Are you looking to invest? If so, one of the most important decisions you’ll need to make is how to allocate your capital. While some investors are comfortable with taking on a chunk of risk, for risk-averse investors, safety and stability is usually more important
In this article we’re taking a look at safe investments, and asking ourselves whether there really is such a thing. Keep on reading for all of the details, or click on a link to head straight to a section…
What are safe investments?
First things first, there’s no such thing a 100% ‘safe’ investment. That’s because when you put your faith into an asset class, there’s always a risk your investment will fall in value. However, while it’s impossible to eliminate all risk, there are investments that are deemed less risky than others.
Examples of safe investments
Let’s take a look at three investments that are considered relatively safe.
- Government Bonds. Also known as ‘gilts’ in the UK, if you buy Government bonds you’re essentially lending your money to the state. In return, you can expect a steady, if unspectacular, return on your capital. However, this isn’t guaranteed by any means, as yields can rise in the future. (When bond yields rise, prices fall). Government bonds come in different maturities and can be purchased through an investment broker. However, do be aware that for the last few years these bonds have performed very poorly and cannot really be seen as the safe investment it used to be. It’s worth reading up on the current situation here in Investopedia and here from Tim Price, for example.
- Investing in blue-chip companies. Blue-chip investing refers to buying shares in established organisations with proven business models. Blue-chip companies are usually highly profitable, though often have a high share price to begin with. If you’re interested in learning more, take a look at our article which explores the pros and cons of blue-chip investing.
- Annuities. An annuity is essentially an insurance contract. If you buy an annuity, you’ll receive an ongoing guaranteed income. This will either be paid to you for a fixed term, or for the rest of your life. While this may seem straightforward and risk-free, annuity rates can change. So if you buy an annuity today, you’ll miss out if rates rise in future. This is why buying an annuity isn’t risk-free. Contrary to popular belief, you don’t have to buy an annuity with your pension pot. You can buy one from your investments or savings if you wish. However, in order to buy an annuity in the UK you must be at least 55 years old. This is rising to 57 from 2028. To learn more, take a look at our article that explains annuity rates.
A note on savings accounts
When it comes to managing your wealth without risk a savings account may be the first thing that comes to mind. After all, interest rates on savings accounts have risen a lot over the past 12 months or so, and there’s zero chance you’ll get back less than you put in (as long as you have less than £85,000 saved, and you deposit cash into a bank with FSCS protection).
Before you consider opening a savings account, however, it’s worth bearing in mind that savings rates still pay nothing close to the current rate of inflation – even on fixed accounts. So, while you won’t technically lose money in a savings account, the real terms value of your wealth will decrease. This is why savings accounts shouldn’t really be considered a ‘safe investment’ at the current time.
What are the benefits of safe investments?
It almost goes without saying but unlike high-risk investments, safe investments have a low probability of losing value and can offer stable, predictable returns. It’s why safe investments are often to go-to for investors looking preserve their capital.
Besides investors who have a low tolerance for risk, safe investments are also popular with those nearing retirement. This is understandable as investors nearing retirement are typically older. This is an important factor to take into account as older investors are unlikely to have the appetite to risk wealth by holding volatile assets – especially if they’ve a desire to cash in on their investments in the near future.
What are the drawbacks of safe investments?
The most obvious drawback of playing it safe when investing is that returns are rarely extraordinary.
Take cryptocurrency for example. Buying digital coins is arguably the riskiest investment out there due to the lack of intrinsic value. Yet if you bought Bitcoin 5 years ago, you’d have earned yourself a hefty 109% return. That’s even after taking into account Bitcoins huge 43% fall in 2022. Likewise, Ether has climbed a similar 93% over the past half decade.
Compare these returns to the 12% delivered by the blue-chip FTSE 100 index over the same period, and it’s easy to see how risk taking investors can be lavishly rewarded.
The same goes for investing in emerging markets. While this sector had a bit of a mare last year, annual returns when investing in companies with high growth prospects can often go into double figures, especially when the global economy is booming. In contrast, double-digit returns for investing in blue-chips or buying Government bonds is less common.
Aside from the reduced probably of earning big returns, another major drawback with safe investments is that there are still no guarantees you’ll avoid a loss. Take the bond market for example. Despite UK Government bonds being considered one of the safest asset classes out there, in 2022 they suffered one of their worst years on record.
This came as a surprise to many, especially when you consider the bond market usually has an inverse relationship to the stock market. Let’s not forget that stocks and shares also had a year to forget in 2022.
Ultimately, the lesson from the bond market’s performance last year is that safe investments don’t always perform as you might expect. ‘Low’ risk doesn’t mean ‘no’ risk.
Is it a good idea to play it safe?
Your investment goals, time horizon, and personal tolerance for risk are ultimately the biggest factors that should determine whether you should eer on the side of caution when putting together you portfolio.
However, it’s always worth bearing in mind that diversification is key to any investment strategy, including one that prioritises safe investments. A well-diversified portfolio can help you mitigate overall risk, which is arguably more effective than sticking solely to safe investments.
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Disclaimer: MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.
Seems to be sensible sound advice to follow, that nothing in life is without risk of some sort or another! If you haven’t money to afford to risk losing, be really careful and cautious in other words!