FAQs about Safe Investments
FAQs about Safe Investments
Are you interested in investing? Relatively new in the investing world that you are still researching and learning more about it? Perhaps you should start with safe investments!
Here is the list of frequently asked questions that will hopefully help you get a good grasp of what safe investment is all about.
1. What exactly is a safe investment?
2. Is safe investment only for beginners?
3. Are safe investments really safe?
4. Will I gain from safe investments?
5. What are the examples of a safe investment?
6. How will I know if it is a safe investment?
7. What are the pros and cons of safe investments?
01. What exactly is a safe investment?
A safe investment is a general classification used to describe investments that are low risk and has predictable returns.
In the spirit of full disclosure, it is challenging to select one investment that is clearly the safest due to the number of possibilities on the market and the unpredictability of the economic climate. But through risk evaluations and measurements, it becomes possible to identify certain investing categories to be far riskier than others. And those that are less risky are the ones considered safe investments.
02. Is safe investment only for beginners?
No, safe investments are not only for beginners. In fact, it is recommended for every investor to have safe investments in their portfolio. Furthermore, as shown in the risk pyramid, the base or the foundational structure which composes the investments with the lowest risk should compose most of the investment resources. This is to safeguard the whole investment portfolio and to strike a balance among the mid and high-risk ones.
While safe investments are not only for starters, but it is also encouraged for them to start with safe investments before going with the riskier decisions. Through this way, they will be able to build a portfolio with secured bases in case unfavorable conditions happen in the volatile financial markets.
03. Are safe investments really safe?
This can be answered in two manners – first in comparison with other types of investments, and second is in the lens of safe investments per se.
When compared with the other type of investments, say those on the middle and summit of the risk pyramid, safe investments are safer. The risks are more minimal, and it is more guaranteed to receive your capital in full amount, not to mention the gains that you can receive regularly.
Now, when we look at a safe investment, it still carries a few risks with it. One example is the risk of inflation. This refers to the risk associated when the price of products and services rises faster than expected, or when the same amount of money has less purchasing power. This is mostly inherent with Certificate of Deposits (CDs) and high-yield savings accounts because the growth in the money during the period it was deposited may not have enough value to buy the same goods before, because of the inflation.
Another risk associated with safe investments per se is the changing interest rates. There are several factors affecting an individual interest rate such as the following:
• Real Risk-Free Rate of Interest. This pertains to the nominal risk-free rate that would exist if there was no expectation of inflation.
• Default Risk. This risk carries the possibility that the security issuer will default on the security by failing to make interest or principal payments on time or at all.
• Inflation. This is an economic event wherein the price level of a basket of goods and services continues to rise.
• Liquidity Risk. This refers to the concern that the security will not be able to be sold at a predictable price and with minimal fees on short notice.
• Term to Maturity. This is the amount of time a security has until it reaches maturity.
• Special Provisions. This pertains to certain provisions, may it be within the financial institution only or industry wise or from legislative, that have a positive or negative impact on the security holder and are reflected in interest rates.
04. Will I gain from safe investments?
Definitely. One characteristic that defines a safe investment is the foreseeable returns it can yield for the investor. You can trust that. However, it is important to take into consideration that the gains will not be that high, especially as compared with other, riskier investments.
This is consistent with the concept of risk-reward trade-off. According to the risk-return trade-off, the rate of return on investment (ROI) should rise as the level of risk rises. And thus, contrary to this, the low level of risk save investment has should be equivalent to a low rate of return.
05. What are the examples of a safe investment?
Common examples of safe investments are those backed up by Foreign Deposit Insurance Corporation (FDIC) such as savings accounts and Certificates of Deposit (CDs). Given the limitations on the interest rates offered by these banks, investors should look for those with high yields, offering higher interest rates than the competitors. More examples of safe investments include U.S. Treasury bonds, bills, and notes, Treasury Inflation-Protected Securities or so-called TIPS, money market accounts, and money market funds. Should the investor be also considering stocks, preferred stocks are safer than common stocks.
06. How will I know if an investment is considered safe and low risk?
Investment is generally considered safe and low-risk under the following conditions: (1) it is issued and governed by a trusted financial institution regardless of whether it is private or government-based, (2) it is secured by the Foreign Deposit Insurance Corporation (FDIC), and (3) it does not promote a high rate of return on investments (ROI). These three conditions are not an exhaustive list though as these are just the most observable characteristics of a safe investment.
07. What are the pros and cons of safe investments?
The pros of safe investment include the safety it provides, in comparison to other investments. More pros include the positive impact this gives to the investor’s portfolio establishing its good and robust foundation and the option to have a short-term and long-term investment, depending on the term to maturity of each. On the other hand, the cons this carries is the low rate of return on investments (ROI) which also slows down the growth of the assets invested. As a result, it will take time before the accumulated gains and profits will be felt by the investor because of the slow returns if the investors shall only focus on safe investments. To address this, it is encouraged to start investing in funds with a relatively higher risk once you already have a good grasp of how the market works, in an effort of diversifying your portfolio.