Ranking Investments from Safest to Most Risky
When you first decide to invest, you’ll often ask yourself the question “how risky am I willing to go?”. One of the major keys to success in investing is to maximize your returns while mitigating risk. Typically, the riskier the investment, the higher the potential returns could be and on the other side, the lower risky investments typically provide low returns. Balancing the two while maximizing your returns is the goal to becoming a successful investor.
A start-up business can provide tremendous returns if successful. Most of the richest people in the world started a business at some point. While these have a great amount of potential, they are also the riskiest. If you are not an experienced business leader, you can make mistakes and have hiccups along the way. However, that’s not the only risk. Competition can stifle your product or service making it difficult to compete and stay profitable.
While the risks of a small business might seem like too much, don’t forget about the upside potential. Investing in a small business with a strong leader and hard-working team can be a great investment and provide long-lasting returns.
Equities, or stocks as many people call them, are our second most risky investment. Stocks can have massive swings in value from day to day. Trade negotiations, earnings, or Federal funds rate changes can all have major impacts on a stocks price.
The good news is that you can mitigate some of the risks by staying diversified. By investing in several different stocks in different sectors, you can lower your exposure to some market volatility but there will still be some risk.
Some companies will choose to issue bonds instead of selling more shares of stock. Think of a bond as a loan. You will collect interest on your money and your money must be returned (mature) by a certain date. Bonds are considered more secure than equities because there is little to no volatility. The only risk is that the company files for bankruptcy and it cannot repay the bonds. Therefore, investing in corporate bonds for large companies is unanimously considered a very safe investment.
Did your grandparents ever give you a savings bond when you were younger for your birthday or Christmas? These bonds are issued by the United States government and backed by the Federal Reserve. Similar to corporate bonds, these are also considered extremely safe because one of your only risk factors is if the government shuts down and cannot repay the bonds. The interest rates are typically lower than corporate bonds so it’s up to you to decide which is right for you.
Savings Accounts or CDs
Savings accounts or CDs (Certificate of Deposit) at your local bank are considered very safe. This kind of investment will only perish if your bank cannot pay them after bankruptcy. To take it a step further, some or all of your money is insured by the FDIC up to a certain amount. This makes a savings account or CD a very safe option.
While cash may not seem like an investment, in one way it is. A dollar bill only has value because it is backed by the Federal Reserve. Intrinsically, it is a piece of paper worth practically nothing. Gold, on the other hand, has a strong value worldwide. If the global economy was wiped out tomorrow, gold is still considered precious and holds some of its worth. In order for cash to lose its value, the entire global economy would need to collapse. This makes cash the safest option however it receives no return.
No matter what investment you decide to chose, staying diversified is a proven way to lower risk and increase returns. Be sure to keep good records of all your investments so you can analyze your results and make more informed decisions later. What is your favorite investment? Let us know below!