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Investment portfolios often include a mix of high- and low-risk investments. Riskier investments have the potential for bigger losses—but there's also the opportunity for larger gains. Low-risk investments, on the other hand, are seen as safer bets that typically pull smaller returns.
Both types of investments can help bring you closer to your financial goals. Below is a high-level view of what makes them unique, followed by a deeper dive into how they work.
|The Difference Between High- and Low-Risk Investments|
|Low-Risk Investments||High-Risk Investments|
|Characteristics||Returns are usually smaller, though it's unlikely you'll lose money.||These investments can lead to significant returns, but it's never a sure thing.|
|Pros||Their predictability can provide peace of mind; they can also balance your portfolio and protect against market volatility.||High returns can grow your wealth faster and also help you keep pace with inflation.|
|Cons||On their own, these investments probably won't do much to accelerate your wealth in a significant way.||The built-in uncertainty can be nerve-racking because there's a greater chance of losing money.|
What Are Low-Risk Investments?
Low-risk investments come with a certain amount of consistency. This can be reassuring for investors who have a tough time stomaching market volatility, but there is one caveat: Unlike high-risk investments, you're less likely to score big financial returns. Still, safer assets can help diversify your portfolio and hedge overall investment risk. That's important—if your portfolio consists solely of high-risk assets, you're more vulnerable to losses. Below are some examples of low-risk investments.
Bonds allow you to loan money to different government agencies, municipalities and corporations and then be repaid over time with interest. Series I bonds and U.S. Treasury Inflation-Protected Securities (TIPS) are particularly attractive because they're indexed for inflation, further protecting your investment.
A high-yield savings account provides plenty of liquidity and higher rates than traditional savings accounts. If you encounter a financial emergency, you should be able to access your money relatively quickly (though your bank may limit how many withdrawals you can make in a given billing cycle).
Money Market Accounts
For more flexibility in a savings account, a money market account might make sense. You'll earn interest on your funds, but you can also pull money out with greater ease—often with a debit card or check. There may be caps on monthly withdrawals, but rates are usually higher than traditional savings accounts and may meet or beat those of high-yield savings accounts, depending on the financial institution.
Certificates of Deposit (CDs)
Your money is tied up for the length of the CD, but when that period expires, you'll get your investment back plus interest. The catch is that you'll pay a penalty if you pull your money out before then. Generally speaking, the longer you give up access to your money, the higher the reward.
What Are High-Risk Investments?
High-risk investments can result in a potential payout, but no one can predict which investments will soar—and which will end up underperforming. Be that as it may, high-risk investments like stocks play a key role in long-term financial planning. Whether they're right for you depends on your risk tolerance, financial situation and unique goals. Here are some options to consider.
Over the last hundred years, the average annual stock market return has been around 10%. When buying stock in publicly traded companies, the idea is to buy low and sell high—but this involves a lot of guesswork. Going with exchange-traded funds (ETFs) and mutual funds, which pool together stocks and possibly other assets into a fund, can help mitigate risk. Instead of buying individual stocks, you can purchase smaller shares of different securities within a portfolio of investments. This allows for built-in diversification.
Crypto assets are known for their volatility, but it's certainly possible to score big here. Shares of Bitcoin were selling for around $210 in 2015. By November 2021, stock prices had skyrocketed to $69,000. That translates to a mind-boggling return for folks who held out and sold at the right time. But the thing about cryptocurrency is that things tend to fluctuate wildly and without much notice. Significant losses are more than possible.
Investing in Businesses
There are plenty of ways to dip your toes into business investing. Just be sure to do your due diligence as there's never any guarantee that a business will ultimately be successful.
- Angel investing: This typically involves a high-net-worth individual providing business guidance and capital in exchange for equity.
- Venture capital (VC) investing: Partnering with a VC firm or fund allows you to invest more heavily in startups. This route is often reserved for wealthy investors.
- Crowdfunding platforms: This can be a viable point of entry for everyday folks who want to make smaller investments in new businesses.
- IPO investing: Another option is waiting until a company goes public and investing during the initial public offering (IPO). Amazon's initial stock price was just under $2 in 1997. Today it's trading at over $3,100.
Investing in real estate can be both lucrative and risky. Buying investment properties usually involves a lot of upfront capital—and being a landlord isn't for everyone. Buying and flipping homes also requires deep pockets. With that said, those who have the funds and know-how could do well for themselves.
Real estate investment trusts (REITs) can be a safer, more cost-effective way to break into real estate investing. Instead of buying properties, investors purchase stock in companies that own real estate portfolios.
Which Type of Investment Is Better?
Both high-risk and low-risk investments can play a valuable role in creating a strong portfolio. High-risk investments can lead to bigger returns, while safer options help mitigate risk and provide more stability. This is precisely why diversification and asset allocation are so important. The goal is to spread your investments across different asset classes, industries, sectors and geographic locations. This can help soften the blow of investment losses.
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