Nothing in life is ever linear.
We experience ups and downs, highs and lows, successes and failures. But, each one of these seasons serves a purpose and it teaches us lessons that we can carry with us into the next chapter of our story.
These cycles of change exist everywhere, especially when we take a closer look at economic trends and the stock market’s history.
Sometimes the outlook is great.
Sometimes the outlook is not so great, but in the end, making the decision to participate and take a chance on your dream life is the most fulfilling part of the experience.
Though many people are scared to start investing because of its perceived risk, if you know how to invest your money well, every risk you take is guaranteed to come along with an equally rewarding opportunity. Making your first initial investment is the hardest step.
Many of our Rule 1 investors gravitate toward taking big risks in order to reap the potential rewards that may follow. However, there are many high-risk investments to avoid given the current economic climate, so it can be extremely beneficial to add a few low-risk investment options to your portfolio as well.
Let’s discuss the types of low-risk investments, the things you should consider before making low-risk investments, and the best low-risk investments that can put you on the path to a brighter financial future.
What are Low-Risk Investments?
Low-risk investments are stocks that only have a slight chance of losing money. Their growth is easy to predict, but the downside is their value does not increase as rapidly as the value of a high-risk investment.
We’ll cover the types of low-risk investments later in this post, but two common low-risk investments include bonds and Certificates of Deposits (CDs).
If you are new to investing and feel wary of investing a lot of money upfront, adding a few low-risk investments to your portfolio is a great place to begin.
Adding these relatively safe investments to your strategy will help you get experience in stock market investing while being able to rest assured that your contributions are generating returns that will help you grow your wealth.
What to Consider When Investing
Many people subscribe to the idea that investing is hard, time-consuming, complicated, and risky.
I’m here to tell you that as long as you stick to a few basic rules of investing, these assumptions could not be farther from the truth.
Once you learn the basic framework for how to invest like the best in the business, you’ll become an expert in knowing how to find and buy stocks in wonderful businesses on sale, how to generate consistent returns with low-risk investments and get your money off the table sooner.
Knowledge and understanding of the investments you wish to make are all you need in order to start generating more passive income.
Then, once you’ve done some initial research, you can determine the level of risk you feel comfortable putting your money into an investment that involves no risk, a low risk, or high risk.
Each of these tiers of investments comes with its own benefits and drawbacks, so be sure to spend some time determining which tier is best suited to fit your current financial needs.
After choosing how risky you’d like to be with your investments, the next step involves learning how to pick the right investing strategy for you. The five most common types of investing strategies include:
An income investing strategy focuses on buying securities that are paying dividends, such as dividend-paying stocks, mutual funds based on dividend-paying stocks, or bonds that produce steady income.
With impact investing, investors choose to consciously buy companies that are committed to positive social or environmental change.
If you’re hoping to see financial returns and give back to society by investing in worthwhile causes that you are passionate about, Impact Investing could be the avenue for you.
Growth investing is centered around investing in companies that you know are valuable in order to exploit their future growth.
When determining a growth investing strategy, you won’t have to look much farther than major companies like Facebook, Google, and Apple all have high PE (Price to Earnings) ratios and are rapidly growing every day.
It is important to keep in mind that growth investing can be very bad for your investment portfolio if you are buying into these companies at today’s valuations.
Small-cap investing is very similar to growth investing since it is also concerned with a company’s potential for massive growth.
The only difference with small-cap investing can be seen in the age of the company. Typically, investors will buy into younger, riskier companies with the hope that they’ll one day grow to the size and success levels of large companies like the “Google’s” and “Facebook’s” of the world.
This is a high-risk, high-reward type of investment strategy.
Last but not least, value investing is all about waiting to get the best price for the companies you’d like to invest in. It is all about buying companies when they go on sale and are listed at a price that is far below their true value.
Value investors buy companies that they know will produce cash flow in the long run when they are on sale for a discounted price. This makes value investing one of the best low-risk investments due to its ability to generate high returns without needing to spend much upfront.
In addition, building a smart investment strategy is just as important as picking a process for your strategy. When I mention smart investments I am referring to investments in:
Gold has tangible value, which is why many people gravitate toward it in times of fear and uncertainty. The price of gold rises and falls, depending on the demand.
Demand may go up when people feel afraid or uncertain about the future, but there’s no way to predict that an investment in gold will be worth more in the future than it was when you bought it. In other words, the value of gold will never be more valuable than the current demand for gold.
Investing in real estate can be a great investment since in many cases, its value increases over time.
However, there are some downsides. First of all, you need to have a significant amount of disposable income that you can use to successfully invest in a real estate property.
