With the memory of the market crash from COVID still fresh, many investors are using 2021 as an opportunity to reassess their investments and eliminate risk from their portfolios. Now that the market has largely recovered, many are flocking to index ETFs, low-cost mutual funds, and real estate — assets that represent much lower risk of loss.
The safest investments for 2021 are mostly diversified funds and hard assets — securities that spread risk out over many different holdings or are based on real, tangible assets whose values are typically more stable.
Why investors want safe investments in 2021
The reasons investors are flocking to safety are numerous and obvious. The world remains in the grip of a pandemic — the deadliest in over a century. And, as if that wasn’t enough, the developed world is also suffering from considerable political upheaval.
And, though far less troubling, 2021 also marks the beginning of a new administration, with Democrats in control of both houses of Congress, as well as the White House. This carries significance not only for social policy, but for economic policy as well. Tax policies in the U.S. will surely be changing over the next several years, as will regulations (about the environment, for instance) that may have far-reaching consequences for business.
It’s not for us to say that anything of these things are bad, per se, but it’s easy to see how all of these circumstances may represent risk to certain businesses and their investors. Because of these new risks, investors need to be mindful of where they may be exposed.
At the same time, it’s also important to avoid getting caught up in violent market fluctuations, like those seen in cryptocurrency and among stocks being pumped up by online communities on Reddit and other sites.
What makes an investment safe?
Safe investments aren’t those that are MORE likely to MAKE investors money, but those that make them LESS likely to LOSE money (and yes, there’s a difference).
Using safe investments exposes investors to less risk of loss, not just from market fluctuations but also from fraud, financial difficulty, bankruptcy, etc.
Granted, safe investments usually earn investors a lower rate of return, but that’s the trade-off to avoid volatility.
Safe investments are often tied to hard assets that help keep their values stable — things such as gold or real estate — or they represent debt secured by specific assets (or issued by governments). Others are diversified, so investors spread out their risk among many different underlying assets, rather than just one or two companies. This lowers their risk of loss and also typically exposes investors to less volatile swings than riskier assets.
Lastly, but perhaps most importantly, safe investments are those that you understand. For any investment to be safe, you should understand how it’s structured — what will make it go up in value and what will make it go down. And, if it’s an investment in a particular industry, you should have a general idea of how that industry works and what makes companies in that sector succeed or fail.
Failing to understand an investment or the sector it operates in is almost always a recipe for disaster, regardless of the investment.
Our top picks
|Investment||Why we like it|
|VOO||Vanguard is an excellent fund company, and this one has an annual expense ratio of just .03%|
|SPY||Closely tracks the S&P 500|
|SWPPX||No investment minimum|
|FNILX||No annual fees|
|BOND||If you like bonds, PIMCO is tough to beat|
|Rental Properties||Tangible assets with real value|
What investments AREN’T safe?
Sadly, the world of unsafe investments is far larger than the world of safe investments, because all investors want the same thing — to make large returns. The lure of quick riches is too much for most to resist, so they chase ever-larger gains, venturing into ever-riskier investments.
Some of the riskiest — those to absolutely avoid if you’re trying to reduce risk — include:
- Oil & gas partnerships — Interest in private drilling or exploration ventures
- Penny stocks — Stocks aren’t listed on an exchange, but over the counter. Even discount brokers charge commissions for trading in these. And, with lower stock prices and usually lower values, stocks can be subject to increased volatility
- Options or futures — Brokers charge commissions for these as well. And, these “derivatives” are time-sensitive (they expire after a certain period of time)
- Foreign stocks — Foreign stocks usually come with increased political risk, plus risk from fluctuating currency values
- Crypto — Apologies to the Winklevi, but cryptocurrencies like bitcoin have no inherent value — they’re dependent entirely on its popularity. Value that’s taken years to establish can disappear overnight
While these investments and others represent more risk than others, any investment can be unsafe if you don’t understand it; or if you use it improperly or focus too much money in it. Instead, it’s important to invest only in things that you understand and avoid concentrating too much of your portfolio in any one investment.
Types of safe investments
|Investment||Why it’s safe|
|Index ETFs||Risk is spread out among many securities|
|Low cost mutual funds||Investors save on commissions and fees|
|High-grade bonds||Debts are secured by specific assetts|
|Blue chip stocks||The oldest and largest companies are often the last to book big losses|
Why you should care
Investing in the wrong things can cause you to lose some or even all of your investment. In fact, if you invest on margin, you may even end up owing money. Buying safe investments, on the other hand, will help you to build wealth steadily, albeit slowly.
People often dabble in risky investments or, unknowingly, concentrate their money in assets that might lead to considerable losses. But, with all the upheaval of recent years, many are refocusing their portfolios in safe investments.
As well they should, if it helps them sleep better at night.
How to build wealth with safe investments
The way to build real wealth through investments, is through small, frequent purchases of safe, reliable assets. Not by betting big on high-risk investments and hoping to get lucky. If you want to build wealth, avoid selling and do very little trading.
Instead, start off by buying, keep on buying, and just don’t stop.
Investing repeatedly in safe investments over time allows investors to benefit from dollar-cost averaging. When the price of an investment is down, investors can purchase more shares for the same amount of money. And, even when the share price is high, it still helps build your share balance and let interest compound over time.
Also, regardless of what you invest in, it’s critical to reinvest your earnings, whether they come in the form of dividends, interest payments, or other distributions.
The pros & cons of safe investments
|Lower risk of loss||Investments are boring|
|Less volatility||Returns tend to be lower|
|Great liquidity||Few tax advantages|
|Low transaction costs||N/A|
Safe investments aren’t exciting, but they’re the smart way to build wealth slowly and methodically over time. Even if you decide to dabble in riskier assets, safe investments should make up the core of your portfolio. That will help you to avoid scams, fads, and other dangers of more aggressive investing.
Here are some books that offer greater insights into safe investments and strategies:
The bottom line
Following the gains the stock market made in 2020 after recovering from the correction at the beginning of the year, shifting to safer investments may seem like a suckers game. But, taking your winnings off the table while you’re ahead at the casino is anything but dumb. If you want to protect your gains and shield your portfolio as the world moves into an uncertain, post-COVID future, refocusing in safe investments may be just the right way to start 2021.
If you’re opting for safer investments this year, be sure to pay attention to some of those named above. Diversified index funds like VOO and SPY can help investors keep some exposure to the market while also shielding them from too much downside, while investing in more tangible assets like real estate can help avoid risk of loss entirely, in exchange for lower returns.
The opinions expressed in this article are for general information purposes only and are not intended to provide specific advice or recommendations about any investment product or security. This information is provided strictly as a means of education regarding the financial industry.
Originally posted at https://thinksaveretire.com/safe-investments/