Let’s be clear: There’s no one single investment that everybody “needs,” and there’s no investment that provides the ultimate dream of unlimited return with no risk. Investments exist along a risk continuum, with higher-risk investments typically offering the potential for higher rewards. And while most investors could benefit from having at least a portion of their money in traditional safe havens like CDs insured by the Federal Deposit Insurance Corp., there are plenty of other investment types that can help stabilize the returns of your portfolio as a whole — even if they themselves may be volatile, nontraditional or outside the textbook definition of “safe.”
Here’s a look at a number of money moves along that risk continuum, from more traditional offerings that can anchor your portfolio to more exotic or creative choices that can help stabilize your long-term investments.
Last updated: Sept. 3, 2020
1. Online Savings Accounts
Online savings accounts aren’t like the stodgy old passbook savings accounts you may have had at a bank when you were a kid. Today’s online savings accounts, as the name implies, are offered by web-based financial services companies that might not even have a physical branch. These types of accounts offer all sorts of modern, high-tech features such as mobile apps, online money transfers and educational tools that teach you about savings and investments.
Why You Need an Online Savings Account
For starters, online high-yield savings accounts are unbelievably simple to use. In most cases, you can open an account online, link your bank and fund your savings account within minutes — although the actual transfer and receipt might take a few business days. You can review and manage your account balance right on your smartphone. However, the biggest draw for online, high-yield savings accounts is their yield. As of late August 2020, the average savings account annual percentage yield (APY) was 0.06%, but some online savings accounts paid 0.80%.
2. Credit Card Points, Bonuses, Rewards and Perks
Credit cards? How are credit cards a “stable investment”? If you think outside the box and are responsible with your finances, many credit cards offer a host of benefits you can use to safely “invest,” including generous sign-up bonuses, additional travel miles or points for certain types of spending. Assuming you pay off your full balance each month — which you should do to avoid high interest costs — those miles or points can qualify you for extravagant perks such as round-trip airline tickets overseas.
What Types of Bonuses Are Available on Credit Cards?
Different cards offer different bonus and mile programs, so it’s important to read the fine print to get the best deal. Since travel has all but died during the coronavirus pandemic, you might want to look for a good cash-back card. In addition to standard cash payback rates of 1.5% or even 2%, some cards offer extra cash back if you spend in certain categories. Both the Discover and Chase Freedom cards, for example, offer rotating bonus categories that pay 5% cash back. If you’re going to spend money at a grocery store anyway and a card is offering you 5% cash back, you’ll be getting free rewards for something you’d do anyway. Just remember to pay your balance in full every month.
3. High-Dividend Stocks
Stocks can be volatile investments, and you can theoretically lose all of the money you put into a stock. So, how can high-dividend stocks be a “stable” investment? You have to look at everything in perspective. Many high-quality stocks pay high dividends. In an environment where savings accounts pay a measly 0.06% APY on average, and even top high-yield savings accounts barely crack the 0.80% APY level, top dividend stocks are paying 4% or even more. Even the average yield for the S&P 500 as a whole reaches 1.8%.
Are High-Dividend Stocks From Unknown or ‘Junk’ Companies?
What types of companies pay high dividends? Only some of the biggest, most established companies in the world, including AT&T, Johnson & Johnson, Chevron and Coca-Cola. These stocks might have their ups and downs, but as some of the strongest brands in America, they’re likely to be survivors over the long run. In the meantime, you can earn more than double the amount you’d earn even in a high-yield savings account.
4. Real Estate Investment Trusts
Real estate is a good way to diversify a portfolio anchored by financial assets like stocks and bonds because the real estate market doesn’t directly correlate with either. This can help you achieve higher returns with lower overall risk. A real estate investment trust, or REIT, is akin to a mutual fund with real estate holdings. This gives individual investors the ability to hold pieces of prime real estate investments across the country — or even across the world — for a limited investment.
How Can I Profit From REITs?
REITs deliver returns in two ways: through long-term capital growth and through consistent dividend payouts. Your typical REIT will pay out a dividend much higher than the average stock or even many bonds. In fact, as of August 2020, the average REIT paid out a dividend yield of about 7%. One of the top REITs, Simon Property Group, pays a yield of 7.84%. Bear in mind that in extraordinary circumstances, even REITs can sell off dramatically. In the midst of the coronavirus pandemic, for example, malls across the nation effectively shut down; this hit the earnings and share price of Simon Property Group and other REITS dramatically, thereby increasing their yield as well.
5. Senior Loan Funds
No, a senior loan fund doesn’t extend loans to older Americans. Rather, it’s a short-term bond fund that invests in securities that have first priority when it comes to getting paid. Even if a company has financial difficulties, holders of senior loans get paid first, before all other bondholders and stockholders.
Why Senior Loans?
Senior loans are typically short-term and adjustable-rate securities. This means the income you earn might rise and fall based on the movements in short-term interest rates. This can help keep senior loan prices relatively stable, as they will always pay a rate that moves in line with the current market price — and that rate is usually well above that of comparable Treasury yields.
