What are the safest types of investments?
When it comes to investing, there is no one-size-fits-all answer, especially when it comes to risk management. It’s important to note that everyone’s strategy for investing will also be different based on their goals. While some people may chase high returns with high-risk options, others prefer a more conservative approach.
For those looking to preserve their capital while earning a steady return, knowing the safest investment options is non-negotiable. Without any prior knowledge of the investment world, it can be a confusing place to start.
For this reason, we’ve put together some of the safest types of investments available today to help you make informed decisions that align with your financial goals and risk tolerance.
What is an investment?
An investment is the purchase of goods like stocks, bonds, real estate or materials intended to generate income or appreciate in value over time. It involves committing resources such as money or effort, with the expectation of achieving a higher return which includes both potential profits and risks.
With these investments comes risks, so how do you know which is the safest type? Well, education and knowledge of the different types is vital. Read on to learn more.
What different types of investments are available?
In this section, we will take a look at savings, fixed-rate bonds, government bonds, corporate bonds, index funds, dividend stocks, property and precious metals. Let’s explore what they are and how much risk they carry.
1. Savings accounts
Starting with the basics, a savings account is one of the safest investment options available. While it offers lower returns compared to other investments, the risk of losing your money is extremely low.
In the UK, savings accounts are protected by the Financial Services Compensation Scheme (FSCS), which covers up to £85,000 per person, per institution, in the event that a bank or building society fails. This makes them an excellent option for storing your emergency funds or saving for short-term goals.
2. Fixed rate bonds
Fixed-rate bonds are a type of savings account that offers a higher rate of interest in return for locking away your money for a predetermined period, typically ranging from one to five years. The interest rate is guaranteed not to change, providing a predictable return.
These are considered safe investments because, like savings accounts, they are often protected by the FSCS. However, the trade-off is reduced liquidity, as accessing your money before the term ends usually incurs a penalty.
3. Government bonds (Gilts)
Government bonds, or gilts in the UK, are loans you give to the government in exchange for regular interest payments until the bond matures, at which point your initial investment is returned.
Gilts are considered one of the safest investments because the risk of the UK government defaulting is extremely low. They offer a safe way to generate income, particularly suitable for retirees or those who prefer a low-risk investment portfolio.
4. Corporate bonds
Corporate bonds are similar to gilts, but instead, you are lending money to a company. They generally offer higher interest rates than government bonds due to the higher risk of default.
However, investing in bonds from well-established, financially stable companies—especially those classified as ‘investment grade’ by rating agencies—can still be a relatively safe option. It’s important to diversify your holdings across various sectors and companies to mitigate risks.
5. Index funds
Index funds are a type of mutual fund designed to replicate the performance of a specific index, like the FTSE 100. They are considered safer than picking individual stocks because they spread out the investment across many companies.
While the returns will mirror the ups and downs of the tracked index, the diversification helps to mitigate individual stock volatility. Index funds also benefit from lower fee structures compared to actively managed funds, making them an attractive option for cost-conscious investors.
6. Dividend stocks
While generally more volatile than bonds or savings, investing in high-quality dividend stocks can be a safer approach to stock market investing. Companies that have a long history of paying out dividends are often well-established and financially stable.
These dividends provide a regular income stream and can be reinvested to compound growth. However, it’s vital to research and choose companies wisely to ensure they have the potential for long-term stability.
7. Property
Investing in property can be seen as a safe investment, especially in areas with high demand and limited supply. The property market in the UK has historically seen steady growth, providing both rental income and capital appreciation.
However, it requires significant capital and is less liquid than other forms of investment. It also comes with responsibilities and costs like maintenance, taxes, and insurance.
8. Precious metals
Gold and other precious metals often act as a safe haven during periods of economic instability. While they do not produce income like bonds or stocks, they can serve as a hedge against inflation and currency devaluation.
Investing in precious metals can be done through buying physical gold, gold ETFs, or shares in gold mining companies.
Invest with knowledge
When it comes to investing safely, diversity is your best strategy. Combining different types of safe investments can help protect your capital while providing a modest return. It’s also important to consider your long-term financial goals, your risk tolerance, and the economic climate when choosing where to invest.
Consulting with a financial advisor can also provide personalised guidance tailored to your financial situation, helping you make choices that align with your investment goals and security needs. Remember, the safest investment is one that fits your financial landscape and secures your financial future.
