What are Conservative Investments?
Everyone wants an investment with no risk and high rewards. Unfortunately, those are very hard to find. The good news is there are many options for conservative investors who are willing to accept a little risk. These are called conservative investments.
Conservative investments allow investors to generate higher returns on their investments than they would by leaving their money in a traditional savings account. This is because conservative investments will carry some risk. As with all investments, higher returns are correlated with higher risk. There is always the possibility that there will be a loss of principal.
You will be surprised to find out how many low risk, high return investment options there are.
Why You Should Consider Conservative Investments
Conservative investments will provide you with a steady stream of income. Investors enjoy adding this income on-top of their regular work salaries. In fact, many people who are retired rely on the steady income from these high return investments to pay their bills.
If you are like me and like the idea of having a well-balanced portfolio, then this will be perfect for you. Investors like to have streams of fixed income in their portfolio to offset fluctuations in their other investments.
For example, I am invested in many growth stocks. Growth stocks offer high returns, but they hold significantly higher risk. I am more comfortable holding these positions because I know that no matter what, I will still be generating income from my conservative investments.
As a bonus, I will often take my fixed income from my investments and invest that into growth stocks and higher risk investments. Why? It is purely a psychological reason. I do not stress over price fluctuations in investments that are made with money I did not work for.
Conservative investments give you an edge in your overall investment strategy.
Now I will begin going through the top 7 conservative investments with low risk and high rewards.
Bonds
Putting money into bonds are a great conservative investment to generate a steady, fixed-income. Bonds are investments where you are buying debt. Think of it like being a bank that loans out money to others.
You collect the interest from these investments. This is a safer way of loaning your money because there is less of a chance of delinquencies and defaults. You are lending your money to corporations and states. Do you really expect them to default as frequently as the average borrower?
Another great thing about bonds is you can buy, hold, and sell bonds through regular investment brokers. This is great for someone who likes to have all of their investments in one place.
Corporate Bonds
Corporate bonds are debt coupons offered to investors by publicly traded companies.
The best graded corporate bonds typically offer yields between 2.36% and 4.12%. As you can see, this is almost 10x the yield of traditional savings accounts. Again, they pay higher interest rates than traditional savings accounts because of the element of risk.
Two risk factors are all that really need to be noted here.
The first risk factor is the possibility of a company not being able to meet its debt requirement and defaulting. This is highly unlikely if you are buying corporate bonds from companies with strong balance sheets.
Rising interest rates account for the second risk factor. Rising interest rates will lower the market value of your corporate bonds. This will only affect you if you do not plan on holding your bonds to maturity.
Corporate bonds will pay your full principal investment by the time of maturity. So if you buy a bond with a term of 10 years, and hold the bond until maturity, you will not have to worry about losing your initial principal investment.
One important thing to take into consideration is that most corporate bonds trade in denominations of $1,000. That means you have a to make a minimum principal investment of $1,000. This is a lot higher than completely safe investments that only require a minimum investment of $500.
Municipal Bonds
An alternative to corporate bonds is municipal bonds. Municipal bonds are very similar to corporate bonds. The only difference is that municipal bonds are issued by state and local governments. That means, instead of investing in company debt, you are investing in state and local government debt.
Municipal bonds also carry the same risks as corporate bonds. Although, the risk of a default is significantly lower for municipal bonds. What are the odds that a state or local government will not make an interest payment?
There is another major benefit that municipal bonds have. Interest from municipal bonds are exempt from federal income tax. You may want to look into municipal bonds if you are relying on your fixed-income for living expenses because of the tax benefits.
Real Estate Investment Trusts (REITs)
You can think of these like mutual funds, but for real estate. Real estate investment trusts are funds that typically hold commercial real estate. REITs will hold office buildings, retail shopping centers, healthcare facilities, student housing, warehouses, industrial facilities, and large apartment complexes.
REITs offer high yields between 2% and 4%. Conservative investors can expect three major benefits.
Besides regular dividend income, investors have the added benefit of capital appreciation. This occurs when properties from the fund are sold off.
The second benefit of REITs is that their dividends are relatively stable. The dividends usually keep a high yield and increase over time. Unlike stocks, which have the ability to choose if they even pay a dividend, REITs are required to pay one. The SEC requires REITs to payout at least 90% of their income in the form of dividends to shareholders.
Finally, REITs give conservative investors exposure to investing in real estate without the hassle of property management. Investing in REITs will let you reap all of the benefits of real estate investing without all of the headache.
When investing in REITs, keep in mind that your biggest risk is capital depreciation. Any investment that offers the possibility of capital appreciation also comes with the risk of capital depreciation.
Dividend Paying Stocks
Stocks that pay dividends are great for conservative investors. Dividend paying stocks are historically less volatile than growth stocks. Such stocks are usually well established companies that slowly grow overtime. You can expect a high yield of 1.50% to 3%.
Being able to pay out dividends shows investors that the company is profitable and stable. A company will typically only payout dividends if they have excess cash on hand.
Conservative investors will have the benefit of steady income from the dividends. They will also have the benefit of capital appreciation over time. More importantly, the investor will also have peace of mind knowing the company has a proven history of growth and stability.
There is one very important thing to be aware of! Avoid searching for stocks with the highest yield. Often times, a stock can show a high dividend yield because the price of the stock has recently plummeted.
Review the stock’s chart before you make an investment. You want to see the whole picture before investing.
Exchange Traded Funds (ETFs)
Hands-down, my favorite conservative investment is exchange traded funds. ETFs give you a ton of market exposure with a lot less risk. Think of ETFs as much broader forms of mutual funds.
ETFs are normally composed of entire sectors or indexes. For example, SPY is an ETF that mimics the entire S&P 500. If you invest into SPY, you are investing into all 500 companies in the S&P 500. How’s that for diversification?
