Conservative investments can be attractive for people who want to generate income or minimize their exposure to stock market volatility. An investor’s who getting closer to retirement, for example, may begin to shift their portfolio toward investments that have a lower risk profile. And even if retirement isn’t on the horizon, holding some conservative investments could provide insulation against losses during a market downturn.
A financial advisor could help you create a financial plan for your investment needs and goals.
Conservative Investing Explained
A conservative investing strategy focuses on preserving capital while generating income through low-risk investments. An investor who leans to the conservative side of the spectrum may be less concerned with growth than they are with maintaining the status quo as far as interest and dividend income are concerned.
Conservative investments typically don’t generate the same level of returns as riskier investments. So there’s a trade-off to be made when choosing a conservative investing style. But you may be less likely to lose money during a market downturn because your portfolio offers less risk exposure overall.
That doesn’t mean conservative investments are entirely risk-free. There may still be some risk involved, depending on the investments you choose. And it’s also important to remember that investing conservatively could make it more difficult to maintain your purchasing power if inflation outpaces returns.
Best Conservative Investments for 2022
There’s no one-size-fits-all solution for determining which investments to choose for a conservative portfolio. Individual goals and risk tolerance must be considered. So what is the most conservative way to invest money? And what should a conservative investor invest in? Here are some potential options for low-risk investing in 2022.
Corporate Bonds
A bond is a type of debt. Investors buy bonds from the bond issuer. The bond issuer pays interest back to investors in exchange for the use of their capital.
Corporate bonds are bonds that are issued by corporations. Some are low-risk; others fall into the high-risk or “junk bond” category. Risk correlates to the bond issuer’s credit ratings. The more likely a bond issuer is to default on interest rate payments, the higher the risk. But junk bonds can also offer some of the highest yields.
Pro tip: Consider corporate bonds with shorter maturities to manage interest rate risk.
Municipal Bonds
Municipal bonds are bonds that are issued by municipal and local governments. For example, a local government might issue these bonds to raise money for road construction projects or to build a new police station.
Municipal bonds are conservative investments because the risk of default is low. They can also offer another advantage to investors in the form of tax-exempt interest income at the federal level. Whether interest income is exempt at the state and local level can depend on where the bond was issued.
U.S. Treasury Securities
The U.S. Treasury issues a number of securities, including T-bills, Treasury notes, bonds and Treasury Inflation-Protected Securities (TIPS). These can all be attractive as conservative investments for one important reason: They’re backed by the full faith and credit of the United States government.
That means there’s virtually zero risk of default or non-payment so investors can count on these securities for a reliable stream of income and can be used for short- or long-term investing. For example:
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T-bills have a maturity date of one year or less
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Treasury notes can have maturities of up to 10 years
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Treasury bonds can offer maturities of up to 30 years
So you can decide what you’d like to invest in, based on your personal timeline. It’s also worth noting that TIPS can be a good conservative investment if you’re worried about inflation. The principal value of these securities adjusts up or down over the maturity term to keep pace with rising or falling consumer prices.
Money Market Funds
A money market fund is a type of mutual fund that holds highly liquid investments, such as cash and cash equivalents. This is not to be confused with a money market account, which is a type of deposit account offered by banks.
Money market funds can be attractive as conservative investments because they carry less risk and are more liquid than other types of mutual funds. Investors can collect regular dividend payments from a money market fund with minimal risk. There are three main types of money market funds to choose from:
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Prime money market funds, which mainly invest in short-term corporate and bank debt securities
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Government money market funds, which primarily invest in government-backed securities
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Tax-free money market funds, which can invest in municipal bonds or other tax-exempt forms of debt
Pro tip: A money market fund can offer a higher rate of return than a regular money market account, while still being relatively low-risk.
Dividend Stocks
A dividend represents a share of a company’s profits that are paid out to investors at regular intervals. While stocks are generally less conservative investments overall, there are some benefits to holding dividend stocks in a portfolio.
For one thing, stocks overall tend to provide higher returns than bonds or other fixed-income securities. If you were to build a portfolio with zero stock exposure, you might be playing it too safe in terms of being able to meet your investment goals.
Dividend stocks can also appeal to your desire to have a consistent stream of income. Depending on how a company’s dividend payout schedule works, you might receive dividend income monthly, quarterly, biannually or yearly. If you’re investing in Dividend Aristocrats or Dividend Kings, which denote companies with a lengthy track record of raising dividend payouts year over year, you may be able to maintain that income stream with very little effort.
Preferred Stock
Preferred stock is a type of stock that offers priority to shareholders for receiving dividend payments ahead of common stock shareholders. Preferred stock owners also take precedence over common stock owners if the company goes bankrupt or merges with another company.
You don’t get any voting rights as a preferred stock shareholder but you do have some added reassurance in knowing that any dividends that are to be paid out will come to you first. It’s important to remember that this is still stock, however. So if market volatility increases that could affect share prices and the total value of your investment.
Index Funds
Index funds are mutual funds that attempt to match the performance of a particular market index. For example, there are funds that use the S&P 500 Index as their benchmark. This fund would aim to deliver the same returns as the S&P 500.
As conservative investments go, index mutual funds and exchange-traded funds (ETFs) are on the riskier side since they do involve exposure to stocks. But they still represent some of the safest investments with high returns since they don’t try to beat the market at its own game.
Fixed Annuities
An annuity represents a contract between yourself and an insurance company. You agree to pay the insurance company a premium and in exchange, the insurance company agrees to make payments back to you at a later date.
Annuities can be useful for people who want conservative investments that will generate consistent income in retirement. For example, someone in their mid-50s today might purchase an annuity that will start making payments to them monthly at age 65.
There is still some risk, however. It’s possible that annuity income might not go as far as you planned if inflation rises steeply. And if the insurance company goes out of business or files bankruptcy, your annuity payments could disappear.
Certificates of Deposit (CDs)
A certificate of deposit is a time deposit account. You deposit money into a CD and in return, you earn interest on that money. Once the CD matures, you can withdraw your original deposit and the interest earned.
CDs issued by banks or credit unions are generally some of the safest investments to make as long as they come from FDIC- or NCUA-insured institutions. In the rare event that the bank or credit union goes under, you’d be able to get your money back up to the FDIC or NCUA insurance limits.
You may forfeit some or all of the interest earned on a CD if you withdraw money before it matures. And it’s important to compare CD rates, terms and deposit requirements to find the best combination for your needs.
Brokered CDs
Brokered CDs are certificates of deposit that are issued by banks but provided through brokerages. If you have a brokerage account set up for trading, then you may have the option to invest in brokered CDs.
A brokered CD is different from regular bank or credit union CDs because they can be bought and sold on the secondary market. Brokered CDs can also potentially offer high yields than other bank CDs. You do still run the risk of losing interest earned if you withdraw money from one of these CDs early. But overall, they’re worth considering if you’re looking for safe investments with high returns.
Bottom Line
Conservative investments may appeal to some types of investors more than others. When deciding what to invest in for 2022 and beyond, it’s important to consider your goals, time horizon for investing and overall risk tolerance. Finding the right balance between conservative investments and more aggressive investments can be key to achieving your financial goals.
Tips for Investing
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Consider talking to your financial advisor about the best conservative investments to make, based on your situation. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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When deciding where to invest money while managing risk, consider how accessible that money needs to be. Keeping some funds set aside in a high yield savings account or cash management account at your brokerage, for example, can be helpful in case an unexpected expense comes along. By keeping some of your money liquid in these types of accounts, you can still earn some interest income and you don’t have to worry about triggering early withdrawal or tax liability by selling off assets.
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Source: finance.yahoo.com