What Is The Point Of Safe Investing?

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What Is The Point Of Safe Investing?

Summary: Should an investor worry about the level of risk that they take? Should they use safe investing strategies or low risk investments? This page discusses the options.

Understanding the concept of investment risk is one of the key skills that separates the professional investor from the amateur. Having met many fund managers and traders, your author can attest to this fact.

The amatuer investor wants 'tips' - details about individual companies that may be worth investing in. While the focus on a fast profit is understandable, there is usually very little understanding of how this company might fit into the rest of a portfolio.

In contrast, a professional investor or trader gets 'tips' all the time from people trying to sell analytic or trading services. For them, it is a real job to avoid all these tips and salesmen! Therefore, the professional is often focused on the amount of risk being taken with money and whether there are better opportunities available elsewhere for similar amounts of risk. Confused?

This is all in the stock market though.

It is worth remembering, even for a website about the stock market, that there are many other potential ways to invest money. Some are potentially very risky. Some are much safer.

It is also worth remembering that most investments that might be considered to be 'low risk' also offer lower potential returns.

Why Do People Use Low Risk Investments?

If the potential return is low, why do people like them?

The reality is that for virtually every private investor and family in the world, money is finite. Their ability to earn more has some limits - apart perhaps from oil sheiks and Russian oligarchs - and therefore, it is unwise to have all of their money or net worth tied up in high risk, illiquid investments. Some money needs to be available in case of an emergency.

In financial planning, this is known as an emergency fund and would normally relate to a number of months of income set aside in a bank account that has instant access.

There are many forms of saving that use a traditional bank account for 'cash' holdings. But there are many other types of method of safe investing (for example, corporate and government bonds and money market accounts).

As well as a general need to take lower risks with some money, many people are simply not comfortable taking too much risk. This is understandable and may relate to the difficulty in earning money or the value that they place upon it. Either way, for these people that find the mere idea of losing money to be stressful, the stock market and other high risk assets should be avoided.

It is interesting to note though, that many people who are typically low risk or even very risk averse do not seem to find buying a residential property to be risky. There are many reasons for a house to become a family home and much more than an investment, but when looked at coldly as an investment, many houses are very high risk. This is because of the potential lack of liquidity, the high amounts of borrowing required to purchase and the value of the property relative the average annual wage of the buyers.

Therefore, there are both financial and emotional reasons for using low risk investment products.

What Are The Best Methods Of Safe Investing?

For the vast majority of people in the developed world, the best investment that they can make (low or high risk) is in making additional repayments on their debts.

The reality is that most of us owe too much money and at some point - preferably before either death or retirement - it will have to be repaid. Until that day, it is a weight hanging around our necks and requiring some or all of our monthly income.

Money in the bank in an average savings account will almost always earn less in interest than is charged on loans. This is because banks make much of their money and profit by charging more to borrow money than they pay to savers.

In addition, many credit and store cards charge over 15 percent above the rate a saver would earn. Any investment professional will tell you that it is difficult to make an annual return of more than around 8% consistently. Therefore, any debt with a rate of perhaps 18-25 percent per year is a very heavy weight to carry.

Financially, most of us will never in our lives make an investment that returns more than is charged by a credit card. Repaying them should be a high priority.

Admittedly, repaying a debt is not very fun, adventurous or glamorous. We know. But it is a very sound financial strategy to follow.

To answer the rather provocative question at the top of this page, the point of safe investing is that it can actually be more profitable (in the savings made) than many forms of higher risk investment.