8 Tips to Invest Without Too Much Risk
If you can’t stand the thought of losing money, you might be afraid to invest it. After all, the losses many people took in the recent financial crisis were scary. But you also know that keeping your money totally safe in a savings account or a CD that only earns 1% or 2% a year could be financial suicide.
A podcast listener I’ll call Jenny asked me what she should do with her money. She’s 28 years old, has worked really hard to sock away $100,000 in a savings account, but is disappointed with the terrible interest rate she’s getting. Jenny said, “The investment market kind of scares me. What’s the best way to get the highest return on my money without a high risk?” In this article I’ll answer Jenny’s question and give you tips to grow your money even if you hate the thought of taking investment risk.
What Investments Should You Buy?
When you get down to the heart of investing, there are two ways to make money: You can be an owner or a loaner. In other words, you can own assets that you expect to increase in value or you can loan money for a specified return. Stocks, real estate, gold coins, artwork, or your own business are all examples of investments you might own with the expectation that their value will appreciate over time. Investments where you loan money include buying bonds or making private loans to individuals or companies.
There are many ways to invest money outside of the financial markets. However, becoming a real estate investor or starting your own business requires a certain amount of expertise, time, and money—not to mention that selling those investments could take years. So, for most people, the financial markets offer the most convenient and economical way to put aside small amounts of money on a consistent basis.
8 Tips to Invest Without Too Much Risk
Consider these 8 tips to grow your money while keeping it as safe as possible:
Investment Tip #1: Outpace Inflation
For your long-term financial goals, like retirement or paying for a child’s education, inflation can really spoil things. Historically, it’s been about 3%, which means that if you’re only making 2% in a bank account or CD, your money is actually losing purchasing power. For most people, investing some amount of money in stocks or stock funds is the best way to keep up with inflation. Since stocks can go up or down in value at any time, they are the riskiest investments—but they also offer the highest potential returns and have consistently outpaced inflation since the 1940s.
Investment Tip #2: Diversify
Even though stocks can really turbo charge your investment returns, you can keep a lid on your risk by owning a broad range of investments—that’s called diversification. You can buy shares of funds that own real estate, bonds, and commodities, in addition to stocks, so you manage risk by spreading it out among multiple investments. That way, if one investment is a loser, you have other winners to count on.
Investment Tip #3: Consider Why You May be Risk-averse
According to a recent article in Money Magazine, the number of people under age 35 who are willing to put their money at risk has declined. It’s no longer the case that young people are more risk-tolerant than older people! The article reasons that young people who just started investing have only experienced turbulent financial markets, and therefore are soured by the idea of investing and keep most of their money in cash. It seems like Jenny, who is 28-years-old with $100,000 in the bank, may fall under this category. It’s important to remember that taking financial risks, including losing money on paper in the short-term, may be required to meet your long-term financial goals.
Investment Tip #4: Remember that Time Is Your Friend
A big part of making money grow is to take advantage of time. Twenty-somethings might shy away from investing these days, but they’re actually the most suited to own relatively risky investments like stocks. That’s because young people have lots of time to recover from market setbacks. The longer your time horizon, the less market risk is a factor. So if you’re waiting for significant signs of market stability or for the Dow to hit 14,000 before you start investing, that could be very costly. The longer you wait to invest, the more growth you miss. That’s because time is the secret sauce that allows your money to multiply, due to the long-term effects of compounding interest.
Investment Tip #5: Realize that Not Investing Is Risky
If you still don’t feel comfortable about investing your money, remember that keeping it in the bank by default is risky too. The reality is that we’ll probably need more money for retirement than we think because we’re living longer and will probably have reduced Social Security benefits in the future. I mentioned inflation earlier; if it gets out-of-hand, investing in stocks may be the only way to accumulate enough money to last as long as you live.
Investment Tip# 6: Make Appropriate Investment Choices
The markets have a massive selection of securities and funds that are just right no matter your appetite for risk.
Whether we’re talking about stocks or bonds, there’s a range of risk within each of those categories. For instance, aggressive growth stock funds are riskier than income stock funds. And poorly-rated, junk bonds are riskier than bonds issued by the federal government. So saying that the financial markets are just too risky is like saying there’s nothing to eat at the grocery store. The markets have a massive selection of securities and funds that are just right no matter your appetite for risk.
Investment Tip #7: Start Investing in Small Amounts
To gain confidence in your investments, don’t do anything rash. Start by choosing investments that have performed well over the past five to ten years and commit to buying small amounts on a regular basis. If you need help picking investments suited for your risk tolerance ask your benefits administrator at work, consult with your broker, or get ideas from an investing magazine like Money or Kiplingers.
Investment Tip #8: Don’t Monitor Your investments Too Closely
It’s easy to get spooked if you constantly obsess over your investments. If your goal is to build wealth over a long period of time, what your investments do day-to-day is largely irrelevant. Monitor your monthly or quarterly investment statements to stay on top of their performance, but remember that what really matters is how much they’ll be worth in 10, 20, or 30 years from now, when you need to spend the money. You want to see a trend of growth, but some years may give you temporary setbacks.
Jenny, thanks for your question and congratulations on accumulating such a nice nest egg before your 30th birthday! The best way to get a good return on your money without taking too much risk is to start early, diversify your investments, keep enough cash on hand for emergencies, and to consider turning to a financial advisor for help.
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By Laura Adams, MBA,