The “Hidden” Risk Associated With Low-Risk Investing

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When you’re looking to grow your money, you may be looking for a “safe” investment option. However, it’s important to remember that all investments come with some level of risk — even the ones marketed as “low risk.”

“There are. no ‘low-risk’ investments. They all have some level of risk. However, most people consider holding funds in cash as no risk. Their money is in a certificate of deposit (CD), savings, or money market account earning now, approximately 1%,” Zanielia Harris, President & Financial Advisor at Harris & Harris Wealth Management, told MadameNoire.

Further, there is one type of risk associated with these safer investments that hold funds in cash that is not often discussed: purchasing power risk.

“There is a risk associated with staying in cash,” Harris went on. “If the funds in these accounts are for long-term financial goals, then there is purchasing power risk. Purchasing power risk is when your dollar doesn’t allow you to purchase as much in goods or services in the future.”

While holding funds in cash for an emergency fund is a good idea, Harris advises other forms of investment for long-term goals such as retirement or college.

“Think about the cost of college 30 years ago compared to now. It is a complete sticker shock,” said the Finance ‘n Stilettos: Money Matters for the Well-Heeled Woman author. “For your emergency money, having funds in cash and its equivalents is fine. But with long term goals, it can definitely have a major impact on your livelihood.”

For this reason, Harris encourages her clients to be smart with their money and plan for the future by taking calculated risks.

“As a financial planner, it is my duty to consider the consequences that my client may not,” Harris went o. “Therefore, clients not taking on enough calculated risk is a huge concern for me, especially when the focus is retirement. Why? I don’t want clients to run out of money because they did not invest aggressively enough to build their nest egg. These accumulated funds are what will sustain them during their retirement years. This is a major consideration because of the impending issues around social security — one of the major financial pillars for retirement.”

As for real-estate, mutual funds, and EFTs being considered a lower risk investment, Harris had this to say:

“There are those who feel investing in real estate is low risk. Real estate investing is an active investment that can require time, labor, and a certain level of expertise. The risk investors need to consider here is liquidity risk. Owning real estate can take a long time to convert into cash. If you need funds right away and it is locked into real estate, there are many factors that influence when you obtain the cash and how much it will be. This risk can also apply to other types of investments that are illiquid,” Harris advised. “Owning mutual funds or exchange-traded funds (ETF), can be considered lower-risk investments in comparison to owning individual stocks. These types of investments do not guarantee a specific rate of return because it varies depending on market conditions. However, some investors may feel owning funds are less risky because there tends to be upwards of 100 different stocks represented in a mutual fund or ETF portfolio,” said Harris. “That is why diversification, owning investments across different industries, countries, sizes, and types, is important and understanding the purpose of your investments as it pertains to the goals within your overall financial plan.”

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