What is this type of risk-free investment called?
This sounds a lot like an Equity-indexed Annuity.  They date from about 1996 (there is a bit of skepticism about them, as they are tricky to understand for the typical investor).  For instance, an equity indexed annuity pays a portion of the gain in an index (like S&P 500) when the stock market rises, and guarantees you won't lose if it falls.  In an arbitrage sense, it is roughly equivalent to buying a mixture of bonds and index (call) options. There are a lot of complicated 'tweaks' on these, such as annual ratchet/annual reset, interest caps, etc. There is quite a bit of debate about whether they are too good to be true, so I'd read a few articles with pros and cons before buying one. These are also commonly called FIA (Fixed indexed annuities). My Credit Union offers a market-linked CD where the investment has FDIC protection if it is held to maturity, but otherwise they are linked with the S&P 500. it comes with this warning: Market-Link CDs are not appropriate for all depositors including   clients needing a guaranteed interest payment or seeking full   participation in the stock market.  If redeemed prior to maturity, the   amount received will be subject to market risk including interest rate   fluctuations an issuer credit quality. So they still do exist. Another credit union I belong to has a similar product. The risk is that if you need the money early, there may be losses. There would also not be a way to switch to a more conservative posture as the CD approached maturity, if you were interested in protecting your gains. These products are real, but they aren't risk free: 1) The bank could go under in that time.  (Are the investments FDIC insured?) 2) Your money is locked up for 5 years, probably with either no way to get it back out or a stiff penalty for early withdrawal, so you risk having a better investment opportunity come along and not having the liquidity to take advantage of it. 3) If the market does go down and you get 100% of your principal back, the endless ratchet of inflation practically guarantees that $10K will be worth less 5 years from now than it is today, so you risk losing purchasing power even if you're not losing any nominal quantity of money. It's still a fairly low-risk investment option, particularly if it's tied to something that you have reason to believe will increase in value significantly faster than inflation in the next 5 years. This is what is called a Structured Product.  The linked page gives an overview of the relative pros and cons.  They tend to hold the bulk of funds in bonds and then used equity index futures and other derivatives to match returns on the S&P, or other indices tracked.  All combine to provide the downside protection. Note that your mother did not receive the dividends paid by the constituent companies.  She only received the capital return. Here is a link to Citigroup (Europe) current structured product offerings. Here is a link to Fidelity's current offerings of structured products. Here is Investopedia's article detailing the pitfalls. The popularity of these products appears to be on the wane, having been heavily promoted and sold by the providers at the time your mother invested.  Most of these products only provide 100% protection of capital if the market does not fall by a specified amount, either in successive reporting periods or over the life of the product.  There are almost as many terms and conditions imposed on the protection as there are structured products available.  I have no personal experience buying this type of product, preferring to have the option to trade and receive dividend income. The name of this type of investment is Capital Guaranteed Investment, and yes they do exist, some financial institutions do offer them from time to time and they can be better than putting money in the bank. Unlike what someone else said, your money is not is not locked for the five years. You can take out your investment at any time, but if you do take your money out before the term (5 years in your mother's case) the capital gurantee is void. So you would only withdrawal your money if the investment is currently in proffit, because if it is at a loss when you go to withdrawal, you get hit with the loss. In many cases you will get a third party, usually a large bank, being guarantor for the capital guarantee, and they in turn get paid for this obligation.
