For anyone who wants to get their financial house in order and is considering dipping their toes in the stock market, one of the first things they might want to know is what types of risk free investing are available? In order to balance your portfolio, and minimize your risk, many experts recommend a combination of stocks and bonds.
It’s almost universally true that the stocks with the highest potential return are also the highest risk and bonds which have a much lower risk factor will provide a much lower return on investment. It is necessary to balance these two facts when trying decide which way you should go with your investments.
Owning a stock in a particular company is like owning a small piece of that company. The prices of the stocks are tied to the overall trend of the market as well as the performance of the company who has issued the stock. For this reason stocks can be very volatile.
Bonds are basically an ‘IOU’ that is given by the government or a corporation. Basically by buying the bond you have lent the government or corporation some money. While bonds may not seem as sexy as stocks they can provide much needed balance to any investment portfolio. You become the creditor when you purchase a bond and there is little risk associated with bonds.
Even though bonds don’t make as much money or have as high a rate of return as stocks, they do tend to be far less volatile than stocks. Stocks, on the other hand, can fluctuate dramatically in price and unless your investment philosophy is to buy and hold your stocks for a long time ( which will allow you to weather short term fluctuations better) than bonds are a much safer bet.
When buying bonds you can invest in many types such as corporate, municipal and US Treasury bonds. If you want the most secure type of bond to invest in, you should consider buying Treasury bonds since they are backed by the government. You can buy bonds in many different denominations as well as maturity dates.
Most investors find that a mix of stocks and bonds provides them with the right balance between the potential to earn a higher rate of return (stocks) and more security and safety (bonds). The right mix of the two will depend on your investment goals. The traditional way of thinking is that if you are saving for retirement and you are in your 20’s or 30’s than you may want a little more stocks than bonds since you’ll be able to make more money and if your stocks take a hit you’ll have more time to recover when prices go back up.
If you’re closer to retirement age you want to protect the money you have invested and you won’t have much time to recover from losses so bonds may be the better bet for you.
No matter what time frame you have or goals you are trying to achieve, a mixture of stocks and bonds is considered the best way to have risk free investing. No matter which method you choose, it’s important that you take some time to educate yourself. Don’t solely rely on a paid professional, you need to be able to work hand in hand with whoever handles your money.