Invest without risk: is it possible to invest without risk?
Can you invest without any risk? In this article, you’ll discover whether you can invest money without any risk!
Can you invest without any risk?
Unfortunately, it’s not possible to invest without any risk. If a party claims that you can invest without any risk, it’s best to run away as fast as you can. Risk and return are always interconnected. The following rule generally applies:
- If you want a high return, you must take a high risk.
- If you want a low risk, you must accept a low return.
The only way to invest truly risk-free is by using fake money to invest. You can do this by opening a demo account, which is a great way to practice investing. If you’re interested in where you can invest using a demo account, check out the overview of demo accounts:
Avoid all risk?
Many people are so afraid of loss and risk that they avoid investing altogether.
Unfortunately, you’re almost guaranteed to lose money with a savings account due to inflation. Prices increase by a few percent every year, causing the money in your account to be worth less and less over time. The only way to achieve a return is by investing.
Where can you invest with low risk?
Investing without any risk isn’t possible, but you can invest with relatively low risk. In this part of the article, we’ll discuss some investment options with relatively low risk.
Certificate of Deposit (CD)
If you want to take on little risk, you can deposit your money in a CD. A CD is a type of savings account where you receive a fixed interest rate for a longer period of time. You choose a period during which you cannot access the money. With a longer period, you earn a higher interest rate.
Government Bonds
Even government bonds have the reputation of being risk-free. With a government bond, you lend money to a government. Due to the low risk, you receive a lower interest rate on government bonds than on corporate bonds. The chance of not receiving interest is small, especially when you choose a stable government like the United States.
However, an investment in a government bond is not without risk. Bond prices fluctuate significantly. When interest rates rise, you will see existing government bond prices fall. Your interest payments are still fixed during that period, so you lose money if you do not sell them in the meantime. Do you want to learn more about bonds? Click here!
Precious Metals
Investors who want to invest money without risk often choose precious metals. Precious metals such as gold and silver are especially popular and often rise in value when there is economic and political unrest.
However, investments in gold and silver are far from safe. For example, precious metals are listed in dollars, which means you will face exchange rate risk. Precious metals can also fluctuate significantly in value, which means you can still lose part of your investment.
Defensive dividend-paying stocks
A last category often chosen by investors who want to invest without risk are stocks that pay a stable dividend. Stocks of large companies that pay a fixed dividend year after year are relatively less risky.
However, investments in these types of companies are not free of risk; even very large publicly traded companies can go bankrupt. In addition, companies may stop paying dividends when the stock market climate worsens. This happened, for example, in 2020 with Shell; due to the sharply declining oil price during the corona pandemic, they were no longer able to pay a stable dividend.
ETFs
A good option for people who want to invest without risk are ETFs. An ETF is a type of fund that invests in sometimes thousands of stocks at once. In the short term, you can still lose a lot of money with ETFs. However, in the long term, you can build a nice, stable fortune with ETFs. Do you want to know more about ETFs? Click here!
Real Estate
A final category that is sometimes seen as risk-free is real estate. When you buy an apartment, you can generate a fairly stable and certain rental income. However, this does not mean that real estate is risk-free: you can, for example, be faced with vacancy or new regulations.
Diversification & Time: Essential for Risk-Free Investing
Ultimately, your risk is determined by two factors:
- Probability of risk: what is the likelihood of a negative event occurring?
- Impact of risk: what is the impact of the risk on your investment?
For example, the probability of a stock price decline in the short term is high, but the impact for a long-term investor is small. The probability of a company going bankrupt and the stock becoming worthless is small, but the impact is significant.
You can reduce your risks by reducing the impact and probability of your risks.
Reducing Probability of Risk
You can reduce the probability of risks by applying dollar cost averaging. This involves buying securities at a fixed amount periodically. When you do this, you buy securities at both high and low prices, and can achieve an average return.
Reducing Impact of Risk
The impact of bankruptcy is enormous: your stock is then worthless. If you invest in only one stock, you would lose your entire investment. If you invest in ten or even a hundred stocks, it’s a different story: you would then only lose a small part of your investment. Therefore, diversify your investments as much as possible across:
- Various sectors
- Various investment products
- Various regions
How to Invest Money without Risk? 6 Tips
Tip 1: Examine the party you want to invest with
Not all brokers and parties are equally reliable. Investors lose billions of dollars each year to unreliable parties. Therefore, check whether the party you want to invest with has an official license and whether it is well-reviewed. Want to know where I invest? Check out my favorite brokers.
