What is the safest investment right now?

Investing is all about matching risk and reward and matching off those two things at a point that’s right for the individual investor, their circumstances and investment goals. Risk and reward are said to be proportionate to each other.

The higher the risk in an investment, then the higher the return from that investment should be to compensate the investor for taking on that risk.

It follows then that the lower the risk in an investment, the lower the return or reward from it is likely to be.

Small cap equities are categorised as high risk, whilst UK Gilts or government bonds are viewed as low risk.

Investors are typically on the lookout for a combination of capital preservation and growth (and sometimes income) that is, they want to keep their hard-earned money safe, but at the same time, they want to see it appreciate or grow in value.

Cash is often seen as the safest investment, however, holding cash comes with its own risks.

For example, if your cash deposit is earning interest at a rate that’s below the rate of inflation, then the spending power of that money is being eroded on a compounding basis, by inflation.

So if you do hold cash, you should ideally be looking for the best interest rates you can get on those funds.

The longer you are able to leave the money invested or on deposit, then the higher the interest rate you are likely to achieve.

An instant access account may pay little or no interest, whereas a 1-year fixed-term deposit, will likely carry a rate that’s in line with or close to base rates.

You should be able to get your money back if you need to, however, there may be early withdrawal penalties and or a notice period, if you have tied the money up for a fixed term.

More recently firms such as Lightyear (Vaults) have introduced products that allow retail investors to access Money Market Funds or MMFs.

MMFs invest in short-term money market instruments and overnight deposits, to earn a higher rate of interest on the cash that they hold. MMFs typically have daily liquidity.

What are generally regarded as the safest investments?

Outside of cash government bonds, which are effectively a securitised loan, are seen as the safest form of investment.

It’s highly unlikely that the state will default, and bondholders earn regular interest, or coupon payments while they hold the bonds.

And, at the maturity of the bond, they will receive the principal or face value of the bond, and in the UK that’s usually £100.00.

Retail traders haven’t always found it easy to buy and own government bonds, however, recent initiatives aimed at liberalising access should help to change that.

After government bonds, high-quality corporate bonds are next on the roster, they are followed by blue chip equities, particularly those in defensive sectors and industries, or, companies with long track records of profitability.

However, it’s worth bearing in mind that the prices of both bonds and equities will vary (rise and fall) based on a variety of factors, including sentiment, supply and demand, and the macroeconomic backdrop.

Against that backdrop, investors will often employ diversification to help spread the risk of investing.

Which risky investments should you avoid if you want safety of funds?

If you want to maintain the safety of your funds, then you shouldn’t be investing in speculative or growth equities, which would include small caps and technology stocks which have not made a profit and may never do so.

In these circumstances, it’s also probably a good idea to avoid investing in emerging and developing markets, which can be highly volatile.

And, it goes without saying, that you should also avoid short-term leveraged derivatives, such as CFDs, as well as futures and options, and leveraged and inverse ETFs.

Investing in these types of products should only be conducted with risk capital, that’s surplus money that you can afford to lose, and won’t need access to.

What is safe to invest in right now and why?

It’s often said that beauty is in the eye of the beholder and that’s never more true than in investing.

For example at the time of writing both the S&P 500 index and the price of gold are at all-time highs.

Does that mean they should be bought or avoided? The answer to that question will depend on your attitude towards risk.

It’s not an easy time to be an investor right now, I say that because the returns in equity markets have been distorted by the performance of US megacap tech stocks.

The likes of Nvidia have grown dramatically over recent years.

Nvidia’s share price has risen by more than +2700.0% over the last 5 years, its’ market cap is now almost US $3.40 trillion, making it bigger than the whole of the FTSE 100 index combined.

That creates a problem, because even if you invest in an ETF that tracks the S&P 500, because of the size of the megacap stocks, your performance will effectively be driven by what happens to a handful of share prices, rather than the majority of index constituents.

The safest place to invest right now is for the longer term. History shows that the longer you are invested the less chance there is of realising a loss.

A study conducted in 2022, by quantitative analysts at Bank America, using data, dating back to 1929, found the probability of loss by investing in the S&P 500 for just one day was 45%. Over three months the likelihood of loss fell to 38%, over 1-year it was 26.0%.

However, over a time horizon of 5 years, the likelihood of loss was just 10.00% and at 10 years, it had fallen to just 6.0%.