Over the last two weeks I’ve heard a ton of concerns about risk, losing money, investments not growing, and more! Everyone seems to want a guaranteed return. And guess what? Sorry, but that’s not how it works.
There are no guarantees when it comes to investing.
There just aren’t. Investing involves risk — but if you want higher returns, then you have to accept some risk. The more risk you take, the higher the return (typically).
So, what’s an investor to do?
Let’s break down where you can get a guarantee and where you can’t. Even the “safest” investments carry risks, so let’s talk about them.
The Only Guarantee in Investing (Sort Of . . . )
If you want to invest your money, there are only two investments that “sort of” get a guaranteed return.
First, you can invest in certificates of deposit at FDIC-insured banks. These are investments that get a specified return over a set period of time. If you invest under the FDIC limit, your investment is protected by the U.S. government. However, you should realize that this isn’t truly guaranteed. Although the U.S. has never defaulted, there is the slightest risk the U.S. government wouldn’t be able to pay the insurance if the bank fails. This is something to keep in mind, although these deposits are considered extremely safe.
The second almost guaranteed investment: Treasury bonds. Similar to certificates of deposit, bonds issued by the government pay a given interest rate over a set period of time. They are backed 100% by the government, so unless the government fails or defaults, you should have a guaranteed return. However, keep in mind how bond funds are different than individual bonds — they are not the same!
Stock Market Guarantees (Sort Of . . . )
In the stock market, there really aren’t any guarantees at all! In fact, if you think back several years, you could lose half your portfolio in months if the stock market crashes. However, the prices of stocks are based on the value of the companies. The only time a stock goes to $0 is if the company is worthless.
So, in order to minimize your risk, invest in solid companies that will be around for years. Even better, invest in a basket of stocks that are all solid companies, like the S&P 500. This minimizes the risk of the stock market because what are the odds of all 500 companies failing? Very slim.
You Have to Identify Your Risk Tolerance
The key is, you need to identify your risk tolerance. Now that you understand there are no guarantees, ask yourself: how much risk can you accept?
The goal with investing should be to invest over the long run — so don’t use money you need in the next couple years. Think back again — the market crashed in 2007, but it has since gone higher today. So, if you kept your money invested, you’d be better off today. Just hold for the long run!