If there are two words that can get any risk-averse investor’s wallet tingling, it’s “guaranteed ROI”.
But is there really such a thing as a ‘sure bet’ – can you ever truly invest with guaranteed ROI in today’s economy?
Perhaps surprisingly, the answer (with certain caveats) is yes, you can. There are still investments with guaranteed ROI, although the returns may be lower than if you are able to accept at least some level of risk.
Here are some examples of opportunities that allow you to invest with guaranteed ROI while minimising your exposure to risk, even during turbulent markets.
Certificates of Deposit
Certificates of Deposit are among the highest levels of confidence you can get – backed by banks, with guaranteed interest rates over specified periods of time.
There are relatively few rules to understand, just an agreement to place your deposit with the bank for a certain length of time, and receive a set interest rate at the end of that time.
Consumers who don’t consider themselves to be investors at all may be familiar with this kind of long-term savings account, and the structure is basically the same for investors.
The risks are minimal, as your initial deposit is held by the bank, and nothing short of a total collapse of the relevant parent company should be able to affect how much you get back.
However – and there is always a but – your investment will be locked away until the maturity date, which can be anywhere from around 90 days to ten years, so be sure to factor in the impact this will have on the overall liquidity of your portfolio.
Also be aware that Certificates of Deposit are sometimes referred to as CDs for short. Meanwhile Credit Default Swaps are shortened to CDS with a capital S – and you should never confuse the two!
Some governments offer inflation-linked investments, for example UK government inflation-linked bonds (also known as inflation-linked gilts) and in the US, Treasury inflation protected securities or Tips.
These promise to track the headline rate of inflation and may also pay out a fixed interest rate on top of that – so while the interest itself can be as low as 0.5-1.0%, this is on top of an increase in value that matches inflation.
As a result, the real terms value of inflation-linked investments is not eroded under normal market conditions.
The confidence here is a little lower – issues like quantitative easing can impact on the yield, and you may also lose out due to tax – but this can be mitigated to an extent by diversifying between short and long-term bonds, and by buying from international governments too.
One further complication when you invest in international inflation-linked investments is the impact of exchange rates, as these can both increase and decrease the amount you receive when liquidating your portfolio back into pounds sterling.
Money Market Funds
Money market funds or MMFs don’t necessarily offer guaranteed ROI, but they may be the right option for investors looking to balance yields and liquidity.
It is normal for MMFs to offer very good liquidity, with the option to withdraw your funds on a daily basis (often subject to a cut-off time in early to mid-afternoon).
This means that when you need to access your money, you normally can do – unlike guaranteed ROI investments like the Certificates of Deposit mentioned above.
Risk-averse investors should be aware that MMFs typically do not guarantee the value of your investment, including the initial capital you deposit, but they do usually focus on investing in highly liquid and well performing stocks.
Because of this, the fund as a whole can provide good performance on a very short-term basis, and they are well worth considering as a way to balance illiquid investments like CDs as part of a diverse and risk-efficient portfolio.
Where one provides confidence of ROI, the other provides confidence when you want or need to access your money, and together this might be just the mix you have been looking for.
External factors on guaranteed ROI investments
Remember the impact of external factors on guaranteed ROI investments, including those already touched on in this article.
You can sign up to a fixed interest rate and lock your money away for many years, only to find that high inflation has eroded the added value of your payout.
Likewise inflation-linked investments can be eroded by changing currency rates or may simply underperform other investments during a period of market growth but relatively low inflation.
And the compromises you make in order to get guaranteed ROI can introduce other risks into your portfolio, such as limiting your liquidity or restricting you to a single national economy.
Don’t lock away more than you can afford – and consider putting a percentage limit on the proportion of your portfolio that you are prepared to put into illiquid investments for the sake of a fixed interest rate.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.