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The Relationship Between Risk and Return: Which Investment Type Typically Carries the Least Risk?
Introduction | Mastering the Science of Risk and Return in Your Investments
Which Investment Type Typically Carries the Least Risk? A good steward of wealth is someone who knows how to grow it, not just stow it – or even worse, spend it. It is a commonly known fact that investments are important steps in the growth of any financial journey. Investments, which are most often passive or semi-passive, help you achieve financial freedom by letting your money work for you. Let’s face it: no one (even high-income physicians such as yourself) becomes wealthy from a 9-5 job. The real game lies in finding ways to earn the most amount of money with the least amount of time and effort exerted. You win by exploring the best investments right now and making the most out of the cards you are dealt.
Beginners tend to lean towards “which investment type typically carries the least risk”, although we believe that the better question here should be “which investment type typically carries the least risk with the highest possible returns”. Because low risk investments normally generate lower returns compared to high risk investments, it is very important to study all the options available to you in order to achieve the highest possible returns. Nevertheless, low risk investments are a vital aspect to any competitive investment portfolio and are a relatively safe choice for beginners who wish to develop their range of investments.
With regard to determining which investment type typically carries the least risk, the risk level of any investment differs for each investor. Knowing when to invest, how much, and in what manner is dependent on two important factors: your risk capability (how much you can afford to lose) and your time horizon (how long you can uphold an investment until it can be liquidated).
Remember that no investment is 100% safe. All investments carry some sort of risk. Even choosing which bank to open a savings account in involves the science of risk and return. Case in point, if you deposited your savings in Bank A, which has a 1% annual interest rate, only to find out Bank B offers a higher interest rate of 3%, you risk losing a higher rate of return given that the value of your money diminishes over time because of inflation.
In this blog, we explore the benefits and types of low risk investments which can help you determine which ones work best for you. We also zero in on what we believe is the best answer to “Which investment type typically carries the least risk?” and that is real estate.
Low Risk Investments: An Important Facet of Your Investment Portfolio
If you are starting out in your investment journey, we wish to take this time to say “Congratulations!” As a physician, investments are a crucial step to detaching yourself from your clinical shifts and achieving financial freedom. We understand that the world of investment can seem rather daunting at first, which is why low risk investments are a safe, stable choice to channel your hard-earned money into. In fact, we believe that the most profitable investment portfolios are those that have a combination of high risk and low risk investments.
As you slowly build your confidence to participate in high risk investments (which can evidently merit much higher returns), low risk investments offer physician investors unique, invaluable benefits such as safety and stability. Some key indicators to consider when identifying which investment type typically carries the least risk are: a) those that keep your capital, more or less, intact, b) those that guarantee returns, albeit at conservative rates, and c) those that offer higher returns but for a much longer period of time.
Given these key indicators, here are some of the best investments right now which have a safe, stable relationship between risk and return:
- Savings Account
- While your savings account definitely does not exist as a highly profitable form of investment, it creates a shield of protection against inflation for your savings. Your good old savings account is as safe as an “investment” can get because your money is protected and guaranteed by federal law. It provides you with easy access to your funds (usually with a debit or ATM card) and pays you a fixed interest rate per annum. As of 2020 , the best savings accounts offer a 1.10% to 1% annual percentage yield.
- Fixed Deposits (FDs) or Certificates of Deposits (CDs)
- Similar to your regular savings account, certificates of deposits are another type of product offered by your local bank which has a slightly different rate of risk and return. These CDs normally receive a higher annual interest rate. The only catch is that you agree not to withdraw any money from the account for a certain period of time, usually ranging from six months to five years. CDs are a lot less liquid by nature, given that you may lose a portion of the interest rate and even be fined with certain fees if you end up withdrawing from the account outside of the previously agreed upon terms and conditions.
- With this type of investment, the rate of risk and return is also dependent on the time period of the CDs. You can make approximately 0.85% to 0.35% on one-year CDs, and the returns increase as the account matures.
- Bonds (Government, Corporate, Municipal – Oh my!)
- Government, corporate, and municipal bonds are the three main types of bonds – each one serving a marginally different purpose in terms of which investment type typically carries the least risk. Government bonds, also referred to as Treasury Securities, are considered to have the least risk because you are evidently loaning money to the federal government. Corporate bonds offer much higher returns but have a relatively higher risk given that the performance of a corporation can rise and fall. Most corporate bonds are still considered low risk investments as long as the corporation’s credit rating grade is in the A to B median. Lastly, municipal bonds are issued on a state or local level and may be exempt from taxes.
- In this form of investment, the relationship between risk and return lies in the acquisition value of the bond, as you can often sell the said bond at a much more profitable value once it has matured. Another important detail to keep in mind is that these bonds come in a variety of maturity periods. This means that you can lose a portion of your capital should you decide to sell the bonds prior to their maturity date.
- Mutual Funds
- If you are ready to invest long term, mutual funds could be one of the best investments right now. Investing in Equity Funds or Mutual Funds over the long term (usually a minimum of ten years or more) reduces the risk of short-term stock market fluctuations, which forces you to withdraw your investment capital too early. In contrast, participating in Mutual Funds is as easy as entrusting your money to a company and they will handle your investments for you. These companies normally invest your money in a variety of assets, such as stocks, bonds, and short-term debt.
- Fixed Annuities
- Fixed Annuities, on the other hand, offer a more fixed, guaranteed relationship between risk and return once you participate in a contract with an insurance company. You start getting returns only after a set date, and you are not allowed to access your capital before the contract expires. As per Blueprint Income, the average annual return for Fixed Annuities range from 3.7% to 4%.