Tip 2: Avoid Guaranteed Returns
Some providers offer guaranteed returns, but this does not exist! Therefore, avoid too-good-to-be-true promises. Investing is risky, and risk and return are always correlated.
Tip 3: Research the Past
Funds like to show off nice returns, but sometimes do so selectively. Always investigate how an investment has performed over a longer period of time. For example, many funds exclude the disastrous year of 2008. Also, don’t forget that “past performance is not indicative of future results.”
Tip 4: Invest According to a Plan
Don’t start investing before you have a good plan in place. What is your investment goal, how much money do you want to invest, and what risks do you want to take? By first establishing a risk profile, you can avoid unpleasant surprises.
Tip 5: Control Your Emotions
One thing is certain: you will be disappointed. Especially in the short term, investments can perform poorly. Many new investors make the mistake of reacting immediately: for example, they try to time the market and lose a lot of money as a result. Read more about how emotions can affect your investments here.
Tip 6: Take the Time to Compare
It is important to take sufficient time to compare different investments and brokers. This allows you to select an investment style that suits you and that you can stick with for the next few years.
Tip 7: Invest for the Long Term
It is important to remember that investment risks decrease over the long term. For example, stocks are very volatile in the short term. In the long term, however, the economy tends to grow: by shifting your focus to the long term, you also increase your chances of a positive investment result.
Tip 8: Invest wisely
If you want to invest with low risks, it is wise to invest regularly. This way you can avoid investing your money only at the top of the market. It is also important to invest only with money that you can truly afford to lose. This way you can invest without the risk of getting into real trouble.
Tip 9: Evaluate Your Investments
Finally, it is important to regularly evaluate your investments. See if the decisions you have made are paying off. If not, it may be wise to change your approach. After all, Einstein already said, “insanity is trying to do the same thing and expect another result.” So don’t be a donkey, accept that you are wrong and look for a better solution.
Conclusion: invest without Risk
If you read about a strategy on the internet that you can use to invest 100% risk-free, ignore the site and stop reading! Investing without risk with real money simply doesn’t exist.
When you start investing, you will quickly discover that risk and return are connected. Speculative investments offer higher potential returns, but also higher risks.
In fact, there is a spectrum of investments, with bonds being relatively safe options and derivatives being very risky. Which method of investing is best for you depends entirely on your risk tolerance.
Frequently Asked Questions about Risk-Free Investments
Unfortunately, investing without any risk is not possible when using real money. Investing and risk are inseparably linked. However, as a new investor, you can choose to invest risk-free with a demo account. This way, you won’t lose any money, as it’s just a practice account.
Many people seek a way to invest their money completely risk-free. This is understandable, since losing money is never a good feeling. However, risk and return are inevitably linked. The reason you receive a return is that you take on the risk of losing a significant portion of your investment.
Did you know that not investing is also risky? Inflation causes the prices of all products to rise every year. The interest rate on savings accounts is not high enough to compensate for this. Therefore, if you don’t invest, you’ll guaranteed to lose money. If you do invest, at least you have a chance of achieving a positive result.
You should keep in mind that the focus of investing should not be on avoiding risk since investing without any risk is an illusion. Instead, the focus should be on investing with the lowest possible risk.
Another technique for reducing the risk of losses is hedging. With hedging, you look for securities that have a negative correlation. This means that when one security tends to rise, the other security tends to fall. For example, you can simultaneously invest in the US dollar and the price of gold. When the economy is struggling, people often flee to gold, and the price of gold rises while the dollar falls.
If you invest in stocks, you can buy stocks from cyclical and anticyclic companies. Cyclical companies perform well when the economy is growing, while anticyclic stocks perform well when the economy performs poorly.
Risk-free investing is still not possible, but a stop-loss can at least limit the risk. First, check whether the stop-loss offered by the broker is guaranteed. With some brokers, the price can still drop significantly if the stop order can’t be executed immediately.
A stop order automatically closes your investment position when a certain loss is reached. This way, you can manage your investments well even when you’re absent.
Auteur
Over Alex Mostert
When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing trading.info for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click here to read more about trading.info! Don’t hesitate to leave a comment under this article.