"I struggled with this one at first.   It's easiest if you temporarily ignore the mathematical machinery of martingales and go back to the derivation that Black and Scholes provide in their 1973 paper. They basically show that when you construct a portfolio consisting of a long position in the option (the one being priced) and a short position on the replicating portfolio (consisting of shares of stock and cash in the risk-free bank account), then that portfolio will be entirely risk-less, and hence will earn the risk-free rate of interest. This makes intuitive sense if you think about it - every change in the value of the option is going to be countered by an opposite change in the replicating portfolio; by no arbitrage, that composite portfolio (the option + the replicating portfolio) must therefore earn the risk-free rate.   The fact that the composite portfolio earns the risk-free rate provides the connection to martingale pricing.   Recall that a martingale is basically* a stochastic process that has no drift, only volatility. Here, it's useful to think of the drift as being the ""risk  premium"" or ""return"" of a particular asset (like the stock).   What martingale pricing theory says is that to find the price of the option we (1) discount the value of the replicating portfolio by the cash bond (the numeraire asset), and (2) turn the stochastic process of the risky asset in the replicating portfolio into a martingale. This move intuitively makes sense because the Black-Scholes derivation shows that the replicating portfolio + the option must earn the risk-free rate, but if you divide the value of the Black-Scholes replicating portfolio by the numeraire asset, you're going to cancel out that risk-free rate -- e.g. have a Martingale.  (I'm not a mathematician, so please correct me if I've mucked something up in my explanation).   *I say basically because there are some technical conditions that need to be fulfilled, but that's generally true." "https://www.fool.com/investing/general/2013/07/30/2-types-of-risk-2-types-of-bubbles.aspx (mirror): The Wall Street Journal reviews: What Mr. Bernstein calls ""shallow risk"" is a temporary drop in an asset's market price; decades ago, the great investment analyst Benjamin Graham referred to such an interim decline as ""quotational loss."" ""Deep risk,"" on the other hand, is an irretrievable real loss of capital, meaning that after inflation you won't recover for decades -- if ever. So quotational loss = loss not explained by change of actual value of a firm." I think your premise is slightly flawed. Every investment can add or reduce risk, depending on how it's used. If your ordering above is intended to represent the probability you will lose your principal, then it's roughly right, with caveats. If you buy a long-term government bond and interest rates increase while you're holding it, its value will decrease on the secondary markets. If you need/want to sell it before maturity, you may not recover your principal, and if you hold it, you will probably be subject to erosion of value due to inflation (inflation and interest rates are correlated). Over the short-term, the stock market can be very volatile, and you can suffer large paper losses. But over the long-term (decades), the stock market has beaten inflation. But this is true in aggregate, so, if you want to decrease equity risk, you need to invest in a very diversified portfolio (index mutual funds) and hold the portfolio for a long time. With a strategy like this, the stock market is not that risky over time. Derivatives, if used for their original purpose, can actually reduce volatility (and therefore risk) by reducing both the upside and downside of your other investments. For example, if you sell covered calls on your equity investments, you get an income stream as long as the underlying equities have a value that stays below the strike price. The cost to you is that you are forced to sell the equity at the strike price if its value increases above that. The person on the other side of that transaction loses the price of the call if the equity price doesn't go up, but gets a benefit if it does. In the commodity markets, Southwest Airlines used derivatives (options to buy at a fixed price in the future) on fuel to hedge against increases in fuel prices for years. This way, they added predictability to their cost structure and were able to beat the competition when fuel prices rose. Even had fuel prices dropped to zero, their exposure was limited to the pre-negotiated price of the fuel, which they'd already planned for. On the other hand, if you start doing things like selling uncovered calls, you expose yourself to potentially infinite losses, since there are no caps on how high the price of a stock can go. So it's not possible to say that derivatives as a class of investment are risky per se, because they can be used to reduce risk. I would take hedge funds, as a class, out of your list. You can't generally invest in those unless you have quite a lot of money, and they use strategies that vary widely, many of which are quite risky. Everyone would like a savings/checking account that has the same liquidity as others but pays multiple times as much, but such a thing would break the laws of finance.  The thing keeping savings and checking accounts cheap isn't particularly the FDIC insurance but the high liquidity and near certainty that you will not lose money.  In all of finance you are compensated for the risk (and perhaps illiquidity) you bear.  If you insist on a risk-free and highly liquid investment, you will get the risk-free and highly liquid rate, which is currently around 1%. Doesn't matter what type of investment it is (savings, money market, treasuries, etc.).  Money market funds, in particular, were designed to be a replacement for savings accounts.  