Plus, if you decide to take on the responsibilities of a landlord, you’ll be responsible for repairing any damages to your real estate property and responding to questions and requests from the tenants living there.
Setting aside money that you can use once you’ve left the workforce is one of the best personal investments you can make. That being said, the way you decide to invest in your retirement can determine how much value you’ll get out of your retirement plan in the future.
For example, there are times when opening a 401k is considered a smart investment and times when there could be better options available to you.
If your employer offers to match a percentage of your investment, for instance, this is a smart investment because you’re basically receiving free money.
However, if your employer doesn’t match your investment, it may be more advantageous to begin investing for your retirement on your own.
Stocks can be an incredibly smart investment if you do your research on the best stocks to buy. When you buy stocks, you benefit in two ways: from any increase in the price of shares of the stock, and from dividends that the company pays to its investors.
If a company continues to grow, your investment will grow as a result. It’s really a no-brainer.
Plus, it’s one of the best low-risk investments you can try.
The key to minimizing risks and maximizing returns with stocks lies in what we call the moat of safety, which refers to the process of buying companies on sale when their shares are selling at half the price of the company’s value. That sounds like a great deal, right?
If you learn how to invest in stocks this way, then it is the smartest investment you can make.
When thinking about the investment strategy that is right for you, there is one critical principle to always come back to: do not let the fear of what the market will or will not do control your investing strategy.
The stock market naturally cycles through periods of prosperity and destitution. The best thing you can do no matter the market condition is to weather the storm and continue moving forward.
As long as you do your research and stick to the Four M’s of investing when choosing new companies to add to your portfolio, you’ll be well on your way to reducing risk exposure and exceeding your fiscal goals.
Additional Types of Low-Risk Investments
As I mentioned, there are many different types of safe investments with low risk involved. And, although these investment options are less popular among Rulers, this doesn’t necessarily mean we avoid them altogether.
Here is a list of some of the best low-risk investments that you can easily add to your portfolio. Examine each one carefully to identify the investment accounts that will help you successfully reach your financial goals.
U.S. Savings Bonds
U.S. Savings Bonds are backed by the federal government. This makes them a very stable investment since there is not a high chance of default.
These bonds are classified into Series I and Series EE bonds.
Series I bonds include a fixed interest rate return and an adjustable inflation-linked interest rate return. The fixed-rate always remains the same, whereas the inflation return rate changes every six months.
Series EE bonds, on the other hand, have a fixed interest rate that gets applied to the bond at the end of every month.
Personally, I feel that bonds can be relatively safe investments if you’re scared to lose money. However, investing in the stock market will increase the value of your investment and help you make money faster over time.
Certificates of Deposit
Certificates of Deposit (CDs) don’t see a lot of action and this is what makes them one of the best low-risk investments.
When you invest in Certificates of Deposit, you agree to keep your money in a specific account for a designated period of time (of your choosing) in exchange for a guaranteed return that is independent of and unaffected by changes in interest rates for the duration of that time period.
Plus, your financial institution will pay interest on the CD for the predetermined length of the CD. So, the longer the term of your CD, the more you’ll earn.
At Rule 1, we think CDs are one of the easiest low-risk investments you can take for a test run. They don’t require you to be actively involved in the investing process, and as long as you have the time, they are a long-term investment that will provide you with a healthy payout once the terms of the CD have elapsed.
High-Yield Savings Accounts
If you’re not earning extra money through an online savings account, then you need to open one immediately because you are missing out on free money.
Money in a savings account automatically earns interest—or more value (money when you think about it tangibly) that you pocket just for keeping your savings account active.
If you make just 1% interest on your savings annually, you have $100,000 in your account. Within just one year of building interest on your current savings, you’d earn an extra $1,000 in interest alone.
And, it gets even better. Because compound interest builds upon itself to give you the most value for your money, the next year you would earn an additional 1% on the total from the year before (the original amount of money plus the interest that was earned the previous year).
This cycle then continues every year.
Plus, high-yield savings accounts are federally insured and earn rates that are much higher than the national average. This means that a minimum investment in a high-yield savings account will go even further since rates start at 1.5% APY.
This is the easiest money you’ll ever make. Opening a few traditional savings accounts and high-yield savings accounts will give compound interest the power to reward you for how much you’re putting away for a rainy day.
Dividend stocks are distributions of a company’s earnings to its shareholders. The rate of the distribution is determined by the board of directors and can be in the form of cash, stock, or property. It is the money the company pays out to its shareholders in cash.
At Rule #1 Investing, we think of dividend stocks as a return on capital instead of a 2-3% return on our investment each year.
