Safe? Risk? These two words can in some ways seem counterintuitive to their dictionary definitions when we look at them being used on Wall Street. Safe is defined as, “protected from or not exposed to danger or risk.” While risk is defined as, “a situation involving exposure to danger.” Based on those definitions you would expect to want to pursue safe investments and leaving those risky ones alone. However, when it comes to investing these definitions become a lot more complicated.
In the financial world “safe” and “risk” reference the potential for you to lose your initial investment. In a safe investment you can expect the possibility of losing what you invested to be low. While you won’t likely lose your money in this investment the return on the money you invest will also be low. (Think bonds, money market funds, bank notes, etc.) In a risky investment the potential for you to lose what you invested is higher, but to entice you to take the chance you will also earn a much higher return on your money (Think stocks, options, hedge funds, etc.).
Sounds simple right? If you are a risk taker and want a higher return, simply put your money in more risky investments. If you want to play it safe and can’t afford to lose your investment simply put all your money in safe investments.
However, if you employed either of these strategies today you could set yourself up for tremendous financial pain.
If you use a “safe” strategy and put all your money in bonds and money markets today your return on much of that money may be less than the rate of inflation. This means that while you are not likely to lose your initial investment the purchasing power of that money may decrease over time due to inflation. Therefore, your safe investment may simply be a safe way to lose money.
If you use a “risky” strategy and put much of your money in stocks, a recession or a depression could create a significant decline in your investment making you unable to retire how you want to or when you want to. You may have to wait years for the market to return to its previous highs so that you can safely retire. This is why we focus on using a balanced approach.
In your younger years you can afford to take more risks because the time available until you retire is much greater. Those with greater than 15 years to retirement may have a risk tolerance allowing them to put more of their portfolio in equities or other assets that carry higher risk/return and lower amounts in bonds or money markets that have lower risk/return. That way they give their money great opportunity for growth, but if the market dips and they need money for a house down payment or a car, they still have some assets in less volatile investments and won’t have to sell equities while the market is low.
As you near retirement you want to have more of your assets in the safe bucket to ensure a dip in the market won’t complicate your retirement plans. Those with less than 15 years to retirement will gradually want to reduce the percentage in equities and increase the percentage in fixed income. That allows for a portion of their money to still grow to ensure they are provided for during their hopefully long retirement. At the same time, they will have enough money in their safe bucket to ensure they can pay for their needs during the year without selling stocks if the market has a decline.
As you can see simple words like “safe” and “risk” become a lot more complicated when it comes to investing. If you have questions or concerns about your assets or investments feel free to reach out and contact us today. We would be happy to provide you a complimentary consultation to help you “Get a Plan and Retire Right!”
FAQs
The difference between Safe & Risky investments lies in the amount of risk involved and the potential return it offers. Safe investments have lower risks and hence offer lower returns vs. risky investments. It can be daunting to choose investment options, especially if you are starting.
Why investments are called as risky? ›
High-risk investments may offer the chance of higher returns than other investments might produce, but they put your money at higher risk. This means that if things go well, high-risk investments can produce high returns. But if things go badly, you could lose all of the money you invested.
What is a safe stock? ›
Simple agreements for future equity, or SAFEs, are flexible agreements providing future equity rights without immediate valuation. SAFEs are commonly used for early-stage startup funding. Conversion terms are triggered by specific events like equity funding rounds or acquisitions.
What is the safest investment with the highest return in the UK? ›
If you're looking for higher interest with low risk, opt for a fixed-term ISA. Ultimately, ISAs provide flexibility, security, and the potential for growth. They are one of the safest forms of investment.
What does "safe" mean in investing? ›
A simple agreement for future equity (SAFE) is a financing contract that may be used by a startup company to raise capital in its seed financing rounds. The instrument is viewed by some as a more founder-friendly alternative to convertible notes.
What is investment risk in simple words? ›
What Is Investment Risk? Investment risk is defined as the probability or uncertainty of losses rather than expected profit from investment due to a fall in the fair price of securities such as bonds, stocks, real estate, etc.
What is the meaning of risk? ›
1. : possibility of loss or injury : peril. 2. : someone or something that creates or suggests a hazard.
What does it mean if an investment is at risk? ›
In the tax world, "at risk" simply means that the business owner is personally liable for the business's losses. It has nothing to do with the business's chances of success or failure.
What is the safest investment with the highest return? ›
These seven low-risk but potentially high-return investment options can get the job done:
- Money market funds.
- Dividend stocks.
- Bank certificates of deposit.
- Annuities.
- Bond funds.
- High-yield savings accounts.
- 60/40 mix of stocks and bonds.
9 Best Growth Stocks to Buy for 2024
| Stock | Implied upside over May 29 close* |
|---|
| Tesla Inc. (TSLA) | 19.2% |
| Mastercard Inc. (MA) | 22% |
| Advanced Micro Devices Inc. (AMD) | 21.1% |
| Intuit Inc. (INTU) | 19.5% |
5 more rowsA SAFE is equity, not debt
SAFE notes are technically equity, not debt, and we account for them as equity on the balance sheet. This has important ramifications for investors who are trying to take advantage of the Qualified Small Business Stock (QSBS) exclusion.
How do you know if a stock is SAFE? ›
Metrics like earnings growth, price-to-earnings (P/E) ratio, and profit margin can potentially help isolate possible danger signs for a stock. Traders often compare a stock to its sector and see how it's doing compared to other stocks.
Where is the best place to invest $100,000? ›
6 approaches and strategies to invest $100,000
- Park your cash in an interest-bearing savings account.
- Max out contributions to retirement accounts.
- Invest in ETFs.
- Buy bonds.
- Consider alternative investments.
- Invest in real estate.
If you keep saving, you can get there even faster. If you invest just $500 per month into the fund on top of the initial $100,000, you'll get there in less than 20 years on average. Adding $1,000 per month will get you to $1 million within 17 years. There are a lot of great S&P 500 index funds.
What is the best investment right now? ›
11 best investments right now
- High-yield savings accounts.
- Certificates of deposit (CDs)
- Bonds.
- Money market funds.
- Mutual funds.
- Index Funds.
- Exchange-traded funds.
- Stocks.
Safe assets such as U.S. Treasury securities, high-yield savings accounts, money market funds, and certain types of bonds and annuities offer a lower risk investment option for those prioritizing capital preservation and steady, albeit generally lower, returns.
What is considered an at risk investment? ›
In the tax world, "at risk" simply means that the business owner is personally liable for the business's losses. It has nothing to do with the business's chances of success or failure.
Which is considered the riskiest type of investment? ›
corporate stocks can be considered as the riskiest investment. Investment is risky when returns are uncertain. Corporate bonds have credit risk and interest rate risk.
How do you know which investment is riskier? ›
Investments with higher expected returns (and higher volatility), like stocks, tend to be riskier than a more conservative portfolio that is made up of less volatile investments, like bonds and cash. However, even the most conservative portfolio can experience short-term losses due to ever-changing market conditions.