They have decent liquidity and almost no risk (and no FDIC insurance).  But they earn about what good savings accounts do, because that's what risk-free investments earn. If you wish to earn more you must decide what you will give up: Decide on one (or both) of those to sacrifice and you will find yourself with options. "Investing is always a matter of balancing risk vs reward, with the two being fairly strongly linked.  Risk-free assets generally keep up with inflation, if that; these days advice is that even in retirement you're going to want something with better eturns for at least part of your portfolio. A ""whole market"" strategy is a reasonable idea, but not well defined. You need to decide wheher/how to weight stocks vs bonds, for example, and short/long term. And you may want international or REIT in the mix; again the question is how much. Again, the tradeoff is trying to decide how much volatility and risk you are comfortable with and picking a mix which comes in somewhere around that point -- and noting which assets tend to move out of synch with each other (stock/bond is the classic example) to help tune that. The recommendation for higher risk/return when you have a longer horizon before you need the money comes from being able to tolerate more volatility early on when you have less at risk and more time to let the market recover. That lets you take a more aggressive position and, on average, ger higher returns. Over time, you generally want to dial that back (in the direction of lower-risk if not risk free) so a late blip doesn't cause you to lose too much of what you've already gained... but see above re ""risk free"". That's the theoretical answer. The practical answer is that running various strategies against both historical data and statistical simulations of what the market might do in the future suggests some specific distributions among the categories I've mentioned do seem to work better than others. (The mix I use -- which is basically a whole-market with weighting factors for the categories mentioned above -- was the result of starting with a general mix appropriate to my risk tolerance based on historical data, then checking it by running about 100 monte-carlo simulations of the market for the next 50 years.)" "It's a risk free investment only if you have 100% warranty that you will be able to sell these stocks for a better price than what you've paid. And that's virtually impossible. I don't think there is any ""risk free investment"" when stocks are involved. You can try to minimize the risks and consider them low, but IMO it's dangerous." I recall similar strategies when (in the US) interest rates were quite a bit higher than now. The investment company put 75% or so into into a 5 year guaranteed bond, the rest was placed in stock index options. In effect, one had a guaranteed return (less inflation, of course) of principal, and a chance for some market gains especially if it went a lot higher over the next 5 years.  The concept is sound if executed correctly. "Thank you for the in-depth, detailed explanation; it's refreshing to see a concise, non verbose explanation on reddit.  I have a couple of questions, if that's alright.   Firstly, concerning mezzanine investors. Based on my understanding from Google, these people invest after a venture has been partially financed (can I use venture like that in a financial context, or does it refer specifically to venture capital?) so they would receive a smaller return, yes? Is mezzanine investing particularly profitable? It sounds like you'd need a wide portfolio.  Secondly, why is dilution so important further down the road? Is it to do with valuation?  Finally, at what point would a company aim to meet an IPO? Is it case specific, or is there a general understanding of the ""best time""?  Thank you so much for answering my questions." GIC perhaps? These would be quite similar to Certificates of Deposit where one is agreeing to lock up their money for a term and be paid a percentage for doing so. There are various kinds as some may be linked to market returns in some cases and others are just simple interest. "There are tax free bonds in the United States.  They are for things like public housing and other urban projects.  They are tax free for everyone but only rich people buy them.  Why?   The issue is that the tax free nature of the bond is included in its yield.  So rather than yielding say a 5% return, they figure that the owner is getting 20% off due to not paying taxes.  As a result, they only give a 4% return but are as risky as a 5% return investment.  Net result, only rich people invest in tax free bonds.  ""Rich"" is defined here to mean people paying a 20% tax on long term investment returns.   Or take the State and Local Tax (SALT) deduction, which has been in the news recently.  Again, it is technically open to everyone.  But there is also a standard deduction that is open to everyone.  For the typical family, state and local taxes might be 5% of income.  So for a family making $100k a year, that's $5k.  The same family can take a $13k or so standard deduction instead of itemizing.  