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26 November 2024 15h40
Source: Banco Carregosa

Safe investments: myth or reality?

Safe investments: myth or reality?


 

Every investor wants to see their capital grow in a safe and steady manner, without the ups and downs that often accompany the financial markets. However, there are no foolproof investments – only good selection, research and monitoring practices that all investors should follow. Find out more.

 

 

Safe investments: what does it mean?

 

 

An investment is generally considered to be safe if it is less susceptible to market fluctuations, if it has some form of protection, or if it has a lower probability of losing capital. Such investments tend to offer a relatively stable and predictable return, minimising volatility. Some of the most common examples are term deposits, short-term government bonds or even low-risk investment funds (e.g. money market or low-risk bond funds).

 

 

However, the concept of security varies according to each investor’s profile. Each person deals with volatility in a different way – some prefer security and stability, while others accept risk to try to achieve greater gains.

 

 

In addition, personal financial goals have an impact on each person’s sense of security. For example, if you are speculating on a sharp rise over a short period of time, you should be prepared to take more risk than if you are trying to invest with the aim of capitalising your assets at a steady rate and achieving your long-term goals.

 

 

Finally, economic and political conditions also play a role in this definition, as periods of instability can make even traditionally safe investments a little more uncertain.

 

 

 

Risks to consider when investing

 

 

Although some investments may be safer than others, it is important to remember that total security can never be guaranteed. All investments carry some risk, even if it's minimal. These are the most common risks associated with investing.

 

 

1. Interest rate and credit risk

 

 

Even term deposits and government bonds are subject to risk. In the case of deposits, guaranteed by the Deposit Guaranteed Fund, the main uncertainty is the risk of inflation, which may erode the purchasing power of the interest received. Government bonds, on the other hand, can be affected by changes in economic policy or financial crises that affect the solvency of the issuing government.

 

 

2. Liquidity and market risk

 

 

Some investments may be safer, but they may also be subject to liquidity constraints. For example, there may be penalties for withdrawing or selling the capital before the maturity date, or there may be periods when you can’t move the invested capital. It is important to choose investments that balance security with the need to access capital.

 

 

3. Investment correlation risk

 

 

Diversification is an important strategy for reducing the overall risk of a portfolio. Investment in different types of assets can be a hedge against fluctuations in any one type of asset. However, even a diversified portfolio needs to be well weighted and analysed, in particular to avoid assets becoming correlated in any way, thereby negating the "power of diversification”. Asset correlations fluctuate over time, which contributes to the need to dynamically rebalance exposures to each asset class.

 

 

4. Limitations on guarantees and protections

 

 

Some investments come with guarantees, such as the Deposit Guarantee Fund, which guarantees repayment up to a certain amount if the financial institution goes bankrupt. However, it is important to understand their limits and specific rules.

 

 

 

Investment options

 

 

While there is no such thing as a completely risk-free investment, some are safer than others. Here are some to consider.

 

 

1. Term Deposits

 

 

Term Deposits are the most traditional form of saving. Many Portuguese see term deposits as the only way to invest their savings. However, they tend to offer below-inflation returns and are not a form of investment (but a form of savings). In recent years, especially among the younger generations, term deposits have become one of the pillars of Portuguese wealth, representing only a percentage of the capital available for saving/investing. An increasing number of other solutions, such as those listed below, account for the remaining percentage.

 

 

2. Short-term, highly liquid investment funds

 

 

Investment funds tend to be one of the alternatives that more traditional investors look for, as they provide a risk scale that helps in deciding where to invest. O Money market funds are a type of investment fund that invests in short-term, highly liquid debt instruments such as term deposits, government bonds and other high-quality, low-risk assets. The main objective of these funds is to provide investors with immediate liquidity and a stable rate of return, while keeping the exposure to risk to a minimum.

 

 

This type of fund is considered one of the safest options on the investment market, with reduced fluctuation risks, making it a good solution for investing capital temporarily or for those looking for short-term protection. Although the return is modest compared to other types of funds, the focus on capital preservation and easy access to the amount invested are key features that attract many investors.

 

 

3. Bond investment funds

 

 

The universe of lower-risk investment funds also includes bond funds. These funds invest in debt instruments such as government and corporate bonds and tend to offer more stable and less volatile returns than equity funds. They are suitable for those seeking portfolio diversification and a more conservative risk profile. However, it is important to choose a fund that has a good reputation and is prudently managed. Bonds cover a wide range of risk levels, from low to high, so you should choose a risk level that suits your profile and objectives.

