Investing On The Safer Side for Higher Yields

|| Staff Blog: 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:

  • Peer to Peer Lending: You lend money directly to individuals or small businesses any diversify by spreading your loans out among many borrowers. Loans tend to be for either 3 or 5 years. Your loan is repaid with interest and you can get started for as little as $25.
    • Prosper to invest in consumer loans. Money Answers is an affiliate of Prosper.
    • Lending Club to invest in consumer loans, small business loans and auto refinancing.
  • Real Estate Investing Funds: Invest in almost any size real estate deal through such a fund. They give you access to both big and small projects you may never otherwise be able to afford investing in or don’t want to manage personally.
    • Fundrise to invest in real estate developments. Choose between growth, passive income or a balance of both. Money Answers is an affiliate of Fundrise.
    • Roofstock to invest in single family rental homes with tenants. Market information, lenders, property management and more. Start earning passive income the day you close. Roofstock is an affiliate of Money Answers.
  • High Interest Savings Accounts: Some banks and credit unions are offering accounts paying as high as 5% interest and low or no fees. With FDIC insurance, these accounts are normally risk free.
    • Consumers Credit Union pays up to 5.09% interest on qualifying accounts Anyone can join Consumers Credit Union. Consumers Credit Union is an affiliate of Money Answers.

As a personal finance expert, Jordan recognizes quality solutions, forming affiliate relationships to help improve people’s financial lives.

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