So why would they take the smaller deduction?   As a practical matter, two groups take the SALT deduction.  People rich enough to pay more than $13k in state and local taxes and people who also take the mortgage interest deduction.  So it helps a lot of people who are rich quite a bit.  And it helps a few middle class people some.   But if you are lower middle class with a $30k mortgage on a tiny house and paying 4% interest, then that's only $1200 a year.  Add in property taxes of $3000 and SALT of $2.8k and that's only $7k.  Even if the person gives $3k to charity, the $13k deduction is a lot better and requires less paperwork.   Contrast that with someone who has $500k mortgage at 3.6% interest.  That's $18k in interest alone.  Add in a SALT of $7k and property taxes of $50k, and there's $75k of itemized deductions, much better than $13k.  Now a $7k donation to charity is entirely deductible.  And even after the mortgage interest deduction goes away, the other $64k remains." "That characterisation of arbitrage-free pricing sounds a bit like the ""relative vs. fundamental"" approaches to asset pricing that Cochrane outlines (in his text, *Asset Pricing*). Rebonato also makes this distinction with regard to term structure models in *Volatility and Correlation*.   On one extreme you have CAPM-style models in which asset prices are completely determined by investors' risk preferences; on the other extreme, you would have something like a SABR-Libor Market Model where you take everything up to and including the volatility surface as given.   What's interesting to me is the way in which these different classes of models get used in various parts of the financial industry. So, buy side firms tend to rely a lot more on equilibrium-style models, since they ultimately care about things like how the equity risk premium or the bond risk premium affect asset prices. In contrast, derivatives quants working at a big sell-side bank who are pricing exotics don't care about what the ""fundamental"" value of their underlying assets is; they just take that as given and price the exotic accordingly." "First, congratulations on choosing to invest in low cost passively managed plans. If you choose any one of these options and stick with it, you will already be well ahead of most individual investors. Almost all plans will allow you to re-balance between asset classes. With some companies, sales agents will encourage you to sell your overweighted assets and buy underweighted assets as this generates brokerage commissions for them, but when you only need to make minor adjustments, you can simply change the allocation of the new money going into your account until you are back to your target weights. Most plans will let you do this for free, and in general, you will only need to do this every few years at most. I don't see much reason for you to be in the Target funds. The main feature of these plans is that they gradually shift you to a more conservative asset allocation over time, and are designed to prevent people who are close to retirement from being too aggressive and risking a major loss just before retirement. It's very likely that at your age, most plans will have very similar recommendations for your allocation, with equities at 80% or more, and this is unlikely to change for the next few decades. The main benefits of betterment seems to be simplicity and ease of use, but there is one concern I would have for you with betterment. Precisely because it is so easy to tweak your allocation, I'm concerned that you might hurt your long-term results by reacting to short-term market conditions: I know I said I wanted a hands off account, but what if the stock market crashes and I want to allocate more to bonds??? One of the biggest reasons that stock returns are better than bond returns on average is that you are being paid to accept additional risk, and living with significant ups and downs is part of what it means to be in the stock market. If you are tempted to take money out of an asset class when it has been ""losing/feels dangerous"" and put more in when it is ""winning/feels safe"", my concerns is that you will end up buying high and selling low. I'd recommend taking a look at this article on the emotional cycle of investing. My point is simply that it's very likely that if you are moving money in and out of stocks based on volatility, you're much less likely to get the full market return over the long term, and might be better off putting more weight in asset classes with lower volatility. Either way, I'd recommend taking one or more risk tolerance assessments online and making sure you're committed to sticking with a long-term plan that doesn't involve more risk than you can really live with. I tend to lean toward Vanguard Life Strategy simply because Vanguard as a company has been around longer, but betterment does seem very accessible to a new investor. Best of luck with your decision!" "Due to the zero percent interest rate on the Euro right now you won't find any investment giving you 5% which isn't equivalent to gambling.  