Safe Investment Options When You Can't Afford Losses

There are safe investment options available to investors that provide opportunities for some growth. These types of investments are important for those individuals who have a short time horizon (less than 5 years) and are looking to preserve capital as an investment objective. Investors who are nearing a life event such as retirement or funding a child’s college education are more likely to run to safer investments that provide some growth but are not as risky.

Risk Profile

When an investment account is established for an investor, a risk profile is determined. The risk profile allows an investment professional to determine which type of investment products are appropriate relative to an investor’s risk tolerance. Risk is ranked from low to high, with the end being an investor who is adverse to investment risk and high being an investor who is aggressive.

Investments are selected that are appropriate for the investor, after establishing the risk profile. Investment types including cash and money market instruments (i.e. treasury bills, commercial paper and certificates of deposit), debt instruments (bonds) and stock are ranked in terms of their possibility for loss relative to their investment return.

Cash and Money Market Instruments

Cash and money market instruments such as CDs are considered to be the safest type of investment. These investments offer safety of principal and liquidity and are appropriate for investors who are willing to forego returns in exchange for easy access to your money. This is important for retirees who need to protect their savings in order to fund retirement.

Bonds

Bonds provide more investment return than money market instruments. They carry a modest level of risk depending on the issuer. U.S. Treasury bonds issued by the government carry the lowest amount of risk among all bonds followed by municipal bonds and finally corporate bonds. The average returns for these 3 types of bonds rages from 5-1/2 to 6 percent.

Stocks

Stocks are considered the riskiest of investment types. They offer the highest potential return but are the most volatile in terms of potential for loss. A portion of an investor’s portfolio should include stocks in proportion to other investments. Using a strategy of diversifying investment and allocating assets in proportion to risk helps an investor achieve a target rate of return and minimize some of the risks inherent to all investments.

An investor who is looking for safety should examine their investment objectives, goals, time horizon and risk tolerance carefully to determine what mix of investments provides the highest potential degree of safety. Using asset allocation and diversification, a higher percentage of cash and money market instruments would be sought to protect the portfolio’s principal amount.

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