How To Invest With Minimal Risk
One of the basics of investing is that it involves risk. It’s virtually impossible to eliminate it all together. Even guaranteed investments like bank CDs have interest rate risk.
There are many different measurements of risk. Wall Street uses terms like beta and standard deviation.
I spend a lot of time with clients discussing their risk tolerance. It is a constant review process, because your risk tolerance can change from time to time.
My opinion is that risk is truly measured by your own internal barometer. If we were to repeat the market decline of 2008, how would you react? Stay calm? Freak out? Or maybe a little of both?
Did you kind of blow off the last decline and say to yourself that it will come back? Or did you obsess over it and watch the news to get the next shocking headline?
Your Patience Level
Another way to measure risk is with your patience level. In other words, how long can you wait for the market to recover? Could you only wait a few years? A decade or more? We do know that markets eventually recover and move higher.
If you have the time and patience to wait for a recovery, these corrections are good news. You’ll be able to get your investments “on sale”.
If you don’t have the time or patience to wait for the eventually recovery, then you may not want to have as much money in the stock market. If your totally stressed by a correction then you probably should seek out other investments.
Low Risk Investing Ideas
Treasury Bills, Notes and Bonds are direct obligations of the U.S. government. They are considered very safe. Bills are short-term securities that come in different maturities up to a year. Notes and bonds are longer term securities. Many times these bonds are used for safety or a haven in turbulent markets.
TIPS are Treasury Inflation Protected Securities. TIPS are still obligations of the U.S., but the interest payment is recalculated regularly to take inflations into account. These bonds will fare better than other bonds in a higher interest rate environment.
CDs are issued by banks and brokerage firms. A guaranteed product from banks that offer FDIC insurance. Again, you will get a very low return for the minimal risk taken. Generally you invest in a CD for a certain time frame. The longer the time frame the higher the interest rate.
Fixed Annuities are issued by insurance companies. They work just like bank CDs in that they pay a fixed interest rate for a specified period of time. They are guaranteed by the issuing insurance company. As long as that company is in good shape, not much to worry about.
Preferred Stocks are a hybrid security. They trade like stocks but act like bonds. It has a stated dividend of about 2% higher than CDs or treasuries. The price usually trades within a few bucks of its issued price of $25. Preferreds may be a way to keep the risk at a minimum and still achieve some portfolio growth.
Utility Stocks remain relatively stable in price like preferred stock. They involve a bit more risk than a preferred. They also pay dividends that are about 2-3% higher than treasuries. Utilities are another way to get conservative portfolio growth.
If you’d like help evaluating your risk tolerance or developing a minimal risk portfolio, email me or call me today! Don’t leave this page until you subscribe here for free. I’ll deliver my articles to your email inbox every Friday morning!