I currently have my savings in a number of cash accounts, here in Ireland, earning not more than 0.25%.
I am at an advanced age and would like to invest €100,000 in secure low risk investments. Can you advise me what I should do and how to go about doing it?
– HL, Ireland
Recent times haven’t been kind to people in Ireland who have kept all their savings in cash. It just doesn’t pay. And it looks like that won’t change for the foreseeable future.
So what can you do to get your money working for you, without taking excessive risks?
Spread it wide
Of course, there is no risk-free investment. Even staying in cash means watching the value of your money erode over time, as inflation reduces its buying power.
As an investor, you are being paid to take some risk with your money. But that doesn’t mean betting the farm on the Next Big Thing. Quite the opposite. Investing wisely is all about sowing lots of different seeds, each offering you growth potential. And with a sum like €100,000, that’s certainly possible.
3 golden rules for low risk portfolios
There are three golden rules to building a low-risk portfolio of investments.
1. Don’t confuse risk with uncertainty
Risk is the possibility that your crops will fail, and you’ll be left with nothing. That can’t be allowed to happen.
Uncertainty is the fact that you won’t know exactly how big your harvest will be, or when you will get it. That might take a bit of getting used to. But it shouldn’t stop you from tilling the field.
2. Be diverse
If you only plant a single crop, you are exposing yourself to unnecessary risk. There will be winners and losers. You need to invest your money widely to spread your risk and give your money many opportunities to grow.
The easiest way to do that is to use an investment fund. Funds pool money from many investors, and use it to buy a diverse range of assets, from company shares, to government debt (or bonds), infrastructure, gold, and more. A low-risk fund will place less in shares, and more in less volatile asset categories like bonds.
Investment funds can help you manage your risk further. You can drip-feed your investment over time, adjust your portfolio along your investment journey, and sell when you want to.
3. “Capital protection” is not all it seems
Lastly, and this might seem surprising to a low-risk investor, be wary when it comes to so-called ‘capital-protected’ investments such as ‘kick-out bonds’. They break almost all of the rules above.
At best, many of these products offer limited upside, because the costs of offering capital protection are substantial. At worst, many such investments do not protect your capital in the event of a major downturn.
For example, one such investment offered in Ireland in 2020 stated that “Capital is fully protected unless the underlying index is more than 40% below its initial level at maturity, where you will lose the same percentage by which the index has fallen”. So just when you need the guarantee of capital protection, it’s not there.
There is no magic beanstalk. Instead patience, diversification, and keeping it simple is the key to cultivating a low-risk investment portfolio.
This article is adapted from a piece we recently wrote for the Sunday Times. You can read the original article here.