 

 

4. ETFs

 

 

Low-risk ETFs (Exchange-Traded Funds) are an interesting alternative for investors looking for diversification with less exposure to risk. These ETFs generally track indices made up of assets that are considered more stable, such as high credit quality bonds and short-term debt instruments. Because they are traded on an exchange, ETFs offer transparency, low management costs, and tend to be more liquid. Although the expected return may be more modest than other investments, the simplicity of management, intrinsic diversification and lower expected volatility make them an attractive option for those seeking security without sacrificing market efficiency. However, it is important to pay attention to the index that the ETF tracks and the market conditions that affect its underlying assets.

 

 

5. Shares

 

 

Although it is not wise to consider shares a "safe” investment in the strict sense, the long-term strategy can be one of the most effective for investors willing to accept some volatility. Historically, shares have shown strong growth potential when held over time, allowing investors to benefit from the power of compounding, reinvesting gains and overcoming short-term volatility. When investing in shares, it is important to follow good practice, such as knowing the sector in which the company operates, analysing past financial results and assessing the company’s future prospects. In addition, portfolio diversification across sectors and geographies mitigates the negative impact of declines in specific markets.

 

 

Finally, investors who focus on shares of companies with a consistent track record of paying dividends can guarantee an additional return which, when reinvested, will maximise gains over time. This approach requires discipline, patience and continuous analysis in order to adapt the portfolio to changes in market conditions.

 

 

 

Best practices for managing investment risk

 

 

If your goal is to minimise the risks of investing, there are some practices that can help protect your capital and still allow you to achieve your financial goals.

 

 

1. Diversification

 

 

Diversification is one of the most effective strategies you can use to reduce the overall level of risk in your portfolio. By spreading your investments across different asset types, sectors and geographies, you reduce the impact of any underperformance of a single investment. For example, rather than putting all your money into shares in a single company or sector, it’s a good idea to spread your investment across shares in different companies, bonds, property and other assets. Diversification helps to smooth out fluctuations and protect against large losses.

 

 

2. Risk profile assessment

 

 

Before making any investment decision, it is important to assess your risk profile. This involves understanding your ability and willingness to withstand fluctuations in the value of your investments. Investors with a lower risk tolerance tend to choose safer, less volatile investments. Investors with a higher tolerance for risk, on the other hand, can explore opportunities for higher returns, even if they come with a little more volatility. Understanding your risk profile will help you choose the investments that best suit your needs and expectations.

 

 

3. Planning and strategy

 

 

Having a well-defined investment plan is crucial to maintaining peace of mind in more uncertain times. Set clear goals and a time horizon for your investments. A good plan includes a strategy for allocating your capital according to your risk profile and financial goals. You should also review your plan regularly and make adjustments as necessary, especially if there are significant changes in your personal circumstances or the economic environment.

 

 

4. Analysis and research

 

 

Before making an investment, you should carry out a thorough analysis and research of the investments in which you are interested. Understand the fundamentals of the investments and assess the potential risks and rewards. Analyse the past performance, financial health and future prospects of assets. Analyst reports and expert opinions can also provide valuable insights.

 

 

Banco Carregosa offers specialised content for those who want to keep abreast of investment trends.

 

 

5. Regular monitoring

 

 

Portfolio rebalancing is the practice of adjusting the composition of your investments to maintain your desired asset allocation. Over time, some investments may appreciate more quickly than others, and the initial allocation of the portfolio may change. Regular rebalancing helps keep the portfolio in line with your risk profile and objectives. You may find that you need to sell assets that have become too heavy in the portfolio, or you may need to buy other assets to restore the original allocation.

 

 

6. Expert advice

 

 

Consulting a financial expert can be an excellent way to ensure you make the best investment decisions based on your specific needs and objectives. The team of experts at Banco Carregosa can provide you with personalised advice, help you build an appropriate portfolio and advise you on how to manage and mitigate risk. An external and specialised perspective is essential to achieve a more stable financial path and avoid making emotional decisions on the spur of the moment.

 

 

 

Banco Carregosa, specialised risk management support

 

 

Although there are low-risk options, all investments carry some degree of risk. The key is to understand the different types of risk, how to mitigate them and tailor your investment strategy to your personal needs and goals. Ultimately, the best way to achieve a good balance between security and profitability is through a well-diversified portfolio and a prudent approach.

 

 

If you need help exploring investment options that meet your goals, don’t hesitate to seek professional advice. After all, building a stable and secure financial future requires planning and strategy. Contact us.