How to Invest Safely for Optimal Returns ?
If building wealth is your focus, it's common to look for the holy grail of investing: a safe investment with high returns. While "high returns" typically suggests more risk, there are strategies and asset classes to target encouraging performances while minimising risks to your capital.
1. Understand the Risk-Return Tradeoff.
There is no free lunch investing. Even "safe" investments, like government bonds, have risks related to inflation and interest rates. What you aim for is to take on risk that is acceptable to you, while maximising your potential returns. To do this you must understand your risk tolerance and your time horizon for investing.
2. Diversification is Key.
The old adage about not putting all your eggs in one basket is one of investing's most important principles. Diversification allows you to spread your capital out across:
• Asset classes (real estate, bonds, commodities, stats)
• Geographies (domestically and internationally)
• Sectors (technology, energy, finance, healthcare)
You thereby reduce the impact that a poorly performing asset can have on your overall portfolio.
3. Concentrate on Dividend-Paying Companies
Blue-chip businesses with a track record of paying dividends and raising dividend distributions can provide both stability and income. Stock prices can fluctuate, but dividend distributions provide a cushion to an income portfolio in a down market, and dividend reinvestment has a significant impact on long term return.
4. Think about Index Funds and ETFs
Index funds and Exchange Traded Funds (ETFs) are low cost, diversified investments that attach to the performance of an index such as the S&P 500 by holding each of the underlying component securities in similar weights. A broad market index ETF, like the S&P 500, has historically led to excellent returns year-in and year-out along with minimization of risk compared to stock picking.
5. Consider Bonds and Fixed Income, but be Cautious
Corporate bonds rated investment-grade, certain types of municipal bonds and certain government issued securities provide predictable coupon interest payments. Furthermore, if it is higher yields without taking extreme risk you are looking for consider:
• Investment-grade corporate bonds
• Bond ladders (to alleviate interest rate risk)
• Treasury Inflation-Protected Securities (TIPS)
6. Consider Real Estate
Real estate can give you steady rental income and long-term appreciation. Here are some examples:
•You can directly own your investment in real estate
•Real Estate Investment Trust (REIT) are effectively stock in commercial or residential real estate
•Crowdfunding platforms (many well-known examples allow you to invest small amounts)
Real estate typically will deliver moderate income returns and reasonably low volatility if your investment is in a desirable location, both for residential and commercial properties.
7. Think about Dollar-Cost Averaging (DCA)
DCA (dollar cost averaging) is a form of investing where you invest a fixed dollar amount over a prescribed period of time instead of investing a lump sum of money. DCA reduces the chance of investing a lump sum at an inopportune time and smooths the negative impacts of capital market volatility which would mainly occur over shorter periods of time.
8. Be aware of what is occurring in the market, and do your best to avoid emotional based decisions!
Market trends, changes in the economy and global events will have an impact on your investments. By being aware of what is happening, you can make a reasoned decision versus emotionally reacting to a correction or downturn in the market.
9. Consider meeting with a Financial Planner
If you want to invest but do not want to concern yourself with tracking the proverbial million investment options, you can have a discussion with a qualified financial planner who can develop a portfolio designed specifically to address your investment goals and risk tolerance.
Closing Thoughts:
The principles of Safe investing and expecting a high return on your investment requires patience, diversification, and reasonably good judgment. You will never eliminate risk completely, but you can try to reduce risk. By adhering to quality assets and quality income sources and reasonable discipline and behaviour you have a reasonable opportunity to grow your wealth without doing anything risky.
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