Should A Beginner Start With Safe Investing Strategies?Summary: Low risk safe investing ought to be the foundation on which most portfolios are built. In fact, almost every household or individual should be starting with safe investing strategies before looking at riskier options. This section looks at these low risk investing approaches. There can be little hiding the basic facts - most investors are not expert enough or well enough informed to be profitable over the long-term. One of the dirty secrets of Wall Street is that over 80% of retail investors (the public) lose money in the stock market. The odds of losing money in stock and commodity markets are actually very high. In fact, most stock market traders will go broke. The similarities with professional gamblers are quite striking... Therefore, this should hopefully offer some food for thought when looking to make a first investment. Safe investing strategies have their merits! Most people with small amounts of money to invest tend to think that they need their money do something wonderful and gain many times in value so that it can help to enhance their standard of living. While that is very understandable, it is also quite unlikely. It is also worth adding that for most people, their first ever investment is likely to be the least well considered investment that they ever make. If it makes money, they may make poorly thought through investment decisions in the future as well. But if it loses money, their decision making process will probably be a little more careful in the future. What Is A Low Risk Investment? Generally, there are two types of options for low risk investing: 1. Genuinely low risk investment. These have very little capital risk and can usually be broadly described as deposit or cash based. 2. Every other sort of investment, with the exception that the investor knows something that provides an 'edge' which in turn reduces the risks being faced. The world's greatest investor, Warren Buffett has made billions with this strategy. However, for many others - including many stock market professionals - they choose to use insider information to provide their safety net. Obviously, this is illegal and we won't mention this approach any further. Cash Based Investments Truly low risk homes for your money are everywhere. They can be found in banks, cooperatives, building societies, money market funds, certificates of deposit, government bonds and more. Their defining characteristic is that capital invested will be returned at some point in the future. The invested capital should not be at risk of loss. Most other investments (the stock market, property, commodities, etc) do not have this level of security. Since 2007, the idea of a bank being 'safe' has been tested somewhat around the world, but for most of us, this is still an ideal way of investing. The rest of this section will discuss these types of investment. Why Invest In Low Risk Products? There are two main reasons for choosing products that enable low risk investing: 1. The investor does not wish to lose their money, as mentioned above. 2. The investor may wish to have access to the money in the future and cannot afford to sell at a loss if a short-term cash requirement comes along. This access is known as liquidity and is a vitally important aspect of financial and investment planning. Some investments, by definition, are long-term and illiquid. A great example might be a pension fund. If an investor is in his or her 30s or 40s, the number of years to retirement is likely to be measured in decades. As such, immediate access to funds is probably not required. In contrast, money being saved for a holiday at a known time in the future (perhaps a few months away), needs to be very accessable. This requirement for access should be very strongly considered by every investor. Therefore, it is always recommended that an individual or family keeps some money available for emergencies that can be accessed immediately. In case of a sudden cash requirement (a car breaks down, the kitchen floods or whatever) some money should be available today, or at worst on Monday morning when the banks are next open. The financial planning industry calls this an emergency fund and it ought to be in everyone's finances. After immediate access, it is worth saving some money in an account with a notice period. This money should earn a higher rate of interest, but a penalty will be paid if access is required within the notice period. These two low risk savings vehicles ought to be in the finances of every family before higher risk options are considered. To read more about related topics, please follow these links:
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