6. Non-Correlated Assets
Non-correlated assets are investments that “zig” when others “zag.” Commodities are an example of non-correlated assets, as they move up and down in price in a different pattern than the U.S. stock market. For instance, while U.S. small-cap stocks typically go up and down with the larger S&P 500 index, gold prices tend to move in the opposite direction of large-cap U.S. stocks.
Why Buy Something That Goes Down When the Market Goes Up?
As sole investments, non-correlated assets such as natural resources or commodities can be very risky. However, if you own non-correlated assets that go down when the market goes up, they’ll usually go up when the market goes down. This acts as a hedging mechanism that smooths out the overall volatility of your portfolio, making it more stable.
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7. Tax-Free Bonds
Tax-free bonds, also known as municipal bonds or “munis,” are offered by entities such as local governments and school districts. These bonds pay lower interest rates than taxable bonds but their income is tax-free. While many tax-free bonds have maturities of 10, 20 or even 30 years, short-term tax-free bonds are also available.
Are Tax-Free Bonds Really Worth It?
Obviously, tax-free bonds are a better deal for high-income earners because they’re in a high tax bracket. However, munis can be a good investment for anyone. Although prices will rise and fall with changes in market interest rates, you’ll get your money back if you hold the bond to maturity just like with regular taxable bonds. The safety kicker is that many muni bonds are insured, meaning that even if the municipality can’t pay its bills, the insurance company will make your investment whole.
8. 0% Balance-Transfer Credit Cards
No one should have high-interest credit card debt, and opening a new credit card account is not always a prudent strategy. However, if you’re like most Americans, you probably do have at least some credit card debt — the average American had $5,338 of it as of May 2020, although that was down from the $6,193 average in January. If you’re among that group, transferring a high-interest balance to a 0% credit card can be a very smart short-term “investment.”
How Does a Balance-Transfer Card Save Me Money?
If you’re a believer that a dollar saved is a dollar earned, you can actually make money using a 0% balance-transfer credit card. Imagine that you have $10,000 in outstanding credit card debt at a 20% interest rate. If you transfer that balance for one year to a 0% card — even if you have to pay a 3% transfer fee, which is common — you’ll end up saving $1,700 in interest over that year if your balance stays around $10,000.
9. Peer-to-Peer Lending
Peer-to-peer lending lets you make small loans to people from across the globe who are in need of financing. Essentially, peer-to-peer lending is simply a marketplace where lenders and borrowers get together and negotiate their own small loans. Many P2P lending marketplaces have a social justice tilt to them because they help poorer people start businesses by lending them money.
How Is Peer-to-Peer Lending Stable?
As with any smart and stable investment, you don’t want to put all of your money into a single P2P loan. However, you can diversify your P2P portfolio easily since you can fund loans with very small amounts of capital. Additionally, marketplaces are set up so you can review the personal histories of people asking for loans, meaning you can choose to lend only to those who seem capable of paying you back.
Collectibles are investments such as rare coins, vintage cars, masterwork paintings or old bottles of wine. Investors flock to these items because they’re interesting and — perhaps more importantly from an investment standpoint — very rare. Just like in the stock market, the collectibles market is driven by supply and demand. Items that are truly unique can command extraordinary prices. For example, a one-of-a-kind Mike Trout baseball card signed by the star sold for $3.93 million in August.
How Do I Invest In Collectibles?
Collectibles are a bit of a different animal from other types of investments because they don’t trade on any publicly visible market. However, they’re also one of the few investments that can also spark joy simply from holding or viewing them. Although prices can be volatile, there will seemingly always be a market for collectibles because of the personal value they hold. You can usually find collectibles at specialty shops and auctions, but be sure to only conduct business with reputable sellers.
11. Covered Call Options
A covered call is a type of option investment. While many options are speculative, high-risk investments, covered calls are stable ways to provide both income and protection to your portfolio. For most investors, there’s really no way to “lose” money when you sell a covered call option, but you might miss out on some of the upsides of your stock.
How Do Covered Call Options Work?
When you sell a covered call option, you trade away the right to future gains above a certain price. In exchange for giving up this right, whoever buys your covered call option pays you a premium. If your stock goes down or trades flat, the option will eventually expire worthless, and you’ll get to keep the option premium. If your stock trades higher, you may be forced to sell your shares, but you’ll get the predetermined price, which was higher than when you originally sold the option. Thus, you’ll either keep your stock or sell it at a higher price. In both cases, you’ll keep the option premium as well.
12. Treasury Bills
Although there are more exotic ways of incorporating stable investments into your portfolio, there is only one gold standard, and that is the U.S. Treasury bill. Backed by the full faith and credit of the U.S. government, Treasury bills are considered one of the world’s safest investments, though the returns are not nearly as big as other investments. If you need to add stability to your portfolio, you won’t find a safer option than Treasury bills, which are extremely liquid and short-term investments.
Do Treasury Bills Offer Any Return?
It’s true that Treasury bills don’t earn much. As of late August 2019, the 13-week U.S. Treasury bill, for instance, was yielding right around 0.11%. However, this yield seems more than fair for such an extraordinarily safe investment. Even many CDs and savings accounts pay far less than the U.S. Treasury bill yield, which is also exempt from state taxes. If you’re looking for the ultimate portfolio stabilizer, the U.S. Treasury bill is the model.
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