Looking for low-risk investments

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 Q. I’m 67 and I don’t like taking risk with my investments, but I know that I need some stocks. What investments will give me the returns of stocks without a lot of risk?

A. The simple answer to your question is that there are no investments without risk.

All investments have return and risk characteristics, said Jim McCarthy, a certified financial planner with Directional Wealth Management in Rockaway.

Even cash is subject to inflation risk, McCarthy said.

The higher the desired rate of return the more risk you must take, he said, noting that there are different return/risk levels within each asset class.

“For example, within stocks, Johnson & Johnson (JNJ) is significantly less risky but with a lower return potential than say SIRIUS XM Radio (SIRI),” McCarthy said. “Government bonds are less risky than high yield bonds, and so on. Remember, all investments are subject to market fluctuation, risk, and loss of principal.”

Before looking for specific investments, McCarthy said you should determine your financial goals. Are you trying to generate retirement income? Or account for inflation? Or protect your wealth?

To help answer these questions, McCarthy recommends you complete a risk tolerance profile with an advisor or do it on your own using a tool such as this risk quiz from Rutgers University.

Your goals, along with your risk profile, should drive your asset allocation mix — equities, fixed income, alternatives, cash.

Once you determine the appropriate level of equities, you should then determine how best to diversify your equity allocation, McCarthy said.

“Given your concern about risk, it is critical to adequately diversify your equity positions,” he said.

If you want to invest in individual stocks, McCarthy said, in his opinion, you should have at least $150,000, preferably $200,000+, allocated to equities. Below that level, he said, you get better diversification by using mutual funds or exchange-traded funds (ETFs).

“There is no reason you shouldn’t be able to build an equity portfolio that meets your risk tolerance and helps you achieve your financial goals,” he said, noting you may want to consult with a financial professional regarding your individual circumstances

Even if you’re risk averse, there are lots of reasons to invest in stocks.

“The majority of investors require some level of stock exposure in order to grow their assets over time,” said Chadderdon O’Brien, a certified financial planner with Lassus Wherley in New Providence. “Tailoring your stock exposures to your risk and return objectives is an important step in structuring your portfolio.”

He said diversification among the various stock asset classes is one tool to reduce risk and smooth the sequence of returns over time. For example, O’Brien said, stock investment in domestic, international developed and emerging markets provide a broad base to global equity investment. International and emerging markets are generally considered higher risk than domestic stock investment. However, the associated expected returns are also higher than that of the domestic market, he said.

“A combination of these assets, with a bias towards domestic markets, can provide your portfolio with the longer term growth it needs with lower risk than any one of these markets contain on an individual basis,” O’Brien said. “Diversification is a key tool to reducing portfolio risk.”

O’Brien said there are various segments of stock markets that have historically experienced lower risk than the broader market. Companies with above average dividend yields, for example, have historically demonstrated higher returns with lower risk than the overall market, he said.

“If we look at the returns of the S&P 500 over the last 50 plus years, the top 40 percent of dividend payers have outperformed the index by over 2 percent per year, while experiencing lower volatility,” he said. “Investment in mutual funds that focus on high quality dividend paying stocks can serve as a great supplement to core indexed exposures.”

If you are entirely uncomfortable with bearing market risk you may want to consider transferring the risk to someone else, O’Brien said.

“There are various insurance products, including annuities, which allow you to participate in stock investment while minimizing the risks to you,” he said. “Of course, transferring the risk can be expensive strategy since many of these insurance products contain annual costs in the 2 to 3 percent range, if not more.”

In addition to the high expenses, your ability to access your dollars may be limited, he said.

Annuities typically offer a fixed payout in scheduled intervals to maintain the integrity of the insurance contract, he said. Amounts in excess of the fixed payouts have the ability to reduce or eliminate some of the policy guarantees.

“A great deal of care should be taken prior to entering into an insurance contract to make sure it fits within your long term investment and cash flow goals,” he said.

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This story was first posted in August 2015.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.