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Can Low Risk Investment Opportunities Give Profitable Returns?

All investors are subject to the vagaries of risk during their careers. The nature of global capital markets ensures that attempting to avoid risk is actually counterproductive and defeats the primary objective of investing, which is to earn reasonably high returns. Generally speaking, high risk goes hand-in-hand with high returns. That makes it difficult for investors to choose investments if they have a low ability to tolerate risk.

All investments do not have to be high risk in order to generate good returns, however. There are several low risk investments that can provide an investor with very satisfactory returns. When the average investor hears the phrase “low risk investment” they will probably think of investments that deal primarily in cash, such as money market securities, Treasury bills, etc.

To a large extent, they will be correct. Low risk investing is primarily about finding investments that have high liquidity and thus low risk. An investment that is highly liquid means that it is easy for the investor to convert it into cash. Thus, liquidity must be the primary concern of a low risk investment strategy.

Here are two example investments that offer high liquidity and a variety of returns:

- Money market accounts are opened at banks, usually in the form of a savings account. The money market deals in fixed-income securities like the bond market. The difference between the two is that money market accounts use their deposited cash to buy instruments that are very short-term, usually less than one year. Since money market securities are traded in very high denominations, investors can only gain access to it via bank accounts or by purchasing certain securities directly from the federal government.

- Treasuries are securities that are sold directly from the Department of the Treasury to investors. Since they are guaranteed by the federal government, they are considered to have virtually no risk. The critical advantage that Treasuries have is that they are exempt from state and municipal taxes. Treasuries come in three flavors, Treasury bills or T-bills, Treasury notes and Treasury bonds. T-bills mature in less than one year, Treasury notes mature in one to ten years, and Treasury bonds mature more than ten years into the future.

Money market accounts and Treasury securities are only two examples of low risk investment options available to investors. Liquidity concerns aside, the returns on these investments depend on several factors, since the money and bond markets go up or down like the stock market. Low risk investments can provide opportunity for investors who know what to look for.

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