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Risk-Free Investments: Do They Exist?

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risk-free-investments-do-they-exist
January 21, 2021|by Payback Team
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As we live through some of the most turbulent economic times in recent history, it’s totally understandable that more of us are looking for much safer places to squirrel away our savings, but are there any perfect risk-free investments out there, and how do we navigate today’s marketplace?

The Benefits of Investing

Whatever the state of the economy or the stock market, there will always be good opportunities to be found. Some of the benefits that you can reap include:

  • Enjoy compound interest – The longer you’re willing to invest for and ride out any market bumps, the more you’ll benefit from compound interest
  • It can provide tax benefits – If you invest in a 401K, traditional IRA, or SEP IRA, you won’t pay tax on the year you earned it. Bonds are another great choice because any interest you earn won’t be taxed at the federal level, and many states provide tax breaks too
  • It helps you focus on a goal and build wealth – Whether you’re planning a dream family vacation, making home improvements, or building a retirement pot, investing will keep you on track

What Are the Risks of Investing?

We need to caveat this section by saying you’ll never find a 100% non-risk investment. There are many financial advisors out there who might promise this, but the truth is, every type of investment will always come with some degree of risk, even if this is very small.

Before you make any financial decision, make sure you completely understand what might happen to your money should the worst happen. Some common pitfalls to watch out for include:

  • Market risk – If you invest in the stock market there’s no guarantee that you’ll make money. A company riding high one day can collapse the next; make sure to diversify your portfolio
  • Inflation risk – Some less risky investments might grow very slowly, meaning they’ll be outpaced by inflation, losing you money in terms of buying power
  • Liquidity risk – If you’re invested in assets like property or penny stocks, you’ll find them difficult to convert into cash. Don’t invest in these if you need money quickly

Types of Low-Risk Investments

Once you’ve weighed up the pros and cons of investing, opting for some less risky investments like the ones below is a great way to dip your toe in the water:

  • High-yield savings accounts – A very popular form of investment offered by most banks, and the closest you’ll get to a risk-free investment. Your savings are backed up by the government under the FDIC for up to $250,000
  • Savings bonds – Bought directly from the US Department of the Treasury, these are an incredibly safe bet, though they often coming with some measly returns. You also lose interest if you cash out early
  • Dividend-paying stocks – A little riskier than the above two options, but still a fairly safe bet. Offered by larger, more successful companies, you purchase shares with the promise of regular payouts
  • Money-market funds – Probably the best choice for those wanting to invest in the stock market. This is a diversified portfolio of cash and high-credit rating securities designed to provide a short-term return. It’s rare for this type of investment to fail, but it can happen

Can You Make Low-Risk Investments and Expect a Good Return?

Generally, the lower the risk of your investment, the lower your return. As detailed above, some of the least risky investments can struggle to keep up with inflation. In fact, many people take the low-risk route just as a way to consistently save money. This is best for those that aren’t looking for life-changing returns.

However, that doesn’t mean to say you can’t find options out there that don’t make at least a decent profit. You may be able to find some fixed-rate savings accounts and annuities that net you a good interest rate, but you shouldn’t enter into any of the investments covered here with unreasonably high expectations

Is It Possible to Reduce Risks With Fewer Options?

Rather than spread yourself too thin over multiple investments, you might be able to reduce your risk by focusing on just one or two very secure options. For example, you might want to try an S&P 500 index fund, which is a mixture of stocks covering the top 500 companies in the US.

Since the index was founded in 1957, it’s weathered every financial storm and recession, and offered consistent growth. If you’re able to commit long term, this sort of investment is the ideal option for those looking for a retirement plan and should create above-inflation returns.

What Else to Watch Out For When Investing

  • Fraud and scams – If a deal seems too good to be true, it probably is. Look out for shady organizations charging massive fees, pressuring you for up-front payments, promises of tax-free investments, and pyramid schemes. Make sure you thoroughly research any organization before you invest
  • Social and political factors – Recessions, pandemics, and government instability can all end up losing you money. This is just another reminder of the importance of having a diverse portfolio

How To Recover From Being Scammed

Luckily, many less risky investments, like government bonds and savings accounts, are heavily regulated, and as long as you keep your wits about you, there’s a very low chance of being scammed. However, if you’ve fallen victim to fraudsters, you do have some recourse to get your money back.

  • Credit/debit card refunds – If you paid for your investment using a credit or debit card, there’s a good chance you can recover your cash via a chargeback where your bank will request money back from the scammer’s account. Make sure you keep detailed records, documentation, and evidence of the scam to prove the malicious party failed to follow through on promises
  • PayPal refunds – If you funded your investment through PayPal, you can go through the platform’s resolution center, which has an advanced dispute mechanism
  • Notify the authorities – There are never any guarantees you’ll be able to get your money back, so we’d always advise taking the matter to the authorities. If the fraud occurred online<, the FBI has a specialist website you can use to report the crime. Depending on the scale, you may want to engage the services of an investment fraud lawyer, especially if you’ve been involved in a complex scam
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