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Safe Ways to Invest
by Jonathan Roe
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Overview
When saving money for retirement, a child's college education or even something smaller like a vacation, it is important not to have to save for it twice. Risk and reward go together, but for the investor who is looking for a safe way to invest, dollar-cost averaging, diversification and a portfolio weighted in cash and bonds will reduce the ups and downs an investor will invariably experience.
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Dollar Cost Averaging
Market timing is next to impossible for an average investor to do successfully. The biggest problem is you have to be right twice. You have to call the bottom of the market and you have to call the top and have the conviction to move your money into or out of the market when you think it has topped or bottomed. The alternative to market timing is dollar-cost averaging. Dollar-cost averaging involves putting a set amount of money into the market on a regular basis. This allows you to buy fewer shares when the price is high and more shares when the price is low.
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Diversification and Asset Allocation
Diversification and asset allocation plays a large part in investing safely. Spreading your investments out over a number of different assets and over a variety of asset classes reduces risk. For example, if you invest 100 percent of your money into one company and that company goes bankrupt, you have lost 100 percent of your investment. Alternatively, if you invest your money into a portfolio of 50 companies and one of them goes bankrupt, you have only lost 2 percent of your assets. This sort of diversification also applies to asset classes. If you invest your money into domestic and international large-, mid- and small-cap equities, bonds, cash, currency, commodities and real estate, you are less likely to have your entire portfolio wiped out. This diversification and asset allocation reduces the amount of risk and is a safer way to invest.
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Cash and Bonds
If you are really risk-averse and want to greatly reduce your odds of losing money, you should heavily weigh your portfolio toward cash and bonds. To further increase the safety of your wealth, you want to apply the concepts of diversification and asset allocation here as well. Don't just invest in U.S. dollars, treasuries and bonds, but go global and invest in the currency and bonds of countries such as Switzerland, the United Kingdom and any other country you think is going to remain financially secure. By doing so, you reduce your risk of having your wealth erode if our government defaults on debt or hyperinflation takes root.
