Low risk investments with high returns!

What’s the holy grail of investing? Easy! Low risk investments with high returns.

But is such a thing even possible?

We all know the rules. Low risk investments have low returns and high risk investments have high returns.

In fact, let’s just rephrase that last sentence a little because it’s not quite right. It should really say something along the lines of:

Low risk investments tend to have low returns and high risk investments have the possibility of high returns.

A lot of people conveniently miss out the word ‘possibility,’ but they shouldn’t because high risk investments don’t guarantee high returns. Not by a long shot. Rather, they give you the possibility of high returns, and in most cases that possibility is very small.

The bottom line being that high returns are anything but guaranteed. In fact, you could go so far as to say, the higher the return the less likely it is you are going to get that return.

Invest your cash in the next Amazon and billionairedom beckons, but wack it in the next Pets.com and you could end up sleeping on the streets.

Not many people (if any) can predict the next big thing. Anybody who says otherwise should immediately set alarm bells ringing. More than a passing glance at the latest SPIVA analysis suggests you should also think twice before listening to professionals. More and more evidence suggests highly educated, well resourced financial professionals don’t do any better than the average Joe when it comes to picking investments.

And no doubt that’s why more and more of us are playing it safe. Yeah we invest in risky stocks, but we spread the risk over lots of different companies via a fund. Don’t put all your eggs in one basket and all that! In fact, most of us sensible types go one step further by adding a second layer of security to our finances by incorporating some bonds in our investment mix.

I’ve often thought you could probably tell more about a person from their stock and bond allocation than any number of psychological questionnaires will tell you. A sixty forty (stocks/bonds) equals Mr Traditional, an eighty twenty says Miss Confident and a fifty fifty suggests Mr and Mrs Indecisive.

But even 80% stocks is playing is safe to a certain extent. A quick look over history and we can see that over the very long term stocks provide around 5% (over inflation) and bonds about 2% annually.

Sure, it is better than sticking your money in a bank account and watching the real value drop as inflation works its black magic, but surely we could do better.

If you’d invested in Amazon back in 1997 you’d be up over 120,000% now!

A lot of people think Tesla might just be the next Amazon. It’s up 343% this year. If only we’d invested!

They say hindsight is a wonderful thing. Yes, everybody has been talking about Tesla for a while now, but not all the talk was positive. There were plenty of naysayers out there (most of them professional!) and to be fair their complaints weren’t trivial i.e. the company doesn’t make money, is mired in mountains of debt, and has more competitors than the olympics.

I mean is it really beyond reason that GM, Ford or Fiat Chrysler couldn’t come up with a decent electric car to rival Tesla, because right now Tesla is worth more than those three combined!

The truth is, nobody knows how the Tesla thing will play out. Elon Musk could come to dominate the world and Tesla become the next Apple. In that case current prices of around $1000 per share could end up being a steal, but equally one of GM, Ford, Fiat Chrysler, Toyota, Volkswagen, Daimler, Honda, BMW, Nissan, Hyundai, Peugeot, Renault, Mazda, any of the government backed Chinese companies, or another company altogether might just come up with something better!

Are we really writing all these companies off already? Yeah, some of them will probably fold but not all of them, surely! And even if they do all fold, and Tesla does reign supreme that doesn’t guaranteed the stock price will continue its dramatic ascent from there.

The crux of the matter is nobody knows what is going to happen down the line.

And that’s why it is super dangerous to put too much money in one company’s stock, no matter how much of a sure thing you think it is.

That’s not to say you couldn’t have a bet on Tesla with a bit of loose change. As long as the loose change is money you can afford to loose, and you understand that this kind of trade is more of a gamble than an investment.

But the trouble is, in most cases, weighing up how much you can afford to loose tends to put the kibosh on big winnings. Investing £100 in Tesla a year ago would have turned into £343 today. Was it worth totally losing £100 to make £243? Not for me, but for some maybe!

For many folk, me included, high risk investments with the (slim) possibly of high returns just aren’t worth it and low risk investments with high returns just don’t exist.

Or do they?

Well, maybe. Just so long as we accept that the chance of getting big returns is low, but at the same time knowing that in reality, the same can be said of high risk investments anyway.

If we accept this, then there is a strong argument that low risk investments with high returns do exist. In fact, you could say super duper low risk investments with astronomically high returns exist.

And I’m not talking about some kind of complex hard to access investment product for so called ‘sophisticated investors’ either. Rather, I’m talking about something that is easily available to everyone (including expats!).

I’m talking about……… wait for it!……… Premium Bonds!

Yes, the old stalwart from National Savings and Investments!

At this point, you might think I’m joking, but I’m really not!

The name ‘Premium Bonds’ doesn’t quite carry the same exotic mystic as hedge fund or private equity, and no wonder really, they are the UK’s biggest savings product. Around a third of the population invests in them, but there won’t be many serous investors included in those ranks because to them premium bonds get lumped in with lottery tickets i.e. not a real investment!

But there’s a very big difference. With lottery tickets, if you don’t win, you loose! You don’t get any of your money back, but with premium bonds, you do. You don’t lose a penny i.e. you can’t lose! And with a maximum prize of £1,000,000 on a £1 bond. That’s around a 100 million percent return!

Not sure there are many competitors to those kinds of returns!

OK, your chances of winning are low, but so are the chances of getting big returns from a high risk investment, and it would need to be one hell of a high risk investment to provide 100 million percent returns.

To be honest, in a previous life, when bank savings rates were mid to high single digits investing in Premium bonds wouldn’t even cross my mind, but in a time of such low interest rates, I’m starting to think Premium bonds offer a compelling proposition.

Let me explain: The annual prize fund interest rate for premium bonds is 1.4%. Though you aren’t guaranteed to get that, it does give a kind of ball park figure for the average guy investing for the average amount of time with the average amount of money.

Less time, less bonds and less luck equals less of a return, but still a good chance of a return and in the current climate probably something similar to what banks are paying for savings accounts and what governments are paying for their short term bonds.

There aren’t many articles on this site that don’t advocate splitting your money between stocks and bonds, and though it’s never come up before, there’s no reason why Premium Bonds couldn’t take up some or all the bond position.

Short term government bonds could easily be replaced by Premium Bonds and right now with the Bank of England interest rate so low you’ll probably get a better return from Premium Bonds than you would from short term government bonds (with average luck)! Not to mention the fact that prizes are paid tax free and you don’t pay management charges like you do with bond funds.

So here is a summary of why Premium Bonds might just be a good addition to your investments right now:

• As near as practically possible to risk free as backed by British Government
• Can invest with as little as £25
• Open to expats
• Reasonable rate of return (with average luck)!
• Possibility of very high returns

Just to be clear, if the good old days were back where government bonds & high interest savings accounts paid high single digit interest rates, Premium Bonds wouldn’t even cross my mind, but in the current climate where they don’t pay anywhere near that, and where high return investments are hard to find, I think Premium Bonds make a compelling investment, and I think it would be hard for anybody to argue that low risk investments with high returns don’t exist.

And did I mention the fact that you could win a million!