Confused about certificates? Lamenting over loans? Today, guest blogger, Nichole Coyle, Certified Financial PlannerTM, discusses conservative investment options to help ride the current economic rollercoaster.
Generally, more conservative investment options tend to work best for those who need shorter terms or need to diversify their portfolio and reduce overall risk exposure. These include your emergency funds, savings for an upcoming vacation or other short-term goals. This may also include allocating a percentage of your retirement account (this will vary depending on your risk tolerance).
A lot has changed in the past year, and shorter-term, conservative investment options are currently much more appealing than in recent years. You can take advantage of many of these options with cash and current savings and retirement and investment accounts.
Five of the most common types of conservative investments:
1. High-yield savings accounts.
Today, these accounts average 3% interest or higher compared to 1% just a year ago. Bankrate.com offers its list of the best options available now. These investment accounts typically have some restrictions, like a maximum number of monthly withdrawals, and some have minimum balance requirements. High-yield savings accounts can be a great option to maximize your return on cash and current savings.
2. Money market savings accounts.
These savings accounts are similar to high-yield savings accounts. They have a variable rate, meaning the rates can change with the market and increase or decrease at any time. They often have a minimum deposit amount, and some have a maximum number of withdrawals per month. You can open a Money Market account at FFCCU or another financial institution and within some investment and retirement accounts.
Short-term share certificates also have increased their interest rates. Financial institutions, like FFCCU, are offering promotions with high rates of return and short terms. These certificates could be a great short-term savings option for cash, current savings, and some retirement and investment accounts. This is because your funds do not need to be locked up for years to earn higher guaranteed interest rates, as terms often start as short as three months. Certificates DO have early withdrawal penalties associated with them, so ensure you do not need to access the funds during your chosen timeframe.
4. Treasury Bills, Bonds and Notes, TIPS, and certain types of Stocks and Bonds.
When looking at conservative investment options there are short-term investments (A few weeks to 2 years) and longer-term investments may need to be kept for as long as 30 years. These options include investments like Treasury bills, Treasury notes, Treasury bonds, TIPS, Corporate bonds, Dividend-paying stocks, and Preferred stocks. These investments require more in-depth knowledge than simply opening a savings account or certificate. An investment advisor who is registered to utilize these products can help you decide if one of these options is a good fit for you.
5. Fixed Annuities.
Finally, Fixed annuities can be a good option to consider for conservative investing. These work similarly to a certificate because they offer a guaranteed interest rate for a specific period of time, and you can use current savings, retirement funds, and funds from investment accounts. However, fixed annuities are sold by insurance companies and typically require 2 or 3 years as a minimum timeframe and $10,000-$20,000 as a minimum deposit.
Also, fixed annuities differ from certificates of deposit in that the taxes you owe on earned interest are tax-deferred until you take money out of the account. Taxes are owed annually on the interest earned on certificates. Most fixed annuities offer some liquidity, such as 10% penalty-free withdrawals per year from the account. However, if you take more than the 10% out before the surrender period ends, you could pay a much larger penalty than you would for early withdrawal from a certificate.
In addition to knowing about the various types of conservative investments, it is also helpful to understand your risk tolerance and time horizon.
Conservative Investments and Your Risk Tolerance
According to Investopedia, risk tolerance is the degree of risk an investor is willing to endure, given the volatility in the value of an investment. An important component in investing, risk tolerance often determines the type and amount of investments that an individual chooses. As you would expect, conservative investments require a lower risk tolerance.
What is the Time Horizon for Your Investment Plan?
Consider how much time you plan to “lock your money up” in a financial vehicle. In other words, when do you need access to the funds you are considering investing? Once you have a good idea of your risk tolerance and time horizon, your financial advisor can help you choose the best investment options to fit your needs. As always, if you have questions about this or any other financial topics, please don’t hesitate to contact me.
Nichole M. Coyle,
CERTIFIED FINANCIAL PLANNERTM
20333 Emerald Pkwy, Cleveland, OH 44135