In the ever-evolving landscape of financial markets, the year 2023 has been nothing short of a rollercoaster. With the S&P 500 making a notable comeback – boasting an impressive 18.2% year-to-date gain and a 7.4% surge over the past month as of November 21 – investors find themselves at a crossroads. As optimism battles caution, the specter of heightened risk looms, urging retirees and those nearing retirement to tread carefully in the coming months.
Amidst the uncertainty, financial experts are echoing a common sentiment: the wisdom of steering towards low-risk investments. A Chief Operating Officer at a prominent bank believes that while a market correction is on the horizon, a crash might be avoided. This cautious outlook is fueled by factors ranging from an inverted yield curve and geopolitical uncertainties to historically high non-household debt levels.
The Reign of Cash: A Prudent Approach
In this climate of financial uncertainty, the expert advocates for a “cash is king” strategy. Holding onto more cash or low-risk cash equivalents, according to them, is a prudent move until the markets stabilize. This approach allows investors to position themselves strategically for future growth opportunities while navigating through the economic puzzle that lies ahead.
So, as we approach the end of 2023, the question arises: What low-risk investment options should one be considering? Let’s explore some possibilities that have caught the attention of investment experts.
1. Bank Certificates of Deposit (CDs)
Bank CDs emerge as a popular choice, offering an attractive alternative to traditional savings as interest rates rise. With rates exceeding 5%, CDs provide a shelter for long-term investors seeking refuge from perceived stock market risks.
| Investment Option | Key Features |
|---|---|
| Bank Certificates of Deposit | – CD rates surpassing 5% at various banks. – Acts as a shelter for investors wary of stock market risks. |
2. Dividend Stocks
If cash really is king in a period of high inflation and robust interest rates, dividend stocks should be front and center in a retirement investor’s mind, as the best ones produce dividend income on a regular basis. That’s an ideal scenario for someone living on a fixed income.
A finance giant, for instance, is trading at a relatively cheap $30 per share, which also gets you a hefty 3.2% dividend payout. Another finance giant also offers a 3.2% dividend right now.
Getting dividend payouts isn’t the only portfolio advantage in volatile markets. Historically, companies that deliver regular dividend payments also tend to make money, which helps with stock appreciation.
“An increasing dividend usually signals resilience and the company having confidence in their ability to execute on their strategy in spite of ever-changing market conditions,” says a senior portfolio manager at an asset management firm.
| Investment Option | Key Features |
|---|---|
| Dividend Stocks | – Regular dividend income in volatile markets. – Historical correlation between dividend payouts and company resilience. |
3. Money Market Funds
Money market funds, like CDs, can offer 4% or even 5% returns virtually risk-free, making these high-end bank savings accounts an optimal low-risk investment these days. “This high-interest-rate environment allows investors to earn high interest on low-risk assets like money market funds,” says a certified financial planner and author of the book “Investing Is Your Superpower.”
That’s especially the case if you need to access your money within the next few years. “Good low-risk investment options should (include) money market funds,” the expert says. “Money market funds, like Fidelity Government Money Market Fund, SPAXX, are paying about 5%. That’s a great low-risk investment option that shields you from market volatility.”
| Investment Option | Key Features |
|---|---|
| Money Market Funds | – 4% to 5% returns with virtually no risk. – Ideal for those requiring short-term access to funds. |
4. Real Estate Investment Trusts (REITs)
Amid an earnings recession and a pullback in consumer discretionary spending, holding cash for potential real estate or long-term stock investments becomes strategic. The expert emphasizes the importance of patience, especially with the Federal Reserve committed to keeping rates “higher for longer.”
| Investment Option | Key Features |
|---|---|
| Real Estate Investment Trusts (REITs) | – Opportunities in the real estate market. – Historically resilient during economic downturns. |
5. Long-Term Investments
It’s also a good idea to hold cash right now and track local markets for real estate investment opportunities or track your favorite long-term stock values.
“As we experience an earnings recession and consumer discretionary spending pulls back, there will be buying opportunities in both markets,” the expert says. “If you’ve been holding cash, you’re going to be well situated to take advantage. Remember, the Fed has said they are going to hold rates ‘higher for longer,’ so don’t expect things to change overnight. Slow and steady will win the race here.”
Aim for 60% in stocks and 40% in low-risk investments like bonds and CDs when thinking long term with your portfolio as you save for retirement, experts say. “The only real hedge against inflation is to keep investing,” the expert says. “Additionally, don’t change your portfolio allocation split drastically right now. Just reallocate your dividends and maturing liquidity into cash (or cash equivalents) with a higher yield until you’re ready to better time the market.”
| Investment Option | Key Features |
|---|---|
| Long-Term Investments | – Patience is key during an earnings recession. – Opportunities in both real estate and long-term stocks may arise. |
6. De-risking Investments
For those nearing retirement, the concept of “de-risking” gains prominence. Shifting assets from stocks to bonds in the years leading up to retirement is seen as a safeguard against potential market downturns that could impact one’s standard of living in retirement.
| Investment Option | Key Features |
|---|---|
| De-risking Investments | – Reducing risk exposure in retirement accounts. – Mitigating the impact of market downturns during the retirement red zone. |
Conclusion: The mantra of “low-risk investment”
As the curtains draw on 2023, the prevailing economic uncertainties prompt a strategic reevaluation of investment portfolios. The mantra of “low-risk investment” resonates loudly, urging investors to prioritize stability over volatility. Whether through the tried and tested allure of bonds, the security of bank CDs, the resilience of dividend stocks, or the stability of money market funds and REITs, the key lies in a diversified approach.
In the intricate dance of financial markets, the path to safeguarding one’s financial future requires both vigilance and adaptability. Consider the diverse array of low-risk investment options at your disposal, tailor them to your unique risk tolerance and financial goals, and brace yourself for the opportunities that may emerge amidst the prevailing uncertainties. After all, in the realm of investments, prudence often proves to be the best ally in navigating the seas of uncertainty.