company, so the safety of your investment is typically protected by insurance boards. On the downside the annuity is less liquid than other financial tools such as savings accounts, bonds, or CDs.
- Get educated and use the knowledge to your financial benefit. While investing in low-risk instruments ensures low risk it also frankly guarantees low returns. Better than low returns is becoming educated in how to analyze annual reports and scour news reports for items that are likely to generate financial impact and react accordingly. By gaining a real understanding of analytical tools and their information you can minimize investment risk through applying your own knowledge. Knowledge and experience are your best tools to build confidence and success in your trading approach.
Downside of Low-Risk Investing
There are detractions from taking too little risk when investing. You will find that in general the lower the risk the lower the returns on your investment. Bank savings accounts and certificates of deposit provide some extremely low-risk potentials yet also return very low profits. You may even experience negative growth with such financial instruments, in fact. If your savings account pays a 2% return during a period of 3% inflation, for instance, your results are a net 1% loss in spending power. Not exactly the return you’re looking for.
With these points in mind don’t ignore the fact that lower risk as a rule results in lower return. The risk/reward ratio should be a consideration when you select the financial products to invest in. A lot depends on your risk tolerance of course. How long to you plan to be in the market? If you’re in for the long term you can afford to suffer short-term losses on the premise that your portfolio will rebound over time. Someone in their 30’s investing with a mind toward retirement obviously has more time to make up temporary losses than an individual approaching retirement. A day trader looking for short-term gains or quick profits will not be inclined to consider savings accounts or CDs.
Once you’ve formulated the investment strategy that will achieve your investment goals select a broker equipped to execute your plans effectively and accurately. Online brokers provide real-time tools for analyzing your proposed trades and allow you to monitor stock tickers. Be sure to consider the broker’s reputation and business practices.
SureTrader is a leading online broker for day trading that can provide you with reliable and honest services for your trading activities. SureTrader also offers consistent courteous support for your trades including fast order execution and mobile options for traders using both iOS and Android devices.
Disclaimer: SureTrader Blog is not intended for U.S. persons. Stock information is not to be viewed as buy or sell recommendations.