In other words, the goal is to lower our stock market investment risk each year by receiving dividend payments to reduce our basis. Our basis is directly correlated with the risk of owning that business, so if your basis goes down, so does your risk.
And there you have it!
Dividend-paying stocks are one of many other low-risk investments that could be worth exploring.
Money Market Accounts
A money market fund falls within the same family of savings accounts as high-yield savings accounts. They are essentially interest-bearing accounts that you can open through your bank.
The major difference between a money market account and a high-yield savings account, however, is money market accounts often also have some features of a standard checking account—such as a debit card or a checkbook—whereas high-yield savings accounts do not.
The upside to a money market account is you may not lose much when day-to-day fluctuations in the market take place, but with a money market account, you also may not earn as much interest on your investments either.
A mutual fund is an account that combines assets like stocks, bonds, money market accounts, and more into one portfolio that is managed by a financial expert.
Essentially, mutual funds provide investors with a great opportunity to access and view professionally managed portfolios of a number of different securities.
Personally, I don’t believe it’s necessary to invest money in a mutual fund. In many cases, you are essentially just paying a fund manager to oversee your accounts, which is something that you could easily be doing yourself.
The financial services industry has convinced many of us that we are not equipped with the knowledge or expertise to manage our own money, but the reality is even most advisory or brokerage services can’t beat the market.
The long-term performance of the industry speaks for itself and it tells us that it is far more advantageous to manage our own money than to leave it in the hands of others.
Treasury Bills, Treasury Notes, Bonds, and TIPS
All of these investments are options that are provided by the U.S. Treasury. Once again, because these treasury bonds are supported by the federal government, that makes them one of the safest bets.
One of the lowest risks in this category is Treasury Inflation-Protected Securities, also known as TIPS. Treasury Inflation-Protected Securities come in two different forms.
The first interest rate is fixed so it doesn’t change for the length of the bond and the second is guaranteed by the government to have built-in inflation protection.
This is beneficial since the market value of your investment will continue to grow with inflation, earning you a higher overall return.
Fixed & Immediate Annuities
An annuity is an insurance contract that is issued and distributed by a financial institution that plans to pay out invested funds in a fixed income stream in the future.
Essentially the way this works is that you’ll invest in or purchase annuities through a series of monthly payments. Then the bank will issue a stream of payments (a lump sum of money invested) that is intended to cover your monthly income for a fixed period of time or for the remainder of your life.
Additionally, annuities can be fixed (the rate of return remains the same) or immediate (the rate of return is variable).
With fixed annuities, an insurance company will typically give you a specific payment that is due in the future. Then you’ll invest that money in safe vehicles, like U.S. Treasury securities or corporate bonds.
Variable annuities function a little differently. In this instance, you choose a portfolio of mutual funds and the insurance provider will invest in that portfolio.
Then you’ll receive a payout (either on a fixed timeline or based on the account’s movement) that is determined by taking a closer look at how well the funds perform.
The benefit of an annuity is you are receiving a guaranteed rate of return, and because of this, the risk involved will be much lower. Additionally, annuities are backed by the insurance company (or companies) that issue the annuity, and though these companies do not offer the same type of protection that federally backed investments do, they have still proven to be incredibly secure.
Annuities seem simple, but the truth of the matter is, that they are much more complex than they first appear.
If you’re planning on saving for retirement, for instance, relying on annuities to do so will not cut it. This is because annuities are policies that provide guaranteed income every month for the rest of your life.
However, annuities do not account for changes in inflation, so you’ll actually be losing about 3% of the buying power of your annuity income every year, making it much more difficult to live comfortably and within your means, once you decide to hang up your corporate coat.
Remember, High Risk = Big Reward
As a new investor, if you feel fearful of what could happen to your money, starting with a low-risk investment could help you build the confidence that you need to slowly build up to making the decision to buy into a high-risk investment.
However, although low-risk investments provide a better level of safety and security, they won’t raise money and produce the same big returns that can often come out of taking the chance to put your money into a high-risk investment.
The higher the risk, the bigger the reward.
But most importantly, in order to grow your wealth, it’s imperative that you research investment markets and put your money into wonderful companies whose products and services are projected to become invaluable and whose leadership will continue pushing for continued growth well into the future.
So, what do you think? Will you add a low-risk investment to your portfolio? Or does the thrill of a high-risk, high-reward investment sound more appealing?
No matter what you decide, you’ll want to download my Must-Have Investing Checklist before you start investing using your new strategy. This checklist is the ultimate to-do list for Rule 1 investors, just like you, that are looking for a wonderful business to put their money toward.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.