Risk Free Investments

Written by Jacey Harmon
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We are always trying to defer risk. We use insurance companies to take on the risk of covering expenses in the case of an accident, death, or illness. We try and diversify our portfolios to eliminate investment risk. Most people do not like to take undue risk with their hard earned money. Yet, at the same time, these people want high returns on their investments. The simple fact remains, every type of investment carries risk.

Investment Risk and Mitigating that Risk

Bonds are often considered to be risk free investments but this is not true. Interest rate risk is a risk involved with investing in bonds. Interest rate risk is when interest rates go up after you purchase a bond. Inflation risk is a major concern, especially for low interest bonds. High inflation rates can eat away at annual interest payments. Credit risk involves the debtor's ability to pay back the principal of the bond. Diversification amongst bond classes and yield curve will help reduce, not eliminate, these risks.

Stocks are often considered higher risk investments, though that can be argued. Again, diversification is a way investors can mitigate stock risk. Diversification is only a good way to reduce risk if you don't mind diversifying the reward as well. Investors that are not experienced in the market will benefit from a diversified portfolio. The best way to reduce risk in the market, however, is to have a solid stop-loss strategy. Keeping losses small is the best way to avoid large losses. Only those that ignore the market and hold when stocks fall will be left holding the bag.

Options and futures are very speculative and offer high rewards and high risk. Spread strategies are ways to mitigate risks with these investment vehicles. Spreads are when you buy one contract and sell a similar contract. You reduce risk with spreads but you limit reward as well. Every investment carries some sort of risk in one fashion or another. After all, there is no such thing as free lunch.


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