Investing & Retirement
7 Low-Risk Investment Strategies You Should Use Today
While there is no such thing as a no-risk investment, low risk investment strategies are out there. If your investment portfolio relies too heavily on stocks and other risky methods, it’s a good idea to diversify to even out the ups and downs. Don’t forget the stock market disaster of 2008 and 2009 wiped out $6 trillion worth of wealth in this country. Low risk investments become even more important as you approach retirement, and you can ill afford to lose your savings.
The following are low-risk strategies that will get you a decent return on your money without rolling the dice.
1. Dividend Paying Stocks
While not all companies offer a dividend to stock holders, many do. Of course, you may not want to buy the highest-yielding stocks just for their dividends, as high-yielders may also be high risk. A good place to look is major blue-chip firms in pharmaceuticals, utilities, energy and telecommunications with a yield of 6% or more.
2. High-Yield Debts
“Junk” bonds earned their name back in the ’80s when takeovers were all the rage. Buying debt issued by a company with a low credit rating does introduce risk, as you’re taking a chance the company won’t last long enough to pay back principal. You can get in on this market with relatively low risk through an ETF to improve yield on your portfolio.
3. Foreign Stocks and Bonds
Many foreign companies and governments are not junk, but simply face the same credibility problem as companies in the example above. This means they pay higher interest rates than you’ll see in the United States. If you limit the size of your holdings, this is a good way to boost your yield.
Investments in oil, precious metals and crops have historically been reliable for hedging against inflation. You can invest in some commodities, like gold bullion, directly. With others, it’s more practical to buy stocks in commodity-producing companies or track commodity prices with derivatives. Note this strategy is best if you’re worried about inflation but you’re not concerned about wild price changes.
5. Long-Short Bond Funds
This type of fund buys bonds for the long-term but sells certain bonds short. Bonds are shorted using the same method as shorting stocks: by borrowing bonds from a broker, then selling the security into the market, hoping the bond’s price will fall so the fund can repurchase it for a lower price. This strategy is a good option if you’re concerned about increasing interest rates but want some exposure to bonds.
6. Mutual Funds
Mutual funds have long been the go-to investment strategy for decent profits in good markets and limiting losses in bad markets. Not all mutual funds or equal, however, and some are designed for high-risk investors. Look for funds with a record of strong, steady returns and those that have received at least 3 out of 5 stars from Morningstar.
7. Certificates of Deposit
Certificates of deposit (CDs) may be boring, but they’re also a straight-forward and low risk method to protect your funds. You can buy CDs from your credit union or bank, trading money deposited in your account for a specific amount of time. In return, you get a set interest rate that does not change, no matter what happens to interest rates. You are also locked in until the CD matures, unless you want to withdraw early for a penalty equivalent to three months’ of interest.
CDs are low risk because you are guaranteed to get your principal back if you use an FDIC-insured institution and your deposits are under $250,000. The greatest risk of a CD is locking your money up, only to find out your “real” return, accounting for inflation, is next to nothing.
The Bottom Line
Balancing risk and return is the classic financial puzzle of all investments. Risk will always lie at the heart of any investment strategy, but your goal should be generating the highest yielding returns with the lowest risk possible.
High rates of return are great because you don’t have to invest as much capital to reach your goals, but the higher the return you chance, the more risk you take to get it. If you’re nearing retirement, you simply can’t afford to see a huge drop in the market — and your portfolio — right before you will start pulling funds out to live.
There are certain times in life when it’s important to shift to low-risk investments, which will generate a lower return in exchange for some risk. While you won’t watch your capital grow as fast, you also know your account won’t plummet 25% in a year!