“As a young person who wants to start investing, what is the safest, low-risk option that is not super?"
-Question from Belle in Dandenong, VIC
Top answer provided by:
Jacky Ng
Hi Belle
Thanks very much for your question and good on you for considering investing. Investing is a smart and effective way of putting your money to work, it allows you to use money to make money!
First of all, before you decide to invest any of your money, it is important to carefully evaluate your own goals, risk tolerance, and particularly determine how long your investment time frame is.
Investment time frame
Your investment time frame has a significant impact on your investment decisions and, therefore, the amount of risk you should potentially be taking.
Investment time frame is the period where you are expected to hold an investment for a specific goal. Your goals can be:
- Short-term for one to three years such as saving for a holiday or a new car.
- Medium term for three to ten years such as saving for a wedding, home deposit, or kids’ education.
- Long term for ten years or more such as saving for your retirement.
The longer your investment time frame, the more aggressive the investment portfolio you can build to target higher potential return. This is because you have ample time for the investments to recover if your investments do not perform well in the near term.
On the other than hand, the shorter your investment time frame, the more defensive or less risky the investments you may wish to build. This is because the value of more aggressive investments like shares and property tend to move up and down more frequently. You want to avoid liquidating your investments when your investments have performed poorly, otherwise, you will be crystalising capital losses (i.e. losing your money for good).
Belle, I note that you are a young person, you may wish to firstly think about why you are only considering safe and low-risk investment options. If you are either saving with a short investment time frame or you do not have the risk tolerance for more aggressive investments, there are a few low-risk investment options you can choose from.
Savings accounts and term deposit
Savings accounts help your money grow faster by offering a higher interest rate than everyday transaction accounts. There are different types of savings accounts in Australia. This includes bonus savings accounts, promotional savings accounts, and age-based savings accounts. Different savings accounts have different conditions you must satisfy before you are eligible to earn interest from the accounts.
Term deposits are another safe way to lock away your money for one month to five years. Term deposits let you invest for a set amount of time and get a fixed interest rate. Generally, the longer the term, the higher the interest rate. The interest rate you get from a longer-term term deposit is generally higher than the interest rate of a savings account. However, if you need your funds before the term ends, there may be a penalty fee, or you may have to give up some or all your interest.
If you want to save but might need at-call access to your money, a savings account would be better than a term deposit.
Before you open a savings account or term deposit, it would be wise to compare accounts and interest rates from different providers, so you get the biggest bang for your buck!
Fixed term annuities
A fixed-term annuity can be considered as an alternative to term deposit. It is a secure investment that provides a guaranteed, regular income for a fixed term you choose.
When held for the term, your total investment amount is guaranteed by the annuity provider and will be repaid at the end of the term or throughout the term as regular payments.
The interest rate of a fixed term annuity may be higher than a term deposit. However, as an annuity is not offered by an authorised deposit-taking institution (ADI) such as your local bank, the Australian Government does not guarantee deposits for up to $250,000. While annuities are insured in other ways, make sure only to purchase annuities from well-reviewed and financed companies that have a low likelihood of folding.
Government and corporate bonds
Bonds are mostly viewed as a low-risk investment. When you invest in bonds, you are essentially lending money to a government or corporation, hence these bonds are called government or corporate bonds. Bonds are like a term deposit; you get regular payments for lending funds to the borrowers.
Bonds are considered as a defensive asset, but these are still exposed to several risks such as interest-rate and credit risks. In simple terms, the government and corporation that you lend your money to, can still collapse in very difficult times. Bonds provide higher medium to long term investment returns compared to savings account and term deposit, but also carry higher risks and returns are not guaranteed.
The most convenient way to gain access to bonds is through a bond fund. A bond fund is a managed fund that is a pooled investment that invests primarily in a diversified portfolio of bonds. The investment time frame to invest in a bond fund should be three to five years or more.
Conclusion
Belle, navigating the investment world can be quite complex. I hope I have provided you with some useful information to assist you with choosing a low-risk investment option.
It is worth noting that the interest you get from some of these low-risk investments may not keep pace with inflation (i.e. the rate of increase in prices over a given period). You should consider if ensuring your funds are growing faster than inflation is important to you.
I suggest that you continue to do more research (because why not!) and consider personalised financial advice. Seeing a financial adviser can help provide you with an objective overview of your current situation, and help you make sound and informed financial decisions.
Good luck and all the best!
Kind Regards
Jacky
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Comments1
"Some investment categories are significantly safer than others. For example, certificates of deposit (CDs), money market accounts, municipal bonds. https://psglending.com/"
Gavin Brandon 16:46 on 28 Jan 23