Investing With Minimal Risk

Jamie writes in:

I’m twenty eight years old and am now debt free. I’d like to start investing, but I have almost no tolerance for risk. I don’t mind not earning a great return because of this, but the thought of losing any of my investment makes me feel very uncomfortable. Any suggestions?

Before I begin, it’s worth noting that if you look only at extremely low-risk investments, you’re going to forego very nice returns in other investments. Most investments that include a significant amount of risk – like stocks, real estate, precious metals, and so on – are intended as long term investments. Yes, they lose significantly over short periods, but over longer periods (more than ten years), most of these investments do quite well, significantly better than investments with low risk. Low risk, low reward, after all.

It should also be noted that all of these investments – any investment that you might make – does have a number of risks. Even holding cash in your hand has risks. Inflation is a risk – over time, dollars become worth less than they used to be. Economic disaster is a small risk – look at what’s happened in Iceland and Zimbabwe in the last year. Investment house failure is another small risk, though virtually all of your investments will be insured.

That’s not the question that was asked, however. The big question here is how to invest with minimal risk. I see four distinct avenues for this that are available for most people.

Treasury notes These are basically direct investments in the United States federal government. You can buy these directly from the government at TreasuryDirect.

When you purchase a treasury note (or treasury bond, as they’re called for terms longer than ten years), you pay a certain price (set at auction) for a note that has a face value and a coupon rate. Each year (it’s actually split into two payments, paid every six months), you’re paid out a percentage of the face value (the percentage is the “coupon rate”). At the end of the time frame of the note, the government will pay you that amount.

So, let’s say there’s a ten year treasury note for $10,000 available with a 2% coupon rate, and you can buy this note for $9,800. Every six months, the government would pay you $100 during that ten year period, totaling $2,000 in payments, and at the end, you’ll get the $10,000 back.

These are about as safe an investment as you can get – if these start to fail, there’s going to be a global economic meltdown beyond comprehension. However, they typically don’t earn a great return – it’s usually something just a bit higher than whatever inflation is at the moment.

Alternately, you can invest in TIPS, which are much the same, except (in effect) the coupon rate is recalculated regularly to take inflation into account. These generally just barely match inflation, but often sell for rates higher than their face value (you’ll have to pay more than $10,000 to get one with a $10,000 face value).

Cash Another safe thing to do with your money is to simply keep it as cash. Put it in a high-yield savings account (below the amount insured by the FDIC – currently $250,000) and just simply let it earn interest over time. Online savings accounts tend to vary their rates based roughly on the actions of the Federal Reserve, and since the Reserve has their rates very low right now, online accounts aren’t earning particularly well – 2% to 3.5% is pretty expected. However, if the Fed begins raising rates, many of those banks will begin raising their interest rates, too, up to the 5 to 6% that was once reasonable to expect back in 2006 or so.

Efficiency and self-sufficiency Many people who are concerned about the long-term safety of financial investments are trending towards investing in long-term self sufficiency and efficiency. This would basically involve improvements to your living situation so that you’re not reliant on basic services provided by others: electrical self-sufficiency, food self-sufficiency, and so on.

Some examples of this include buying a home in a rural area, installing a well or a sand point for a renewable water source, installing solar panels or a wind turbine for renewable energy for yourself, setting up a greenhouse and perhaps some micro-farming facilities for self-sustaining food sources, and so on.

If this has appeal to you, many people who are adopting this mode of operation are currently selling their surplus production at farmer’s markets or directly to grocery stores or selling excess energy back to the electrical grid. This creates something of a profit on the effort in the short term, subsidizing the capital investments. Plus, with such self-sustaining materials around you, you won’t be spending much at all on regular bills.

Yourself A final route to consider for investment is investing in yourself. What sorts of self-improvement (that would help your career or earning potential) could you make? Perhaps it’s worth investing in dental work. Perhaps some continuing education might be worth your while. Perhaps you need to update your wardrobe a bit.

All of these areas lead directly to some sort of financial return without much risk.

However, there is something else worth considering. It won’t lead directly to financial return, but it is a worthwhile use of your money. Charitable giving. You always have the ability with your money to help bring about profound positive changes in the lives of others.

Hopefully, you’ve now got some things to chew on. Good luck!

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22 thoughts on “Investing With Minimal Risk

  1. -_- says:

    The biggest risk one can take, is to take no risk.

  2. To Jamie (and other investors of a similar age),

    Please please understand that a temporary decline in value is not the same thing as a loss. Despite how it may look at first glance, investing entirely in “safe” investments is actually an extremely dangerous proposition.

