In the world of finance, risk and returns share a direct relation. While risk-prone investments are likely to yield higher returns, they also have higher volatility. Risk-averse investors are the ones who choose more stable returns, even if lower, over volatility. Here’s a look into some of the preferred investments for risk-averse investors.
Government Securities
Government securities are bonds issued by the U.S. government, which means they’re risk-free and offer a steady rate of return. A 10-year government bond yields returns of approximately 2.65%, as of this writing. While some investors may complain about the lower returns, they often fail to value low risks and steady income attached with government securities. There are two types of government securities, namely treasury notes and treasury bonds. Treasury notes are short-term investment tools, with maturing periods of two to 10 years, whereas treasury bonds are more suited for long-term investments of 10 to 30 years.
Government securities accrue a bad reputation for lower returns, sometimes even below the inflation rate. For investors seeking capital security and inflation-beating returns, Series I bonds offer a solution. Series I bonds come with a fixed interest rate along with a variable inflation component/rate. While the fixed interest rate remains the same for the period of the bond, the inflation component is adjusted at least twice a year, based on the rate of inflation.
Low-Cost Index Mutual Funds
Index mutual funds have gained popularity in the United States over the past decade. A report from the Investment Company Institute (ICI) indicates that the total share of index mutual funds in the net fund market nearly doubled between 2007 and 2017. Unlike actively managed equity mutual funds, index equity mutual funds track the returns of a particular index, such as the S&P 500 or S&P 100. Index funds are also popular for their lower expense ratios. As of 2017, the average expense ratio for an actively managed equity mutual fund was around 0.78%, whereas the average expense ratio for index equity mutual funds was 0.09%, according to the ICI.
Corporate And Municipal Bonds
Another investment class that alienates risks and offers steady income includes corporate and municipal bonds. Corporate bonds are bonds issued by large corporations that need capital for their further growth or development. Municipal bonds, on the other hand, are issued by states, cities and towns to raise money for public projects. While corporate bonds offer higher returns, they carry a higher risk profile, and in the case of a major loss or bankruptcy, the company might not be able to honor payments to its investors. Municipal bonds are comparatively safer, though their rate of returns is much lower than corporate bonds.
Private Lending, AKA Note Investing
Private lending, or note investing, is another low-cost investment option. Unlike index mutual funds, note investing has remained a niche investment option until recently. Fintech companies, such as LendingClub, allow investors to get started for as low as $1,000. Instead of lending to an individual, lending through such a platform allows investors to diversify their money among hundreds of loans. However, the returns can be affected by overhead and defaults. Lending on individual notes will yield the best returns.
In addition to fintech companies, banks and reputable boutique financial firms are other sources to get started with note investing. For investors considering this for retirement, note investing requires a self-directed IRA or a self-directed 401(k) plan. Due diligence for the borrower and underlying asset is a must.
Multifamily Apartment Syndications
Multifamily apartment syndications could prove to be a reliable, high-return investment vehicle for passive investors. An apartment syndicator pools financial resources from private investors and purchases multifamily apartments. The private investors get a direct share in the profits along with tax benefits (depreciation) offered by real estate investments.
A lot of people often compare multifamily apartment syndications with REITs (real estate investment trusts). Among other differences, the primary differentiator is the barrier to entry present in multifamily apartment syndications. These investments come with high dollar investment requirements (commonly a minimum of at least $50,000) and seek accredited or sophisticated investors. While REITs offer higher liquidity and can be traded like stocks, multifamily apartment syndications are likely to offer better returns in my experience. When choosing multifamily apartment syndication, make sure to check the historical track record of the sponsor and seek professional help, if required.
As an investor, it is important to safeguard your capital investments, and one of the best ways to do that is to diversify your investments into various financial products. It is best to seek expert advice when creating your retirement portfolio, and be ready to explore new, low-risk, investment opportunities.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
