When you ask most investment beginners, mostly the newly employed kids who are still fresh from college, they will tell you that risk-averse investment is for sissies. They go for big monies, and they have no time to waste on bonds and government bonds.
They are no different from new bloggers who just want to start a blog without a niche and make lots of money from adverts a month down the line. They have no content, but they are sure that their blogs will be on the front page of Google within a month of getting started. Well, that is before reality cuts them down to size.
Who Is A Risk-Averse Investor?
He is an investor who prefers low-risk investments. They will prefer government bonds and debentures to stocks and money market investments. Before we get too far, what is the definition of risk? It means permanent loss of capital. Naturally, the hunger for risk will be determined by a few factors, among the age.
- Government Securities
What is safer than government securities? Treasury Inflation Protected Securities (TIPS) and other government bonds are almost risk-free. The returns are not that impressive, but they are guaranteed. TIPS are tied directly to inflation rates, and so the investor will get a better return when inflation rates rise. Since these investment options are backed by the investor’s faith in the government, they are attractive to those who want their investment to come back to them after a given period.
- Bank Products
You could also put your money in the bank at no risk. The bank insures the money, and so you can count on getting it all back after the period of investment has matured. The normal savings accounts and money market accounts will keep your money safe, albeit at a small return.
- Preferred Stocks
Preferred stock holders get preferential treatment when the company declares bankruptcy, and they also get the share of profits before ordinary shareholders. If the company has to close down, they are among the first to get their investment back, but common shareholders only get the remnants. The downside is that they have no voting power, and they hardly benefit from the increases in market value of the company’s shares.
- Corporate and Municipal Bonds
Corporate bonds are similar to government bonds by definition. They are financial instruments that a company gets from investors in exchange for a debt. Simply put, well-established companies will issue corporate bonds in return for soft loans, and they will give the investor (creditor) a stated percentage of interest per month for the period of the bond. Upon maturity, the company either returns the money to investors or renews the bond. They are not as safe as government bonds, seeing as such the company could go bankrupt, but they are safer than common stock. State government issues municipal bonds, and so technically, they are safer than corporate bonds.
These investment plans are more popular amongst older investors than they are with the hot-blooded and wealth-hungry. What type of an investor are you?
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