Three solutions for the conservative investor
By Taylor Schulte | Finance News
In January 2016, U.S. stocks posted the worst 10-day start to a year in history. And, while the stock market has moved upwards, it continues to be volatile, causing some investors to be fearful about putting their money in equities.
If the stock market doesn’t align with your financial goals or you are looking for a more conservative option, below are potential solutions for where to park your money.
High-yield savings account at an online bank
Online banks tend to have lower expenses than traditional banks and frequently pass those savings on to their customers. These high-yield savings accounts can generate up to 1.05 percent annually. Note, however, there are a few restrictions. For instance, you can only make six transactions per statement cycle and the interest rates are subject to change. Also, be cognizant of account maintenance fees and stay under the FDIC limit of $250,000 to ensure your deposits are insured.
While finding the right bank with the highest rate might be daunting, there are companies that can help. For a fee of 0.02 percent per quarter, maxmyinterest.com will rebalance your short-term savings accounts as interest rates change to ensure you are always earning the highest available rate.
Short-term bond fund
After savings accounts and Certificates of Deposit, the next step up on the risk scale would be high quality, short-term bonds. Instead of attempting to pick a handful of individual bonds and hoping they don’t default, you might consider buying a mutual fund or index fund that holds hundreds, if not thousands, of bonds. Sure, you may lose some investment control (and potentially yield), but you also lower the risk.
A short-term bond fund typically invests in bonds that are maturing within one to three years — also known as short duration. By keeping the duration short, you are less impacted by a rise in interest rates, which could have a negative impact on bond prices.
Peer-to-peer (P2P) lending
While P2P lending isn’t necessarily a solution for short-term savings (and hasn’t been around long enough to be labeled as conservative), it could prove to be an alternative to traditional stocks and bonds for some. P2P lending is exactly what it sounds like — you lend your money to consumers or businesses for an agreed-upon interest rate. Leading players in this industry, such as Lending Club and Prosper, help facilitate the loan and screen borrowers, so you can make an informed decision. Lending money to a pool of higher quality borrowers — as measured by credit score, credit history, and other metrics — will result in a lower interest rate. Lending money to lower quality borrowers, who have a higher chance of defaulting on the loan, will deliver a higher rate. Many of these P2P lending sites are publishing rates of return between 5 percent and 30 percent, prior to their fee.
Before making an investment decision, be sure you are aware of all the risks involved and consult a financial professional for additional advice and support.
With access to information, technology at our fingertips and great options for short-term savings, there’s no reason you can’t maximize your savings potential and have a healthy reserve in place.
—Taylor Schulte, CFP, is the founder of Define Financial in Downtown San Diego. Schulte specializes in providing independent, objective, financial advice to individuals, families and businesses. Follow him on Twitter at @DefineFinancial or visit his blog at definefinancial.com/blog.