No two investors are the same, just as no two investments are the same. Some investors have a high tolerance for risk, while others don’t. Understanding your risk tolerance, having a plan, and defining your long-term investment goals are the most critical steps in investing. So, if you are risk-averse, here is a list of low-risk investments that preserve your capital and offer stable returns.
The simplest way to think of bonds is to think of an IOU. You’ve likely taken out a loan where you had to repay the loan with interest. Bonds are the same thing, except, in this case, you’re the one lending money and charging an interest rate.
When you purchase a bond from a company, municipality, city, state, or federal government, you essentially lend them money. They use that money to run social programs, initiate construction projects, fund their operations, and run their business. In return, they pay you back the amount you lent them with some interest once the bond matures.
Bonds are ideal for retirement planning, as they provide stable returns with minimal risk. They are also less volatile compared to other investments that may fluctuate wildly in unstable times.
Certificates of Deposit (CDs)
A certificate of deposit is like a savings account, but it pays a higher interest rate. When you purchase a CD, a bank or credit union pays you a fixed interest rate over a predetermined period or fixed term. That period can range from six months to a year, up to five years.
CDs are considered a low-risk investment because your principal or capital is guaranteed, and you receive a reasonable interest rate. However, withdrawing money early will include penalties, so it’s important not to withdraw from the CD until maturity. CDs are an excellent short-term investment when you know you’ll need money soon.
Money Market Funds
Money market funds are considered low-risk because they invest in short-term, liquid investments like cash, commercial paper, and treasuries. The money market fund is managed by a fund manager who aims to protect the capital or principal.
Currency fluctuations are mild, and owners of money market funds earn interest through dividends or payments once the short-term debt securities mature. Money market funds are solid investments that help to diversify your portfolio.
Blue-chip stocks are top-rated with investors because they’re sold by financially sound market leaders with market capitalizations in the billions. These companies often dominate their market, are well-established, have consistent earnings, and have been around for decades.
Blue-chip stocks are known for paying dividends to investors. Examples of blue-chip stocks include American Express, Walmart, Microsoft, IBM Corp., Walt Disney, Procter & Gamble, and McDonald’s, among others. Investors are comfortable purchasing stock in these companies because of their history of success through good times and bad.
Understanding Your Investment Goals
Investing for the sake of investing never works. All investors must have a long-term investment plan regardless of their risk tolerance. Defining what you’re comfortable investing, staying committed to your long-term goals, and working with an experienced financial provider like Sean Casterline, will help you create an investment portfolio you can be confident with.