Lower risk investment options

All investments carry some risk, but interestingly not all investments carry the same amount and there is a scale going from low to high.

At the lower-risk end of the scale you will find investments that typically show set of certain behaviours: low volatility, lower returns, and high liquidity.

This means these investments are less likely to be impacted by short-term market volatility. Often these are cash-like investments such as money market funds, gilts and some bonds.

While there’s no such thing as risk-free when it comes to investing, for those investors who might be dipping their toe into investing for the first time or want to reduce the potential risk of losing money as much as possible, there are low-risk ways to invest.

We explore them here:

Multi-asset funds are one way for investors to manage the risk profile of their portfolio. While some funds may, for example, only invest in shares or bonds, a multi-asset fund will typically hold both, as well as property, cash and perhaps even so-called alternative assets, such as gold.

By investing in one fund, which holds several different assets, you can spread risk. The idea is that the performance of the strongest assets should offset the performance of the weakest, leading to steadier and smoother overall returns.

Most managers who offer multi-asset funds offer a range of funds with risk profiles varying from low to high. If you’re looking for a lower risk option then select one mostly invested mostly in bonds and cash, and a smaller percentage in shares.

Read more about multi-asset funds or our version of this, Ready-made investments

Money market funds are designed to be a lower risk means of earning income on cash. They achieve this by pooling investor’s money and lending this to governments and high quality companies. In return the fund earns interest on this lending, which is typically for a short period of time (days, not months like bonds used in regular bond funds) which means the risk of this not being repaid is very low and that it closely responds to money-market returns.

The funds are also managed professionally by fund managers whose job is to manage risk whilst maximising the income paid to investors. These can be held in different account types such as stocks and shares ISAs, investment accounts or self-invested personal pensions (SIPPs).

Money market funds adhere to a strict set of guidelines which seek to minimise their risk. These will lend to governments or companies with a high credit rating. The fund managers also carefully manage the length of time the fund can lend for; this ensures the fund remains short term which lowers (but doesn’t eliminate) the risk of loss.

Clare Francis says: “If you’re nervous about investing in the stock market at the moment, these funds could be used as a stopgap and invest when you feel more comfortable. But if you don't need your money in the next five years – or preferably longer – you may not need to be seeking out safety in this way.

“Investors should view these as useful short term investment options. With any investment, especially those which look to track cash or interest rates, your money is vulnerable to the effects of inflation.”

In addition to the fund charge, there might be other account costs from your broker or platform where you hold your investment. It’s therefore important to factor these in because they will eat into returns and you might find that the interest you would earn with a savings account could be higher.

It’s possible to hold cash in a Stocks and Share ISA or investment account. Your money will earn interest in the same way as a savings account.

Clare Francis explains: “Broadly, holding cash in any kind of investment account, rather than in a savings account, is thought of as being a short-term measure for those taking a short break from perhaps choppy markets with the view to get invested again.”

If you’re nervous about investing in the stock market at a particular time, you could purchase a money market fund, low-risk Ready-made Investment or even stay in cash as a stopgap, and invest when you feel more comfortable.

However, remember that risk is part and parcel of investing, and as billionaire investor Warren Buffet once said: “Be greedy when others are fearful”. In other words, invest when markets are down. When share prices fall you get more for your money – and reap the rewards when share prices hopefully recover.

Alexander Joshi, Head of Behavioural Finance at Barclays, explains: “Volatility and uncertainty trigger a fundamental human instinct: the urge to seek safety. Many investors’ first instinct is to reduce risk in their portfolios, which can feel like a sensible and responsible response.

“But this has long-term consequences, to what is typically short-term volatility. Investors crystalise falls in portfolio values, whilst then reducing their ability to participate in the recovery and subsequent growth. The bounce back in sentiment, and share prices, can be quite dramatic, and catch investors out.

“For this reason it is important to have the right foundations in place, so as to be able to look through periods like these and capitalise on the opportunities which present themselves.”

Indeed, history tells us that significant downturns can be followed by sharp recoveries. Many of the best days of market performance typically come soon after the worst. And recovery can come just as quickly as a market shock.

Clare Francis adds: “As an example, just recently – on Donald Trump’s so-called ’Liberation day’ – the markets took a turn for the worse. Yet they have already recovered most of their losses.

“While it’s important to invest your money according to your own appetite for risk, it’s also important to consider the importance of risk and reward – the higher the risk you take, the bigger potential rewards.”