How to make safe, low-risk investments in 2019
Investing is risky by its very nature, so there's no such thing as a 100% safe investment — your capital is at risk and returns are not guaranteed. However, there are low-risk investments that can offer high returns.
If you're looking for true stability and security, you should save rather than invest. Just bear in mind that savings products typically offer below-inflation rates that mean your money loses its spending power over time. To maintain or grow your wealth in the current economic climate, you likely need to accept an element of risk.
Read on to find out how to make low-risk investments and adopt safe investment strategies in the UK in 2019.
1.Try peer-to-peer lending
Peer-to-peer consumer lending is a predictable and stable investment. The money you invest is lent directly to borrowers, who then pay their loan back with interest.
Read our guide: What is peer-to-peer lending?
The main risk in peer-to-peer lending is that borrowers default on their loans. However, the safest platforms have lots of measures in place to protect against this.
Here at Lending Works, we have a rigorous underwriting process to ensure that your money is only lent to creditworthy borrowers who are unlikely to default on their loan. We also have the Lending Works Shield, a combination of a reserve fund and insurance, which is designed to make up for shortfalls. We offer high returns of up to 6.5% p.a. over five years.
Read our guide: How safe is peer-to-peer lending?
Not only does peer-to-peer position itself as a low-risk investment, but you can also invest within a tax wrapper by opening an Innovative Finance ISA. This enables you to protect your returns from tax.
Read our guide: What is an Innovative Finance ISA?
2.Choose highly-rated bonds
When you invest in bonds, you lend money to a government or company under an agreement that they pay an annual interest payment (known as the coupon) and repay the loan once the term is up. Of course, the risk with this form of investment is that the bond issuer defaults. Bonds from reliable issuers are therefore lower risk, and typically have a smaller coupon.
Independent credit rating agencies such as Moody's give issuers an investment grade to indicate how likely they are to default. For example, the UK government has an Aa2 rating, showing that bonds issued by HM Treasury (known as gilts) are "subject to a very low credit risk" and are therefore a relatively safe investment. Find out more about the rating system here.
3.Reduce risk with diversification
Diversifying your investments is an effective way to reduce risk. It means spreading your money across a variety of asset classes rather than having all your eggs in one basket, so that poor performance of one type of investment has a smaller overall impact.
Read our guide: How to diversify your investment portfolio
It's for this same reason that it's a sensible idea to invest in a fund rather than buy stocks and shares in specific companies. This spreads risk across 50–100 companies so that, rather than depending heavily on individual performance, returns rely only on a general positive trend. You'll also benefit from the expertise of a fund manager, who will give you an indication of how risky a fund is before you invest.
Most financial advisors recommend investing for a minimum of five years, and ideally ten. Trying to make quick gains is a risky strategy, as the market is volatile and needs time to 'even out'. So, as a rule of thumb: the longer you invest, the safer your money should be.
For the same reason, it can be a good idea to invest your money over a period of months rather than investing a lump sum all at once. This reduces the risk of becoming a victim of bad timing.
5.Invest with FCA-regulated firms
With any savings or investment product, there's a risk that you will lose money as a result of the financial services company committing fraud, providing negligent advice or entering insolvency. However, you will benefit from certain protections in these situations if your provider is authorised by the Financial Conduct Authority (FCA).
Firstly, FCA regulation gives you access to the free Financial Ombudsman Service (FOS). Established by Parliament, this body is responsible for settling disputes between financial companies and their customers, and has the legal power to demand compensation on your behalf.
You may also benefit from free Financial Services Compensation Scheme (FSCS) protection. This allows you to claim compensation for unfair losses up to £50,000 per person, per institution if the investment firm is unable to meet the claim themselves.
So, while the FOS and FSCS will not cover poor investment performance, they protect against other types of risk that arise when investing. It's therefore well worth looking out for FCA-regulated products as part of a low-risk investment strategy. In order to maximise FSCS coverage, it may also make sense to invest no more than £50,000 with one institution.
Lending Works is authorised and regulated by the FCA. Our peer-to-peer lending products are covered by the FOS but are not eligible for FSCS protection. However, peer-to-peer lending platforms ringfence your funds and have back-up services providers in place to help protect your money should the firm have financial difficulties. Read more about the regulation of peer-to-peer lending.
Low-risk investing is a great option if you're disillusioned with poor savings rates but want to remain cautious. It's also typically a low-maintenance strategy, making it suitable if you're a first-time investor — or simply don't have the time or desire to manage a complex portfolio.
Generally, when it comes to savings and investments, the higher the risk, the higher the potential returns. The right balance for you depends on your financial circumstances and attitude to risk, so it's well worth speaking to a financial advisor before making any decisions.
It is important that we highlight that with any peer-to-peer lending platform, your capital is at risk.