A Complete Guide to Low Risk Investments

Investing in stocks and shares with high growth potential can be incredibly exciting but also very volatile! These stocks can soar just as quickly as they can fall, which provides a bit of a rollercoaster ride for investors.

But what if you’re not looking to take big risks?

What if you’re more interested in keeping your money safe, growing it steadily, and sleeping well at night?

Well, that’s where low-risk investments come in. In this guide, we’re going to explore everything you need to know about low-risk investments in the UK for 2024. Whether you’re a cautious beginner or just someone who values stability, this guide is for you.

Why invest in low risk assets?
How to measure investment risk
The potential drawbacks of low risk investments
6 types of low risk investment to consider

Before we get into the breadth of low-risk investments, it’s important to disclaim here that all investments come with some level of risk! Low-risk doesn’t mean no-risk and it is important to treat these investments with the same caution that you would the rest of the stock market.

Why Invest in Low-Risk Assets?

So, why should you consider low-risk investments?

Well, the answer is pretty simple: peace of mind.

Low-risk assets are considered to be more steady, dependable than higher-risk assets. These investments are designed to preserve your capital and provide modest returns, which makes them particularly attractive if you’re close to retirement, saving for a specific goal, or just not keen on taking big financial risks.

Low-risk investments can be a great way to diversify your portfolio, too. Even if you’re more of a risk-taker with some of your money, having some of your money in low-risk assets can balance things out and protect you from volatility.

How to Measure Investment Risk

Before we dive into specific low-risk investment options, it’s worth understanding how to measure the risk involved in any investment.

Risk is basically the chance that you won’t get the return you expect—or that you might lose some of your original investment. There are a few ways to determine risk:

Volatility: This is how much an investment’s price swings up and down. More volatility generally means more risk.
Credit risk: This refers to the possibility that a borrower won’t be able to pay back money that ahs been lent to them.
Liquidity risk: This is the risk that you might not be able to sell your investment quickly without losing money.
Time horizon: The longer you’re able to invest, the more risk you can typically afford to take. Shorter time horizons generally call for safer investments.

How to know if an investment is low risk?

Keeping the above in mind, how do you know if an investment is low risk?

Here are some things to look for!

1. Check the volatility

Look at how much an investment’s value jumps up and down (using historical price data).

Low-risk investments, like government bonds or high-yield savings accounts, tend to have much steadier price charts than tech startups – for example.

If the value has stayed fairly consistent over time, it’s probably on the lower end of the risk scale.

2. Look at the issuer’s credit rating

If you’re considering bonds, pay attention to the issuer’s credit rating. Think of it as a financial report card. A strong credit rating shows a history of successful repayments.

Bonds issued by these entities are typically low risk because they’re unlikely to default on their payments.

3. Understand the liquidity

Liquidity is just a posh way of saying how easy it is to get your money out when you need it. Low-risk investments usually have high liquidity, meaning you can access your money quickly without having to sell it at a loss.

Savings accounts, for example, are highly liquid, whereas selling a property could take months—definitely not what you want if you’re in a pinch!

5. Research the historical performance

Past performance isn’t everything, but it can give you a good understanding of how an investment is likely to perform.

Investments with a long history of steady, reliable returns are often lower risk.

Of course, nothing is guaranteed, but seeing a track record of stability can give you more confidence.

6. Check for guarantees or insurance

Some investments come with a bit of extra security. For example, if you put cash in a UK savings account, it is protected up to £85,000 by the Financial Services Compensation Scheme.

This means that even if the bank goes bust, your money is safe. Guarantees like this can be a good indicator that an investment is low risk.

7. Evaluate the return on investment

Low-risk investments generally offer lower returns compared to riskier options like stocks or cryptocurrencies.

It’s a bit of a trade-off—less risk, less reward. If an investment promises high returns with little or no risk, it’s probably too good to be true.

The Potential Drawbacks of Low-Risk Investments

Before you rush off to put all your money into low-risk assets, let’s chat about some potential downsides.

While these investments are great for preserving wealth, they often come with lower returns. That means your money might not grow as quickly as it could with higher-risk investments.

In the long run, this could mean your investments don’t keep up with inflation, which could reduce how far your money stretches.

By focusing solely on low-risk investments, you might miss out on higher returns available from riskier assets. It’s all about balancing safety and growth, so don’t forget to consider the bigger picture when planning your investment strategy.