  3. Jules says:

    Nothing wagered, nothing gained…

    I do like the idea of self-sufficiency; I’m apparently much more of a hands-on type of person than I thought I was. My boyfriend is one of those “the world is going to end” types (mildly so, but still) and I think his dream is to get us off the grid entirely.

    But self-sufficiency is only a real investment if the world does go to hell in a handbasket. Given that, even in spite of the current state of economic affairs, the world has failed to, well, fail, I can’t say that it’s something that would allow you to make a living on, the way investing in the stock market would.

  4. KC says:

    This is a little more high risk, but I think that’s a relative term anyway – but consider blue chip dividend paying stocks for the long run. Companies like GE are very innovative and are poised to see us into the future – particularly with their ideas on energy usage. They pay a handsome dividend, and it is selling pretty cheaply right now. The same can be said for a company like Disney (think Pixar, ESPN/ABC, amusement parks, branding, etc). There is a little more risk here than a T-bill or a CD, but the risk of loss OVER TIME is fairly nil. But just like any non-cash investment, only use money you know you won’t need in the next 3-5 years. Don’t consider your investing for the short term – you are very likely to see losses – instead consider your investing over the long term.

  5. frugalcpa says:

    Good answer, Trent. Portfolio theory prescribes investing a portion of your money in T-Bills and the rest in the market (index funds and index ETFs are probably the closest equivalent to “the market”). If you’re very risk averse, most of your money should be in T-Bills. If you’re investing for the long-term, and you can stomach a few downturns trusting there will be better times, you should put a good amount of your money in the market.

    My risk tolerance is quite low for short-term investments, so I keep that money in money markets, savings, or CDs. But for long-term investments it increases dramatically due to the almost-sure prediction that the market will make up for downturns like this with upturns to average a very respectable return. In my opinion, right now would not be a bad time to start contributing regularly to a market fund of some sort for the long-term.

  6. Matt says:

    The safe investments hold value when mitigating risk but when it comes down to it the best investment you can make over the long term is to invest in yourself. You will increase your ability to recover from any eventuality. It also increases your potential to generate more income over time.

  7. Debbie M says:

    I also consider myself extremely risk averse. You could do what I did: put just a small amount of your money into stocks, such as an all-market index fund. Think of some amount that’s so small you wouldn’t mind losing it all! Maybe 5% of your investment? Or maybe $10/week? Just a little extra something you won’t miss. (I started with $60/month about 15 years ago.)

    Then if that part of your investment grows to be too large a percentage of your investment (say, from 5% to 8%), just sell the extra and use that money to buy more of your safer-feeling investments. (That’s called selling high!) And when that part of your investment plummets, do nothing, because you thought you might lose it anyway! Just keep adding your little amounts (which is called buying low!)

    I have a really good pension and my own house, so I have been able to expand my stock investments without feeling too vulnerable. Now I max out my IRA every year and all of that money is in the stock market. I also am buying a house and diversifying any other way I can think of such as frugality habits and do-it-yourself skills and other things Trent discussed.

  8. Geron says:

    In terms of investing, I think the word ‘volatility’ is more appropriate than ‘risk’.

    Risk implies a wager, a chance and an outcome.

    Volatility implies short-term ups and downs but a fairly certain long term trend.

  9. Trents idea of investing in yourself is perhaps the best use of the readers time and money right now. They need to read a few investing books and get more comfortable with the idea of investing. Excluding age and time to retirement as factors, most risk averse investors are thatbway simply from a lack of education. Thankfully this is easily remedied.

  10. todo es bien says:

    As regards “losing” it is only a loss if you sell at a loss. I recall, though I may have the precise numbers off a bit, an interview with Bill Gates after the market crash in 1987. I believe at that time he was the first individual to lose ONE BILLION dollars in net worth in a day in the stock market. He was asked what it was like, and he spoke along the lines of “I wasnt going to sell anyway, so I lost nothing”. As an aside, on that day his net worth dropped from 3 to 2 billion. Considering he is in the 50 billion range now, maybe he knows something the average investor could learn.

  11. Anastasia says:

    I would highly recommend using one of those compound interest calculators to determine how much money you need to save using these type of safe, small return, investment methods to reach your savings goals. All of the guidelines for retirement savings assume at least part of your money is going into stocks or mutual funds, at a higher rate of return. So you’re going to need to save more now to have the same amount of money later.

  12. Marc says:

    People who have gone from having no money and a pile of debt to no debt and a bit of money tend to value preservation of capital.

    There’s nothing wrong with that and it may very well change when they have more confidence in their long term finances.

