Risk-free investing, does it exist?

When it comes to investing, risk isutterly fundamental. Some level of risk is always involved when discussing performance or returns. Risk-free investing means that the investment is guaranteed and safe, as a result of which the level of risk involved in extremely low. New investors find it quite tricky to figure out the different between low risk investing and high-risk investing seems quite tricky. To understand this difference, investment risk can be classified on a scale of 1 to 5.

1. Low Risk Investments

Having a low risk, no risk or risk-free investment means that an investor cannot lose principal because these investments are guaranteed and safe. They are considered safe investments because the US Government backs them up with a guarantee. Low risk investments help investors avoid devastating losses and protect them against the chances of loss. While low risk investments are guaranteed and safe, but the returns they offer are also quite low.

2. Minimal Risk Investments

Different types of bonds, such as corporate, government and municipal bonds have their own level of risk. The term and type of a bond determine the risk. The term is the duration in which a bond matures, and the principal has to be repaid. Long-term bonds tie up an investor's money for 10, 15, or even 20 years, while with short-term bonds, investors regain their principal in 1 or 2 years. The risk is usually greater when the term of an investment is longer.

3. Moderate Risk Investments

Investment risk that falls between a low, safe level of risk and an extreme level of risk is regarded as a moderate level of risk. Investors will have a moderate level of risk if they blend low risk investments, such as intermediate and short-term bond funds, with high-risk investments, such as stock index funds. As long as the fund is balanced, the risk is moderate.

4. High Risk Investments

Investments such as stock index funds are referred to as high risk investments. High-risk investments are investments where the chance of underperformance or loss of capital is high, and there is also a minimal chance of suffering a devastating loss. Investments where the chance of earning an expected return is 50/50 are highly risky.

5. Extreme Risk Investments

Whenever a bond, apart from a government bond, or an individual stock is purchased, the risk involved is usually extremely high. This is because the securities of big companies often become worthless when they go bankrupt, and it is true that these companies do go bankrupt. Fortunately, the amount of control an investor has over this extreme level of risk is quite tremendous. Investors can spread their money across several bonds and stocks to avoid extreme levels of risk. No doubt, it is not easy to pick individual securities and monitor them regularly, in fact; a great amount of expertise is required. So, instead of this, the use of mutual funds should be considered.

For investors who wonder whether risk-free investing exists. Without a doubt, low risk investments, in other words, are risk-free investments since they are guaranteed and safe. However, it must be kept in mind that the returns of these investments are also low, while high-risk investments offer high returns as well.

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