The Safest and the Riskiest Assets

Risk is unavoidable if you want to invest in financial markets. Maybe you want to maximize risk for the biggest potential payoff or maybe you want to minimize risk to play it safe and protect your assets. Either way, you need to understand the inherent risk in any investment class and weigh it against your age, goals, and resources. Once you understand the risk factor for any potential investment, only then can you make a smart decision about what works best for you.

The major investment asset classes include savings accounts, savings bonds, equities, debt, derivatives, real estate, and hard assets. Each has a different risk/reward profile.

Here's a look at those asset classes and what they represent in terms of risk.

CDs and Other Safe Havens

The safest investments are savings accounts and certificates of deposit (CD), which are protected by Federal Deposit Insurance Corporation (FDIC) provisions. These investments are the safest asset class available.

Cash, U.S. Savings Bonds, and U.S. Treasury bills are almost equivalent. Each has a similar risk, and the interest rate offered by each is nil or negligible. For accounts that are bigger than what FDIC provisions allow for, however, they are the next closest thing to being guaranteed.

Marketable Debt and Equities Are Risky

Marketable debt is risky. Even though these instruments are bonds, they are quite different from their savings bond cousins. Corporate, municipal, state and federal bonds carry varying levels of risk. Rating agencies such as Standard & Poor's and Moody's publish detailed reports and offer ratings on companies' ability to service debt issues.

Equities and equity-based investments such as mutual funds, index funds and exchange-traded funds (ETFs) are risky, with prices that fluctuate on the open market each day. Taking regular losses in a managed and disciplined way is essential to any stock trading plan. Successful risk management is the key to any stock investment method or system.

Derivatives Are Risky and Complicated

Derivatives are risky and may be difficult to understand, which presents a risk in itself. Futures and options are moderately complex, and investors in each are capable of incurring substantial losses. However, derivatives also offer unique opportunities to profit, which astute investors have earned great amounts of capital utilizing. Constant research and application of a sound plan are essential for managing the risk involved with trading derivatives.

Gold, Silver, and All That Glitters

Commodities such as gold and silver may be owned through futures. Some gold investors own gold coins as a hedge against political instability or the devaluation of a currency. While such efforts may be based on good planning, the value of gold bullion during periods of political instability has varied widely throughout history. Commodities are risky.