    How much risk (and/or volatility) someone can handle is a very personal matter and it can change with personality (or how someone feels that day!). Some people place a high value (financial and emotional) on knowing their money is safe and accessible, so no level of long term certainty will reassure them of short term changes. Proper asset allocation can help, but there will always be some who can’t handle volatility.

  13. George says:

    US Savings bonds are an option if you’re not yet to the $10,000+ stage and you’re a US citizen. Treasury Direct is one avenue to buy them and a full-service bank is another (and in my opinion, a better choice since you get an actual paper bond which is easier to redeem in emergencies, like Katrina).

    Frankly, though, all investments have risk (or volatility). CD & bond rates go up & down and likely lose to inflation by 1-2%. Real estate varies with business cycles and location and needs to be insured. Stocks that pay dividends might stop paying them in addition to the volatility of share price. Commodities are highly volatile, too

  14. Jaime, you need to learn how investments work. The only reason you should fear taking a risk is becuase you don’t understand if fully.

    You say you don’t want to take a loss on your money? Playing it safe in small investments will GUARANTEE a loss on your money once inflation hits.

    If you’re looking to avoid investments, then you need to learn self-sufficiency and learn more skills. You are your ultimate investment in this case. You will never take a loss when you invest in yourself.

    -Nate

  15. Gabriel says:

    This post was practically written for me. I’m 21, slightly younger than the writer, but I feel like we’re in the same boat.

    I think the trouble for my age group is that our formative money years, right as we graduate and start living in the real world, will have occurred in this rocky, unstable phase in which 401ks were decimated and job stability negligible. I suspect that, financially, we will have much more in common with our depression-era grandparents than our parents.

  16. Courtney says:

    While I don’t agree with the sentiment (DH and I are 90%+ in stocks), I commend the writer for being honest about their risk tolerance. Too many people over-inflated their tolerance for risk when things were going well in the markets, and wound up badly burned when things fell. Multiple PF bloggers have essentially said “If your investments keep you up at night, you’ve taken on too much risk.” The writer may have to save more, or take on less ambitious goals, but kudos to them for doing what’s right for THEM.

  17. Jo says:

    Investing in yourself is definitely the best advice. Always be curious and learn new things.

    As for investing money, I think all investments have risks also, but if you understand the risk/reward of your investments then you should be fine.

    We invest in stocks/index ETFs and hedge with options. As far as i know it is the only type of investing that allows a retail investor to hedge. It’s a bit more high maintenance and takes a while to learn (at least for me), but I personally prefer managing my investments instead of buy and hold (and hope for profit).

  18. conny says:

    TIPS, what you pay is the nominal amount and the inflation part + intrest due, that makes it over 10.000 for 10.000 face value.
    (and a part that reflects the rent part of money, if different from the time the bond was issued, but that part is less volatile.)

  19. Chris says:

    I agree with #6.. Put a little in the market just for SOME spice in your portfolio. If this market ever gets “stimulated” or “inflation-ated”, you’ll be glad you have some money in the stock market. Supplement that little piece of the pie with a few bond funds varying in duration (short-term, medium-term, and long-term) and TIPS (once again helping with that inflation thing.

    You NEED to take inflation into consideration. $1,000 today sure as heck is not going to be worth $1,000 in 30 years when you retire. It is all about preservation of PURCHASING POWER, not just a nominal dollar value.

    I firmly believe the next few years will be the buying opportunity of a young worker’s lifetime. We should be so lucky the market is tanking while we are in our 20s and 30s and not 50s and 60s. This is the time to BUY, seriously.

  20. Roger says:

    Good advice. Jamie deserves credit for realizing that he has almost no risk tolerance now, rather than investing in something riskier than would be comfortable, and then leaving after it went down in value.

    Another suggestion for low risk yields would be to invest in a stable fund in a 401(k). If there’s a company match, it’s possible to get an impressive yield (50% or 100%, with some companies) with almost no possibility of loss.

  21. GH says:

    Proper asset allocation (diversification) was only mentioned once so far in the comments. This person needs to understand what it is and how it works. If it’s done properly it mitigates risk on the downside and let’s you fully participate in the upside. Talking about individual investments is not a good thing, unless put into perspective of an overall asset allocation.

  22. Llama Money says:

    Inflation is something many investors forget, but Chris is right – you *can’t* ignore it. It’s real, and it’s a big deal. If you want to keep a bunch in cash, I can’t blame you one bit. But you *must* have some risky investments, whether stocks / mutual funds / starting a business / whatever. If your money doesn’t grow, then you will end up very poor when you’re old.

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