If you’re just getting your feet wet with investing or need liquid funds in the short term, you probably want to err on the side of caution. It’s a scary thing to put your hard-earned cash into investing in stocks, which is an inherently risky endeavor.
For investing scaredy cats or those who need access to cash in the next few years, what are some strategies and funds that will help lower risk? We reached out to some experts to provide their top tactics for lowering your risks when investing.
Open a Savings Account
If you’re looking for an entirely riskless way to save, you can open a good ol’ savings account, recommends Clint Haynes, CFP® and founder of NextGen Wealth. Savings accounts are insured by the FDIC, which means the U.S. government protects the money in your bank against loss.
If you want to keep your money in a savings account so you can easily have it on hand, consider opening one with an online bank. Online banks usually have a higher savings rate than your traditional brick-and-mortar banks. Some online banks offer as high as 1.2% APR, which is higher than what you can find at a traditional bank.
Have a Short-Term Cash Reserve
Stock market risk is easier to deal with if you have adequate money in an emergency fund, have money in mostly bonds or bond mutual funds, and purchase insurance, says Phillip Washington Jr., chief investment officer at Stone Hill Wealth Management. That way you can weather any setbacks in the market – which are inevitable.
“On average, the stock market dips every five to seven years during a recession, which lasts about 18 months on average. By having your short-term cash needs met, you can stay focused on the long term fight, and battle the biggest destroyer of wealth: inflation,” says Washington.
Invest in Cash Equivalents
Investment vehicles and strategies that fall onto the lower-risk end of the investing spectrum include cash and cash equivalents like money market funds, short-term treasuries (T-bills), treasury inflation-protected securities (TIPS), certificates of deposit or CDs, and some municipal and investment grade corporate bonds, explains Tara Falcone, CFP® and founder of ReisUP.
Note that lower risk investment strategies are generally recommended for people who prioritize principal protection and liquidity over earnings growth. “Put another way, if you’ll need to access your money in the short term and want a high degree of certainty that the amount you initially invested will still be there, lower risk investment strategies are for you,” says Falcone.
For instance, these strategies are best if you are saving for a short-term goal, such as a big-ticket item like a wedding fund or down payment on a house or car, bulking up your emergency fund, or if you’re nearing retirement.
Consider Bond Funds
For a lower-risk strategy, consider putting your money in either an ultra short-term or short-term bond fund, recommends Haynes. Ultra short-term bond funds typically take under a year to mature, while short-term bond funds typically take about three years.
Although there’s still a slightly higher risk than squirreling your money into a savings account, you’ll most likely have a higher return than having your money sitting pretty in the bank.
Follow the 90/10 Investment Plan
So what if you want to lower risk but have a longer time frame to hit your goals? If that’s the case, a great low-risk strategy for most investors is to follow Warren Buffett’s 90/10 investment plan, recommends Eric Rosenberg, founder of Personal Profitability. You put 90% of your investment in low-cost S&P 500 index funds, and 10% in low-fee, short-term bond funds.
If you have a long-term investing horizon, this strategy is a winner. Over the last decade, the S&P 500 far outperformed most mutual funds and hedge funds. Plus, this strategy costs far less in fees.
Note: Low-Risk Investments Don’t Really Exist
Zero-risk investments are unicorns, and there is really no such thing as low-risk investments. When you invest, there will always be some level of risk. “When investing, you have two opposing risks to deal with,” says Washington. “There’s inflation risk, which is the risk of the cost of living outpacing your income, and stock market risk, which is when the market is down in the short-term.”
While you can never eliminate risk entirely when investing, there are tried-and-true tactics and options for you to lower your risk. This is best for those who either aren’t comfortable with taking on a lot of risk, or want their money to grow in the short-term.
What are some of your tactics for lower risk investments? Let us know in the comments below!
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