Pros and cons of low-risk investments
Many people choose to grow their wealth and save for future goals through investing. The main advantage is that your investments can pay off over time in the form of interest, dividends or capital gains. However, investments always come with a level of risk that the market may fall, and you may not be able to generate the returns you anticipate.
To circumnavigate the risks of losing money, people often balance their portfolios with a mix of low-risk investments and high-risk investments. However, the way you choose to balance your portfolio can affect the returns you can expect to gain versus how much you are willing to risk.
Pros of low-risk investments:
- Stability — Bonds are generally considered safer than stocks and provide a steady flow of interest payments over time. U.S. government bonds are the safest because they are backed by the full faith and credit of the government. However, they generally pay lower interest than corporate bonds as a result of the guarantee. Large-company stocks are generally less risky than small-company stocks. They also often pay a dividend.
- Security — Investing in bonds and stable companies reduces the risk of vulnerability to significant changes that can lower your returns. Periods of market volatility tend to affect high-risk investments, while low-risk investments are usually able to ride through without much effect.
Cons of low-risk investments:
- Inflation tracking — It is possible to lose the purchasing value of some of your assets through inflation. If the investments do not gain enough after taxes to keep pace with inflation, you may see your investments grow but not fast enough to keep up with inflation.
- Lower gains — High-risk investments are more vulnerable to market volatility, but people include them in their portfolios because of the potential for generating high returns. High-risk investments are usually better options for younger investors who are far off from retirement or their other goals. A negative hit to a young investor’s portfolio has more time to balance out than someone’s portfolio as they are nearing retirement.
- Lower flexibility — Many traders buy and sell high-risk stocks on a regular basis as they follow trends in the market. With low-risk investments, you may find yourself waiting a long time to sell them to gain returns.
Talk to a ProVise CFP® professional about your investment portfolio
Balancing your portfolio is like trying to balance on a tightrope. Shift too much to one side, and you could end up taking a tumble. Just as someone walking a tightrope uses a pole to help them balance, investors can rely on the expertise and guidance of financial professionals for help with their portfolios.
At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.
Are you ready to talk to a professional about balancing your portfolio? Contact ProVise today to schedule a complimentary consultation.