By Cathy Cagle
We’d all like to earn the highest possible yields on our investments – right? Who wouldn’t? Making a profit from your investments is the very heart of what investing is about. Because investments almost always come with some risk, it’s important to understand your comfort level with risk, your ability to withstand potential losses, and the profit you need or hope to achieve before investing. And it’s also important to earn a decent cash yield!
High yield investments, the ones that pay the highest dividends, all too often entail high risks. Junk bonds are a prime example of high yield – high risk investments. Junk bonds have paid high yields but that doesn’t mean they are an appropriate choice for you. You can find safer high yield options with a little research and creativity.
What constitutes a safer investment? A safe investment is one in which you have a lower risk of losing your capital. Ideally you want to preserve your principal, earn yields that beat inflation, and not get zapped with huge fees or restrictions when you need to access your money. Pay attention to time constraints as well – some investments require a minimum holding time. Not being able to access your money when you need it can be devastating! Your ability to access your investment quickly is known as liquidity.
All investments can and should be evaluated in terms of safety, income and growth potential. Safe investing focuses on preservation of principal, diversification, and investment stability as primary goals with secondary goals of capital growth and yield.
Diversification is key to safe investing. Investing in different kinds of investments means you are far less likely to suffer a catastrophic loss in all your assets at the same time. Different investments react differently to the same event, like a catastrophic earthquake or a market crash or a national election. Spreading your risk over several asset classes such as stocks, bonds and precious metals tends to result in higher returns at lower risk. Diversification is considered the most important element for risk management of your investments over time.
Can you be too safe? It all depends on your situation. But yes, sometimes investments that look attractive turn out to have yields well below the rate of inflation. Losing the value of your purchasing power over time means your money buys less and less. Balance the need for safety with the need for a yield that at least beats inflation, which is now running at about 2%.
Figure out your priorities between safety, income and growth and find investment options that match your needs. Check out these options for higher yield, lower risk investments:
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