Low Risk vs. High Risk Investments? Know which to Choose (2024)

FAQs

Which is better high-risk or low risk investment? ›

Low-risk investments give lower returns, but losses are also rare. High-risk investments have the potential for high returns, but these returns are not guaranteed.

High-risk investments may offer the chance of higher returns than other investments might produce, but they put your money at higher risk. This means that if things go well, high-risk investments can produce high returns.

Final answer:

Government bonds have the lowest investment risk.

Low-Risk Investment

There is also less to gain—either in terms of the potential return or the potential benefit bigger term. Low-risk investing not only means protecting against the chance of any loss, but it also means making sure that none of the potential losses will be devastating.

In theory, the higher the risk, the more you should receive for holding the investment, and the lower the risk, the less you should receive, on average. In the chart below, we see the range of risk levels that apply to different types of investment securities.

A lower risk-reward ratio is generally preferable because it offers the potential for a greater return on investment without undue risk-taking. A ratio that is too high indicates that an investment could be overly risky. However, a ratio that is too low should be met with suspicion.

What is Risk Averse. Definition: A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks.

Risk and return go hand-in-hand

You can't have one without the other. Historically, the lower the risk, the lower the potential return; the higher the risk, the higher the potential return. If you'd rather protect the money you already have, you may have to forego the possibility of meaningful growth.

At the low-risk end of the spectrum are basic investments such as Certificates of Deposit (CDs); bonds or fixed-income instruments are higher up on the risk scale, while stocks or equities are regarded as riskier. Commodities and derivatives are generally considered to be among the riskiest investments.

Money market funds

Money market funds are mutual funds that invest in short-term, low-risk assets like Treasury and government securities, commercial paper, or municipal debt—depending on the focus of the fund.

What's the best investment right now? ›

The correct answer is option D: For a potentially higher return. Choosing an investment with high risk means that there is a greater chance of losing money, but it also offers the potential for higher returns.

Riskier investments have the potential for bigger losses—but there's also the opportunity for larger gains. Low-risk investments, on the other hand, are seen as safer bets that typically pull smaller returns. Both types of investments can help bring you closer to your financial goals.

A risk averse investor tends to avoid relatively higher risk investments such as stocks, options, and futures. They prefer to stick with investments with guaranteed returns and lower-to-no risk. The investments include, for example, government bonds and Treasury bills.

For a given portfolio volatility, the higher the value at risk, the less the concern. Losses of less than the VaR amount are common occurrences, you can predict what will happen. Losses of greater than VaR are rarer; these are the days when unexpected things can occur.

If you opt for only low-risk investments, you're likely to lose purchasing power over time. It's also why low-risk plays make for better short-term investments or a stash for your emergency fund. In contrast, higher-risk investments are better suited for long-term goals.

In general, the shorter your investment horizon (i.e., the sooner you need the money) the less risky you want your investments to be. If your horizon is longer than 10 years, relatively higher-risk investments that offer the potential for higher returns, such as stocks, may be a consideration.

A positive correlation exists between risk and return: the greater the risk, the higher the potential for profit or loss. Using the risk-reward tradeoff principle, low levels of uncertainty (risk) are associated with low returns and high levels of uncertainty with high returns.