How to Invest If You Can't Afford to Lose
If you can't afford any risk, choose investments wisely.
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When you absolutely don't want to lose any money from your investment portfolio, you have to choose investments that are bank-insured and so safe that they have historically not lost money. You should understand that the safer an investment, the lower the chances of making high returns. These investments run little or no risk of losing money, so you get safety in return for the lower yield. Even with safe investments, you should divide your money among several investment options.
Divide your funds into two types of investments. The first type represents money you can afford to lose, and the second contains money you can't afford to lose. For example, you might have a tolerance for losing a few hundred dollars left over from a tax refund or payments for overtime at work. On the other hand, you might have savings that you will depend on for your retirement income, and you can't afford to lose any of it. You will find it useful to divide your money so you remain absolutely clear about which portion you can't risk.
Step 2Divide the portion of your funds that you can't afford to lose into four equal portions. Each of your four portions of the investment money you can't lose can go into different types of investments. Any one of these types might do well at any given time. By dividing your money this way, you give yourself the opportunity to prosper from any single investment that starts to pay better.
Step 3Place 25 percent of your investment in a certificate of deposit with a bank. The CD is insured as one of the bank's deposits. The insurance covers up to $250,000 for each bank customer. The CD will earn interest, and you'll get your full investment amount back in addition to that interest. The interest rate on the CD will not go up or down during the term you hold it for. For example, a one-year CD paying two percent interest will not lower or raise your interest rate for a year. After that, you can decide whether to put your money into a new CD that pays a different rate.
Step 4Keep 25 percent of your investments in a money market account with your bank. This is your safest investment. Note that a money market account differs from a money market fund. A money market account is FDIC insured because it is a bank deposit. A money market fund is a mutual fund that is not insured.
Step 5Deposit 25 percent of your money into a savings account. This account will pay less than a CD or a money market account, but it will earn some interest. You can also get to it quickly if you need it. You can fill out a form at your bank making your savings account accessible with your ATM card.
Step 6Keep 25 percent of your money in a checking account. Some banks pay interest on checking accounts that pay a minimum balance. You can use this portion of your money to maintain that balance. This will also save you bank transaction fees.
References
Tips
- If any one portion of your investments grows faster than the other, you might find that you have a larger percentage in that investment. Re-balance your investments if you find that one of them rises to 30 percent of your total investments.
Warnings
- You can invest in government bonds for relative safety, but they are not 100 percent safe. Though they are backed by the full faith and credit of the United States, the country's credit rating can drop. This can lower the value of your bonds.
- Life insurance companies offer policies that grow in value every year. When you buy one of these, you still run the risk that the life insurance company might fail.
Writer Bio
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.