- Real Estate Investments
- For those who are interested to invest in the long term, real estate investments are also a viable option when it comes to which investment type typically carries the least risk. What’s great about real estate is that the level of risk it entails is largely dependent on the amount of research and due diligence you devote to each investment. From buying an apartment complex (this entails much higher risk because it involves mortgage), Real Estate Investment Trusts (REITs), to Real Estate Syndications, you have greater control over the level of risk because your participation is based on your own terms.
Characterized by consistently high returns, medium to low risk, and a proven track record for the past few decades, real estate is an investment method most millionaires swear by. In the following sections of this blog, we will discover the benefits of investing in real estate as well as a handful of tried and tested methods which will help build your wealth in no time.
Exploring Which Investment Type Typically Carries the Least Risk | One of the Best Investments Right Now is Real Estate
The Unique Benefits of Real Estate as One of the Best Low Risk Investments
As we dive deep into the world of real estate, a major reason why it’s great to invest in real estate is because its demand is relatively stable, regardless of how the market is currently doing. The rationale? Having a roof over your head is a necessity for every American. Apart from that, other major reasons why Americans continuously acquire homes are: “changes in jobs, family situations, and the need for a smaller or larger living area”. Based on the annual study conducted by the National Association of Realtors in 2019, “home prices increased slightly to a median of $257,000 among all buyers. Buyers typically purchased their homes for 98% of the asking price.”
Per Global Property Guide, “Demand [in real estate] remains robust. In July 2019, new and existing home sales increased by 4.3% and 2.5%, respectively (at seasonally-adjusted annual rate). Construction activity is increasing again, amidst improving homebuilder sentiment buoyed by lower mortgage rates. In August 2019, building permits authorized for new housing units soared 12% y-o-y to a seasonally-adjusted annual rate of 1,419,000 units, according to the US Census Bureau. Likewise, housing starts and completions were up 6.6% and 5%, respectively.”
According to Lawrence Yun, Chief Economist of the National Association of Realtors (NAR), nationwide home sales are also improving, despite falling interest rates. “Falling mortgage rates are improving housing affordability and nudging buyers into the market. However, the shortage of lower-priced homes has markedly pushed up home prices.” In reference to the 2019 study, existing home sales, such as single-family homes, town homes, condominiums, and co-ops, “stood at a seasonally adjusted annual rate of 5.42 million units in July 2019, up 2.5% from a year earlier.”
On the other hand, the game of commercial real estate is also a worthwhile strategy in terms of which investment type typically carries the least risk. Even in the midst of a pandemic, commercial real estate transactions in the United States average $2.5 million in the second quarter of 2020. Not too shabby, don’t you think? A 2017 study by real estate market analyst firm CBRE Group Inc. perfectly explains why this is so. “Data shows that tenants [in commercial real estate] would enter long leases to lock in prices in pretty much any market environment. Moreover, some tenants with requirements for large spaces will enter long leases due to the limited availability of property that matches their needs.”
Real estate offers a lucrative relationship between risk and return, making it an important investment vehicle for budding physician investors like you. If you could still use a bit more convincing, here are other reasons why real estate should be one of your top considerations when it comes to determining which investment type typically carries the least risk.
- More often than not, you have a say in the terms and conditions of a real estate deal (how you choose to participate in an investment), which lowers the level of risk on your end.
- It is a passive or semi-passive form of investment which offers moderate to high returns.
- It is illiquid and paid for in full, making it a safe and stable investment vehicle.
- There are a slew of real estate tax benefits you can avail of once you become a real estate investor.
- It frees you from having to depend on a single paycheck and detaches you from your day-to-day clinic shifts.
- The returns you get from real estate investments can definitely rival (or even exceed) your high income as a physician and pave the way to long-term wealth and financial freedom.
Maximizing the Relationship Between Risk and Return | How to Invest in Real Estate
Especially for newbie physician investors, Real Estate Syndications are a prime gateway to the lucrative world of real estate. It’s the perfect way to test the waters and, at the same time, immediately get high returns from the get go. Real Estate Syndication is an effective way to invest in larger properties, which guarantee higher returns, by pooling capital together with other investors. Another great aspect of real estate syndications is that there is a Sponsor who frontlines all management aspects and day-to-day duties on your behalf. It’s the perfect way to dip your toes in the world of real estate and learn from other seasoned professionals and investors.
Because there is an expert who handles all important real estate decisions for you, the returns in Real Estate Syndications are very generous while the risk is relatively low (just don’t forget to do an important step: due diligence!). In the grand scheme of things, you reap great financial benefits, such as positive cash flow, by simply being a passive investment player. Need we say more? This is the reason why Real Estate Syndications are one of the best investments right now in our books. If this is something that excites you and you are interested to begin your Real Estate Syndications journey, we’ll be more than happy to help you. To learn more about Real Estate Syndications, click here.
Summary | The Best Answer to “Which Investment Type Typically Carries the Least Risk?”
As we have mentioned prior, arriving at an answer to the question, “Which investment type typically carries the least risk?” can vary greatly from one investor to another. We definitely suggest looking into real estate (in particular, Real Estate Syndications) as it is an investment vehicle which is proven to be safe, reliable, and profitable on many different levels.
Here at PhysicianEstate, we welcome all physician entrepreneurs to learn about commercial real estate investments, rental property investments, and wealth generation. We encourage all physicians to eventually become real estate physician investors. We know a great deal about Who – What – Why – How.
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