Many people are risk-averse, meaning that they don’t like to make what they perceive as high-risk investments in the stock market. Instead, they hold their money in cash or they plow it back into their own companies to increase the scope of their operations.
The problem with this is that they could be missing a trick. Keeping your money in cash offers no return (and in fact can be a negative return if inflation is high). And investing in your own company might not represent the highest rate of return you could achieve. For instance, you might put money into a new advertising campaign to win new business, but if you’ve already saturated your market, additional advertising is unlikely to have a positive ROI.
According to a study by UBS, millennials are particularly prone to conservative investing compared to Boomers and Gen Xers. They hold more than 52 percent of their savings in cash, more than any other generation before them.
So what options are out there that are lower risk but will still generate decent returns?
Be A Market Participant, Not A Market Beater
Many people have this idea that when they buy company shares, they have to somehow figure out a way to beat the market in the process, buying and selling at the opportune moment. Unfortunately, investors who behave like this often end up losing since the big players have more data and faster reactions when prices change. According to Michael Kitches, a financial planning blogger, hardly anybody goes through a bull or bear market and comes out the other side better off than if they’d just stuck with an index fund.
Invest In A Broad And Diversified ETF Portfolio
ETFs or exchange-traded funds are a way to keep your investing costs low. With most investments, the small fees charged by money managers can quickly add up and eat into your overall pot of wealth, especially for things like 401(k)s.
This is why going with ETFs and index funds is such a good idea for risk-averse investors. The costs are low, and the risks are even lower. With indexed funds and ETFs, you’re not at risk of one particular company in a sector going bankrupt. Instead, the money you collect is a rising tide across an entire industry.
If You Want To Invest In Stocks, Allocate A Small Proportion Of Your Portfolio
There’s nothing wrong with investing in stocks in principle. You’ll get a higher return, but you’ll also have to accept a higher risk. The best thing to do, once you’ve got a little nest egg established, is to go to your financial planner and find out the next set of moves that are in your financial interest.
Kitches says that if you want to try your hand at stock investing, you should do so with a portion of your portfolio and have fun with it. There’s a chance you’ll make out with a lot of money, but there’s also a chance that you’ll end up losing money if company profitability tanks.