Which Investment Type Typically Carries the Least Amount of Risk?
Anyone who’s sought out investment opportunities has likely come across some version of the same word of caution: every investment involves risk. This phrase is usually included in disclaimers on conventional financial investment options, and with good reason. Every investment includes some level of risk that the investor might lose money. Stock prices may fall below what one paid for them; real estate ventures may fail to generate a return.
Every investment runs the risk of not panning out. There are varying degrees of risk, however, and some investments are often considered safer than others. The investment type that typically carries the least risk provides more safety for jittery investors, but this sense of security often comes at the expense of returns. This doesn’t always have to be the case: there are a few investment opportunities that carry lower risk than their peers in terms of performance.
Savings, CDs, Money Market Accounts, and Bonds
There’s a wide spectrum of risk thresholds for investing. Some that are considered the safest also generate the least interest (or returns). The investment type that typically carries the least risk is a savings account. CDs, bonds, and money market accounts could be grouped in as the least risky investment types around. These financial instruments have minimal market exposure, which means they’re less affected by fluctuations than stocks or funds.
At the same time, these investment options also come with much lower returns than other investments that are less risk-averse. Current interest rates for savings accounts hover at less than one percent—a paltry return compared to a diversified portfolio tied to the Dow Jones Industrial Average, which measures the general performance of the NASDAQ and New York Stock Exchange.
Bonds are somewhat different from the aforementioned accounts, as they provide a set interest rate on the money contributed after a certain period of time elapses. For example, a person could buy a municipal bond with a date ranging from 1 to 30 years. At the end of the bond’s term, the buyer receives their money back plus interest.
In other words, these options are by far the most risk-averse, but also offer significantly lower returns than other investment types—even those that might themselves still be relatively conservative. Savings accounts and bonds play important roles in a robust personal finance strategy, but should rarely be the sole focus for investors who want to make real returns.
ETFs and Mutual Funds
Investors willing to tolerate more risk in exchange for better returns can look toward ETFs, index funds, and mutual funds for opportunities. These products offer investors partial ownership of a portfolio of stocks, bonds, and other securities that are divided between each of the participants. Mutual funds are managed by a portfolio manager that makes decisions to buy and sell assets within the fund to accomplish certain goals. Mutual funds can be open-ended, where investors can continue to contribute to the fund for an indefinite period; or closed-end, where the fund is designed to pay out at a future target date.
Similarly, Exchange Traded Funds (ETFs) also offer similar investment opportunities, but they are bought and sold on stock exchanges instead of through brokerages. ETFs, unlike mutual funds, are not actively managed—this means lower fees for investors. Many ETFs take a broad swath of a market, sector, or industry, which provides strategic opportunities for revenue. At the same time, ETFs also trade out poorly performing stocks often, which helps minimize risk.
Low-Risk Stock Opportunities
Stocks play an important role in a balanced, competitive portfolio. Some stocks get more attention than others because of their valuation or outsized returns, but run the risk of losing steam (or, worse yet, having their bubble burst). Other stocks may not boast the same gains, but provide a steady rate of return each year on average.
Direct stock ownership elevates the risk-reward dynamic by exposing investors to more risk, but substantially higher returns if their portfolio of stocks perform well. A conservative investor should consider long-standing industry leaders, blue chip stocks, and other stocks that have a track record of steady growth. Although high-flying stocks that garner headlines may seem like a compelling option, they’re rarely a good choice for risk-averse investors. It’s better to go with less exciting options by way of established companies with a seasoned history of generating positive stock growth.
Low-Risk Alternative Investments
Alternative investments can offer several opportunities for risk-averse investors to find value. Some well-known commodities, such as gold and other precious metals, are regarded as safe harbors for investors that want to pull money from the stock market during volatile periods. Depending on one’s asset allocation and long-term strategy, purchasing real estate, participating in real estate investment trusts, or even purchasing fine art can all offer strategic advantages from a risk perspective.
Farmland investing also offers the opportunity to maximize returns while minimizing risk. These investments offer the upside of stable farmland values, recurring revenue from crop sales, and returns that beat other low-risk alternatives significantly. With FarmTogether, investors get access to unique investment opportunities with farms from across the country, in addition to a host of different kinds of crops.
How to Mitigate Risk Without Sacrificing Returns
Balancing your appetite for risk with the desire to maximize returns is the perennial challenge for nearly every investor. No one wants to take on risk for the sake of it, but few investors would say they’re happy to leave money on the table by being overly cautious.
Though striking this balance is different for every investor, there are some options out there that can maximize upside without taking on the same amount of risk as other, similar investors. FarmTogether does just that: with our portfolio of carefully selected farmland investment opportunities, a team of professionals to help guide you through the investment process, and a track record of successful ventures, we can help you maximize returns without creating unnecessary risk exposure.
To make the most of your portfolio, learn more about what sets FarmTogether's investment strategies apart. If you’re ready to get started, sign up today and to get paired with an investment advisor.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.