One of the few investment forms which still promises gains without unreasonable risks right now seems to be real estate, because real estate prices in German urban areas (not so in rural areas!) are growing a lot recently. One reason for that is in fact the low interest rate, because it makes it very cheap right now to take a loan and buy a home. This increased demand is driving up the prices. Note that you don't need to buy a property yourself to invest in real estate (20k in one of the larger cities of Germany will get you... maybe a cardboard box below a bridge?). You can invest your money in a real estate fund (""Immobilienfond""). You then don't own a specific property, you own a tiny fraction of a whole bunch of different properties. This spreads out the risk and allows you to invest exactly as much money as you want. However, most real estate funds do not allow you to sell in the first two years and require that you announce your sale one year in advance, so it's not a very liquid asset.  Also, it is still a risky investment. Raising real estate prices might hint to a bubble which might burst eventually. Financial analysts have different opinions about this. But fact is, when the European Central Bank starts to take interest again, then the demand for real estate property will drop and so will the prices. When you are not sure what to do, ask your bank for investment advise. German banks are usually trustworthy in this regard." "I'd argue the two words ought to (in that I see this as a helpful distinction) describe different activities:   ""Investing"":  spending one's money in order to own something of value.  This could be equipment (widgets, as you wrote), shares in a company, antiques, land, etc.  It is fundamentally an act of buying. ""Speculating"":  a mental process in which one attempts to ascertain the future value of some good.  Speculation is fundamentally an act of attempted predicting.   Under this set of definitions, one can invest without speculating (CDs...no need for prediction) and speculate without investing (virtual investing).  In reality, though, the two often go together.  The sorts of investments you describe are speculative, that is, they are done with some prediction in mind of future value.   The degree of ""speculativeness"", then, has to be related to the nature of the attempted predictions.  I've often seen that people say that the ""most speculative"" investments (in my use above, those in which the attempted prediction is most chaotic) have these sorts of properties: And there are probably other ideas that can be included. Corrections/clarifications welcome! P.S. It occurs to me that, actually, maybe High Frequency Trading isn't speculative at all, in that those with the fastest computers and closest to Wall Street can actually guarantee many small returns per hour due to the nature of how it works.  I don't know enough about the mechanics of it to be sure, though." "Let me see if I can restate your question: are speculative investments more volatile (subject to greater spikes and drops in pricing) than are more long-term investments which are defined by the predictability of their dividend returns? The short answer is: yes.  However, where it gets complicated is in deciding whether something is a speculative investment. Take your example of housing.  People who buy a house as an investment either choose to rent it out (so receive ""rent"" as ""dividend"") or live in it (foregoing dividends).  Either way, the scale of the investment is large and this is often the only direct investment that people manage themselves.  For this reason houses are bound up in the sentimental value people attach to a home, the difficulty of uprooting and moving elsewhere in search of cheaper housing or better employment, or the sunk cost of debt that can't be recovered by a fire-sale.  Such inertia can lead to sudden sell-offs as critical inflection points are reached (such as hoped-for economic improvements fail to materialise and cash needs become critical). At different levels that is true of just about every investment. Driving price-volatility is the ease of sale and the trade-offs involved.  A share that offers regular and dependable dividends, even if its absolute value falls, is going to be hung on to more frequently than those shares that suffer a similar decline but only offer a capital gain.  For the latter, the race is on to sell before the drop neutralises any remaining capital gain the investor may have experienced. A house with a good tenant or a share with stable dividends will be kept in preference for the quick cash-return of selling an asset that offers no such ongoing returns. This would result, visually, in more eratic curves for ""speculative"" shares while more stable shares are characterised by periods of stability interspersed with moments of mania. But I have to take your query further, since you provide graphical evidence to support your thesis.  Your charts combine varying time-scales, different sample rates and different scales (one of which is even a log scale).  It becomes impossible to draw any sort of meaningful micro-comparison unless they're all presented using exactly the same criteria."