I don’t think there is a safer conservative investment than an ETF like SPY. Come on, what is the likelihood that 500 of America’s biggest companies will go bankrupt? The worst that can happen is there may be draw downs where you net a negative return for a few years.
That leads into a very important strategy when investing in ETFs: always dollar-cost-average. You do this by investing incrementally into the ETF overtime. That way, you will always have a decent trade price.
ETFs are even better if the securities in the ETF pay dividends. You will receive those dividends through the ETF.
I recommend considering an ETF if you are interested in investing in bonds.
The fund will invest in different types of bonds, depending on which ETF you choose. For example, some funds will invest in municipal bonds, others will invest in corporate bonds, and others will invest in both.
The funds will also purchase various maturity dates so you can receive your expected interest rate with minimal risk of loss of principal. This is a great way for conservative investors to receive the high yields from bonds while minimizing risk even further.
Peer-to-Peer Lending
Banks make a killing lending money to people and businesses. Wouldn’t it be great if you could do something similar? Well you can with Peer-to-Peer lending.
Peer-to-Peer lending platforms are considered to be low-risk to medium-risk investments. Many lenders report that they earn double-digit annual returns with Peer-to-Peer lending. The best part is that its a very simple system to learn and invest in.
When you use Peer-to-Peer investing, you are investing in pieces of personal loans to people. What do I mean by “pieces”? Pieces of personal loans are known as “notes”. Think of them like buying shares of a company. Most platforms allow you to invest in notes with as little as $25 per note.
Being able to invest in notes is what makes Peer-to-Peer lending a low-risk investment. Whereas banks are required to make full loans to people by themselves, you are pooling your money with other investors to fund the loans. It is very easy to diversify this way. With $1,000, you’d be able to diversify across 40 different notes.
I’m sure your’re waiting for me to mention the medium-risk aspect of Peer-to-Peer lending, so here it is: the higher level of risk comes from the fact that you are funding unsecured loans. That means you are not protected if the borrower defaults.
Lower Risk with Diversification
Don’t worry though! That is why we diversify across many different notes with a very small amount of money. If one or two borrowers default out of those 40 different notes, you can still come out with a positive return.
To make things even better, almost every platform allows you to pick from different grade loans. Platforms use a ranking system and assign grades to loans based on borrow requests and credit history. The highest grade loans come with the least risk, but because of the low risk, the interest rates are usually single-digit. The lower grade loans, the loans with the most risk, tend to have interest rates over 20%!
As always, the best way to reduce your risk is to diversify. Invest in many notes for loans of various grades. Consider a portfolio with a mix of high grade, medium grade, and low grade loans.
Real Estate Crowdfunding
This is probably the closest you can get to investing in various types of real estate without having to worry about the hassles of owning it yourself. Real estate crowdfunding is more up-close and personal than investing in REITs.
Real estate crowdfunding sites work in a similar way to how Peer-to-Peer lending works. Most crowdfunding sites will pool the money from investors and give them shares of a project. Your money is typically invested into historically low-risk investments such as family homes or office buildings in nice neighborhoods.
The best real estate crowdfunding companies only invest in cash flow positive properties in good neighborhoods. This strategy lowers risk and creates a steady flow of income that is predictable. Real estate crowdfunding returns often range between 8% and 13%. The high return and low risk makes real estate crowdfunding one of the best conservative investments.
High Yield Savings, Money Markets and Certificates of Deposits (CDs)
The conservative investments I am about to mention are the absolute safest. There is no risk with these investments and you are given a high return compared to a traditional savings account.
High Yield Savings
Online banks are the only places you will find a high yield savings account. The interest rates on these high yield savings accounts are around 1.50%.
Traditional savings accounts from brick and mortar banks cannot compete with online banks because they have too many expenses associated with having physical locations.
The only downside of having an high yield savings account is that it makes it a little harder to get your hands on cash when you need it. To avoid this problem, I recommend keeping at least a checking account open with a brick and mortar bank.
High Yield Money Markets
If you want to avoid having too many bank accounts open, consider a high yield money market account. High yield money market accounts are similar to high yield savings accounts. They are with online banks and also offer an average interest rate of 1.50%
These accounts usually come with a debit card so it is much easier to access your funds compared to a high yield savings account.
Here’s an obstacle faced with most online high yield money markets- they require a much higher minimum balance. This may be difficult for someone who likes to spread their money across many different investments.
Certificates of Deposit (CDs)
Another option to get higher yields from online banks is to consider a certificate of deposit. A certificate of deposit is an investment contract with a bank. You give the bank a certain amount of money, and the bank agrees to pay you back your full investment at maturity, along with interest at a fixed rate.
CDs have terms between 1 month and 5 years. The longer the term, the higher the interest rate. Most CDs can be purchased with as little as $500. Keep in mind that once your open a CD, you cannot add to it nor can you take money out before maturity.
If you pull your money out of a CD before maturity, you will be charged a penalty fee. The penalties are usually harsh and will result in you losing almost all of the interest you have accumulated.
Only consider this option if you can afford to have your money locked away for long periods of time.
The biggest benefit of a CD is locking in a guaranteed interest rate for a specific period of time. For example, you’d want to consider locking yourself into a CD if you believe interest rates are headed lower.
Final Word on Conservative Investments
These are definitely the best conservative investments that offer high returns with low risk in 2020. My advice would be to look into all of these options and spread your money out between a few.
Conservative investments are low risk and offer high returns, but the best way to keep them even safer is to diversify.
Did you enjoy this post on the top 7 best conservative investments? Which is your favorite method for generating a high return? Is there a great conservative investment that I didn’t add? Make sure to let me know!