Welcome to Lab Ledger Blog

Safe investments, myth or reality?

two man disccusing graphs at their laptop

Safe investments, myth or reality?

Surely the question you always ask yourself when making an investment has to do with the security of your savings, such as ” where to invest my savings safely?”. The truth is that, although in most cases the risk of your investment is low, we must start from the basis that 100% safe investments do not exist.

When making an investment you want your money to work to generate passive income, obtaining a bonus or even the desired economic independence. Of course, always trying to take the least possible risk.

even if there is no risk-free investment, the best way to minimize it is to have basic financial knowledge or professional investment advice. Below, you can see what are the main risks your capital faces if you decide to invest.

Main risks when investing

best long term investments paper

There are two main risks to keep in mind when investing: direct and indirect risks.

On the one hand, the risk of losing money directly is when you sell a good for less money than you bought it, or when you lose part of the investment (for example, if you lend money and it is not returned to you, or if you buy stocks that drop in price). In that case, your assets will be reduced directly: you have less money than you had initially, before investing. This is the easiest risk to appreciate, but there is another, the indirect risk, that only if you have a good education will you be able to perceive.

The indirect risk when investing is that derived from inflation. Inflation causes prices to fluctuate over time, making the value of money less and less. That is, as time passes, you will need more money to buy the same. This phenomenon is known as loss of purchasing power.

In this sense, there is a widespread belief that certain financial products, such as deposits, are safe because you have your money guaranteed to a certain extent.

But the truth is that these types of products are only taking into account the risk of losing capital directly, without putting other elements in the balance. For example, these deposits usually have such a low profitability that over time they do not even compensate for inflation. That is, indirectly, you would be losing purchasing power.

How can you avoid these types of risks?

There are some basic pillars that, although they do not completely eliminate the risk when investing, they do reduce this greatly.

First, a well-diversified portfolio over a given term offers virtually zero chance of loss.

Plan your investment in the short, medium and long term

investment chart

“You don’t plan to fail, but you do fail by not planning.”

Time can be one of the least valued assets when it comes to investing. However, when it comes to building capital, it is the most valuable tool at your disposal.

Time combined with rate of return and consistency is the key to achieving financial security. One of the most common mistakes is that of not saving when believing that you do not have enough money, without taking into account that time is the solution to that problem. Waiting has a high cost, since the longer you wait, the more you will have to save to recover the time you have lost.

Time can be the best friend of growth. Most people cannot deposit € 1,000 at once, they depend on smaller amounts, invested according to a temporary plan. If this is your case, constancy may be the fuel that your investment needs to start the flight.

The power of compound interest

If you carry out operations based on a compound interest rate, it means that the interest you earn in each period is added to the initial capital to generate new interest with them. Consider this example: if you deposit € 1,000 at 6% interest, the following year you will have € 1060, on which 6% will be applied again.

That is to say, with the passage of time the interest is calculated on the total of your account, including all the interests previously generated, making your income increase exponentially over the years.

The diversification is to minimize the risk when making an investment, investing in different securities that represent a variety of companies and industries. For example, increasing the number of sectors in your investments will mean that if one sector goes into crysis the rest can compensate it.

As a reference, you should know that in a time of crysis, the sectors that produce basic necessities such as food will suffer less than the technological or construction sectors, as they are more stable. However, in a time of economic growth, the latter will also tend to grow to a much greater extent.

In summary, investing in several sectors, even in several countries will make your capital not in danger, whatever the situation of the economy.

Most diversified funds cannot invest more than 5% of their capital in a single security. A diversified portfolio is a safer investment.

Finally, averaging is about constantly investing, even if it is little money. The term averaging, does not have to do with the profitability of the product in which you are investing, but in a certainty and discipline when it comes to investing, doing it systematically.

Averaging will allow you to control your capital permanently, regardless of whether the market rises or falls. This is accomplished by investing a fixed fee at constant time intervals.

Taking into account these basic pillars, you will make your investment as safe as possible.

No risk, no benefit

As financial analysts indicate, “investments without the risk of losing a penny are the ones that will keep investors in poverty.” If you want to build a safe estate, put yourself in the hands of an expert, identify the risks and meet the basic pillars of any investment, only then can you minimize the risk and meet your financial goals.

Leave a Reply

Your email address will not be published. Required fields are marked *