Which investments are the most secure

In the investment process it is always necessary take into account that if you are looking for higher returns you will have to assume greater risks

The safety of an investment is a criterion of maximum importance for many investors who, due to an aversion to risk or for reasons of caution with respect to their investment objective, attempt to eliminate or minimize the possibility of incurring a loss.

Leaving aside the nuances of the psychology of the investment, the security of an investment is even more important the shorter term the investment objective. Time is an important determining factor in an investment because it provides or removes leeway.

Let's imagine the case of two people who are saving for their retirement. The first is on the final stretch, five years from retirement. For this person, the safety of the investment is crucial, given the importance of their savings objective and of not risking the effort of decades of saving. In that case, the priority is to preserve the capital. The second person is aged 30 and is beginning to save for their retirement. Their savings horizon is more than three decades and they need to maximize the returns now while they have plenty of room for maneuver. In the case of this person, the risk lies precisely in not taking any risks. Safety is less important at this stage.
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Measure the safety: volatility

Volatility is a measure of risk frequently used in the field of investments. It measures how much the price of an asset deviates with respect to its average value over a specific period of time. The greater the volatility, the greater the risk, but also the potential gain, as the deviation can be positive as well as negative.

Does investment without risk exist?

A risk-free asset is that which offers known returns and zero risk; in other words, its volatility is nil and, as such, its value will not change over time. Given that return and risk are directly related, a risk-free asset will offer a low return and, moreover, the concept of "risk-free” is subject to nuances. An example coul be the public debt of a highly creditworthy country: with a very high probability that it will fulfil its commitments, although it is never possible to be 100% sure of this.

Any investment that seeks a return over and above that offered by this type of asset will involve increased risk . This is one of the basic principles of investing that everybody must be quite clear about.

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Which investments are safer?

Basing ourselves on safety criteria, the following are some of the best known lower and higher risk investments:

Bank savings and deposits

These products offer a fixed return that is known in advance and is usually over a specific period. In low interest rate environments the return is usually very low and these products are normally recommended for conservative investors who prioritise safety over profitability. The inherent risk in these products is the possible failure of the financial institution, although the amounts are guaranteed up to €100,000 per customer under the Deposit Guarantee Fund.

Investments in Fixed Income

There is a wide variety of fixed-income assets, some low risk (such as treasury bills) and others high risk (such as fixed-yield securities from emerging countries). The return is fixed and known beforehand, provided they are kept until their maturity, although there is a series of risks:

  • Market risk: this is the possibility that the assets will fall below the price we paid for them.
  • Liquidity risk: this is the risk that no counterpart can be found on the market and therefore it is not possible to sell the product.
  • Credit risk: This is the risk that the issuer may fail to pay the interest and/or principal investment.

Investments in Equities

When referring to equities we usually mean the shares of companies purchased on organized share markets. These are quoted assets and their volatility is higher than that of fixed-yield securities. In compensation, they aspire to obtain higher returns. Equities do not offer a predetermined return (although some offer periodic payments in the form of dividends) and their evolution is subject to internal variables, such as the management of the company, as well as external variables, such as political or macroeconomic factors.

Investments in derivative products

Derivatives are financial instruments whose value derives from the evolution of the price of another asset known as the “underlying asset”, which can be a share, a basket of shares, a fixed-interest financial security, a currency, commodities, interest rates, etc.

These are very high risk products, as they are subject to what is known as the leverage effect. This means that the actual investment is lower than the actual exposure to the underlying assets, meaning that there is a multiplier effect in both gains and losses.

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