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No Risk Investments

Are there such things as no risk investments? Do we always have to take a risk when we invest money? These are the questions we hope to answer here.

In the financial world, higher investment returns can not be had without accepting greater degrees of risk. However, investors throughout the economy have had no interest in taking any risks over the past three years. Thanks to the credit crisis and looming debt issues in both America and Europe, the markets have seen a flight to quality. Instead of capital appreciation, investors have sought capital preservation.

Of course, given the weakness of the current economy, it may be difficult for investors to find truly risk free investments. However, investors can mitigate the volatility in their portfolios through a bit of careful planning and management.

U.S. Treasury Bonds as No Risk Investments

For most investors, the most popular no risk investment is U.S. Treasury bonds. This may be a bit surprising given the growing debt burden of the U.S. government and weak economic growth. Regardless, investors around the world, afraid of the economic climate, have been fleeing to the safety of treasury bonds.

Even after Standard & Poor’s downgraded the debt of the U.S. government, treasury yields fell as investors continued to look at U.S. government bonds as a low risk investment. Indeed, the current yield on a 10-year note is less than two percent. Given inflation expectations during that time period, investors are essentially giving the government money for free just to hold on to it.

Essentially, investors are not pricing in any default risk with U.S. Treasury bonds. Even after the credit downgrade, U.S. government debt is still rated AA+, just one level below prime. Although it would be a stretch to say that there is no default risk whatsoever with U.S. government bonds, the risk of such default is extremely low.

Large Cap Stocks as Low Risk Investments

Although U.S. Treasury bonds can basically be considered a no risk investment, some investors may be looking for a way to obtain a little better return with a low risk investment. For those people with a long-term investment horizon of more than ten years, blue-chip equities do appear to be providing some value at this price point.

Wall Street has been driving down the prices of stocks for the better part of three years, giving shares of these companies attractive valuations. Many are paying dividend yields that are higher than 30-year U.S. Treasury bonds. If you have a long-term investment horizon, which is an important caveat given the considerable short-term risks to the economy, large cap stocks could provide decent returns without too much long-run volatility.

Given all the bad news concerning the economy, investors seems to have no taste for any high risk investments. Instead, they have been fleeing to any no risk investments that promise minimal volatility. Treasury bonds will provide such characteristics to risk-averse investors. Meanwhile, blue-chip stocks may provide a better long-run return for those looking to take a little more risk. These large companies may not necessarily be considered low risk investments, but they may have the best trade-off between risk and return in the market.

Of course, if an investor is looking for an even less risky investment, they can hold all their assets in cash, although yields on money-market accounts and bank certificates of deposit are practically zero. As such, there is not much to recommend these investments relative to treasury bonds. However, if liquidity is paramount to an investor, they may wish to think about such an allocation.