6 Types of Low-Risk Investments Available to UK Investors

Now for the fun part! Here are six types of low-risk investments that are available to UK investors in 2024.

ISAs

ISAs are a popular choice for UK investors who want to keep things low-risk. The great thing about ISAs is that they’re tax-efficient, meaning you won’t pay tax on the interest, dividends, or capital gains you earn (up to £20,000 a year).

There are a few types of ISAs to choose from:

Cash ISAs: These are basically savings accounts with tax benefits. They’re super safe, but the returns can be modest.
Stocks and Shares ISAs: While these do carry some risk, you can opt for low-risk funds or bonds within your ISA to keep things on the safer side.
Lifetime ISAs: This is a type of savings account that helps people to save for their first home or retirement. You can save up to £4000 per year into a LISA and the government will top up your contributions by 25%.

ISAs are a great starting point if you’re looking to save or invest in a low-risk way while taking advantage of tax-free growth.

High-yield savings accounts

High-yield savings accounts are the bread and butter of low-risk investing. They offer higher interest rates than regular savings accounts, making them a great option for growing your money with minimal risk.

While the returns might not be mind-blowing, your capital is secure, and you’ll usually have easy access to your funds.

These accounts are often offered by banks or building societies, and some may have requirements like maintaining a minimum balance.

It’s worth shopping around to find the best rates and terms that suit your needs.

Bonds

Bonds are an asset that involves lending your money to a government or company, with the promise that they’ll pay you back with interest.

They’re generally considered low-risk, especially government bonds (like UK Gilts). The main types of bonds include:

Government Bonds (Gilts): These are issued by the UK government and are very safe, but usually offer lower returns.
Corporate Bonds: These are issued by companies. They come with a bit more risk than gilts but often offer higher returns.

Bonds are a good option if you’re looking for regular income through interest payments and want to keep your money relatively safe.

Mutual funds

Mutual funds collect money from numerous investors and put it into a variety of different assets such as stocks, bonds, and commodities.

While not all mutual funds are low-risk, you can choose ones that focus on safer investments, such as bond funds or funds that invest in blue-chip companies.

One of the benefits of mutual funds is that they’re managed by professional fund managers, which can take the stress out of investing. Just be sure to check the fund’s risk profile and historical performance to ensure it aligns with your low-risk investment goals.

Annuities

Annuities are insurance products that provide a steady income stream, typically for retirees. When you purchase an annuity, you’re essentially converting a lump sum of money into regular payments that last for a set period or for life.

There are different types of annuities, such as fixed and variable. Fixed annuities offer guaranteed payments and are considered low-risk, making them an attractive option for those seeking stability in retirement.

Preferred shares

Preferred shares are a type of equity investment that offers a fixed dividend payment, which makes them less risky than common shares. They’re like a hybrid between stocks and bonds, providing regular income with less volatility than regular stocks.

Preferred shares are a good option if you’re looking for higher returns than bonds but still want to keep risk levels in check.

However, it’s important to note that preferred shares usually don’t have the same capital growth potential as common stocks.

Things to Consider Before Investing in Low-Risk Assets

Before diving into low-risk investments, there are a few things to keep in mind:

Your financial goals: What are you saving or investing for? Whether it’s retirement, a house deposit, or a rainy-day fund, your goals will influence the types of low-risk investments that are best for you.
Inflation: Even low-risk investments come with some risk, particularly inflation risk. If the return on your investment doesn’t keep up with inflation, the value of your funds could decrease over time.
Diversification: It’s essential to diversify your investments, even within the low-risk category. Spreading your money across different types of low-risk assets can help protect your portfolio from unexpected market changes.
Costs and fees: Always check the costs and fees associated with any investment. High fees can eat into your returns, even with low-risk investments.

Low-risk investments can be a valuable part of any financial strategy, and a great way to diversify your portfolio. In the UK, there are plenty of low-risk options to consider. The key is to align your investment choices with your financial goals, risk tolerance, and time horizon.

Remember, even with low-risk investments, it’s essential to stay informed and review your portfolio regularly to ensure it continues to meet your needs.

Investing always comes a with a bit of risk and it is important to conduct thorough research before making any final decisions.

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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.

A Complete Guide to Low Risk Investments

Why Invest in Low-Risk Assets?

How to Measure Investment Risk