One of the biggest myths that stops people from investing is the idea that investing always involves a great deal of risk. What people who buy into this myth don’t necessarily realize, however, is that there are many different types of investments and many different ways to invest. Additionally, not all of them require you to have a gambler’s nerves of steel.
While it’s certainly true that investments with more risk are more likely to yield higher returns, this doesn’t mean that lower-return, less volatile options have nothing to offer. On the contrary, they can be a vitally important part of an effective retirement savings plan, as they are usually all about long-term value over short-term gain.
If you’re a new investor with a fairly low tolerance for risk, here are five investment options you may want to consider:
1. Government securities
As the name indicates, government securities are US government-issued bonds. Backed by the full faith and credit of the US government, these securities come with no market risk, and offer a steady rate of return. Government securities tend to fall into two broad categories: treasury notes, which are short-term investment tools that mature over a period of between two and 10 years, and treasury bonds, which are longer-term investments with maturing periods of 10 to 30 years.
It’s important to be aware that the returns on government securities are among the lowest of any investment type—sometimes even falling below the rate of inflation. However, there are options available, such as Treasury Inflation-Protected Securities, which ensure that the security’s value increases when inflation rates rise. Furthermore, the low risks and steady income attached to government securities cannot be matched by any other type of investment.
2. Corporate and municipal bonds
A similar investment class to government securities, corporate and municipal bonds offer a comparable mix of steady income and low risk. Corporate bonds are issued by large corporations seeking to raise capital for further growth or development.
These bonds do offer higher returns, but have a correspondingly higher risk profile. For example, if the company goes bankrupt, payments to investors may not be honored.
Municipal bonds, on the other hand, are issued by towns, cities, and states to raise money for public projects. They are comparatively safer than corporate bonds, but tend to offer a much lower rate of return.
3. Low-cost index mutual funds
Index mutual funds can be a great way for risk-averse investors to gain some exposure to the stock market while still keeping to a lower risk profile. In the world of investing, an index fund is a type of mutual fund that essentially tracks the performance of a collection of different stocks.
Some of the most common index funds are the S&P 500 or the S&P 100 index. These are the 500 and 100 largest companies in the US, respectively. Another is the Dow Jones index. It tracks 30 of the largest and most widely-held, publicly-traded US companies across a variety of industries.
The idea behind index funds is not to beat the market, but to be the market. In other words, an index fund attempts to mirror the performance of the index as a whole. This type of investing is based on the principle that, in general, the value of the stock market overall tends to increase over the long term.
A good choice for long-term investors, index equity mutual funds offer low expense ratios, reasonable returns, and a manageable degree of risk. Given all those benefits, it’s hardly surprising that, between 2007 and 2017, index mutual funds’ total share of the net fund market nearly doubled.
4. Private lending
Also known as note investing, private lending is another low-cost investment option that has only recently started gaining widespread popularity. Fintech companies, banks, and reputable boutique financial firms are among the players to offer note investing options.
This type of investing works by lending through a platform, such as LendingClub, rather than to an individual. This means that investors can diversify their money among hundreds of different loans.
Some note investing options allow investors to participate with amounts as low as $1,000. However, investors should be aware that to use this type of investing for retirement planning, a self-directed IRA or a self-directed 401(k) plan is necessary.
5. Multifamily apartment syndications
For risk-averse investors or those interested in generating passive income, multifamily apartment syndications are a popular investment vehicle due to their reliability and relatively high returns. In this type of investing, an apartment syndicator pools financial resources from many different private investors, using these funds to purchase and operate multifamily apartments.
Individual investors then get a direct share in the property’s profits, in addition to the tax benefits, such as depreciation, that real estate investments can offer. It’s important to note that multifamily apartment syndications are best for individuals who already have some investment experience and who are able to meet this investment type’s higher dollar investment requirements.
This can certainly be a barrier for some investors. However, the better returns offered by multifamily apartment syndications (compared with real estate investment trusts, a similar investment class) can be worth the extra effort.