Safe investing: option or illusion?
You’ve probably considered starting investing. Maybe you have friends or colleagues who invest and you wonder if it’s also something for you. But what about the risks? Is there perhaps a way to invest safely? This article answers a number of frequently asked questions.
How safe is investing?
The answer to this question is simple: investing is not safe. You can lose all or part of your deposit. However, there are different degrees of risk when investing. If you want to have a chance of a higher return, this also involves a higher risk. And vice versa: if you prefer to avoid risks, you will have to take a lower return into account.
Are there safe(er) forms of investment?
Certain forms of investment involve higher risks than others. As a novice investor, it is best to ignore them. Think of options, turbos, swaps and other types of derivatives. These investment categories are complicated and require a lot of knowledge and experience.
Equities, bonds and index trackers (ETFs) are generally easier to understand and therefore more suitable for novice investors. This does not mean that you do not run any risk with these categories. However, the risks are better mitigated than with derivatives.
What are safe havens?
Investors use the term ‘safe harbours’ for reasonably stable investments that historically do not lose their value so quickly. Examples include the commodity gold, large stable companies that have been paying a high dividend for years and some currencies such as the Swiss franc. Unfortunately, these types of ‘safe havens’ do not guarantee returns and may just as well depreciate in value.
What are the risks of investing?
As said, investing is not without risks. Exactly what risks you run depends on the categories and products you invest in. For example, you run the risk of a company’s results deteriorating, causing the share price to plummet. In the case of bonds, you run the risk that the issuer is unable to meet its payment obligation. Read more about the risks of investing.
How can you limit the risks of investing?
You cannot completely eliminate investment risks, but fortunately you can limit them to a level you feel comfortable with. The most important measure you can take is to spread your investment across multiple investment categories, sectors and regions. This means that you do not invest all of your money in, for example, shares or bonds from one sector or index, but that you put together a balanced portfolio.
The big advantage of spread investing is that a substantial loss on one investment can be absorbed by the other investments in your portfolio. The best way to diversify your portfolio depends, among other things, on the risk profile that suits you and the return that you have in mind.
Read more about how you can limit the risks of investing.