Which investments are the most and least risky?
All investments carry risk, and a lot of factors impact how they perform. Inflation, for example, is a bigger danger to bond investors than stock investors. Stocks, on the other hand, face greater liquidity risk (the risk of the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss) than do money market and short-term bond investments. Here’s how the big three investment classes rank:
Cash equivalents include certificates of deposit, Treasury bills, money market funds and similar investments. They typically earn lower returns than stock or bond investments but present very little risk to your principal. Cash equivalents may help you cushion your losses in the event of a downturn in the stock or bond markets. Keep in mind that money market funds, while considered safe and conservative, are not insured by the Federal Deposit Insurance Corporation the way certificates of deposit may be.
Bonds / Fixed Income Investments include bonds and bond mutual funds. They’re riskier than cash equivalents but are typically less risky to your principal than stocks. They also generally offer lower returns than stocks.
Stocks / Equity Investments include stocks and stock mutual funds. These investments are considered the riskiest of the three major asset classes, but they also offer the greatest potential for high returns.