Top 5 Low-Risk Investments To Close Out 2011
Low-risk is a subjective term, but it generally indicates an investment that is unlikely to fall in price. Beaten-down investments can qualify as low-risk, as it suggests there is more upside potential in their prices as opposed to downside risk. With that said, here are five investments that could qualify as low-risk options for investors, as we wind down the calendar year.
TUTORIAL: Bond Basics: Introduction
Blue Chip Stocks
The coupon rate on the 10-Year U.S. Government Treasury Bond recently dipped below 2%. Shorter-term rates are close to zero, making it extremely difficult for individuals that need income from their portfolios to earn a safe, adequate yield on their investments. The same can be said for other fixed-income options, including municipal, corporate and other government bonds.
Bill Gross, who runs bond giant Pimco, recently lamented over the low-yield environment in the fixed income space. He even went so far as to suggest that investors would be better served adding stocks of large companies with above-average dividend yields. Many of these firms offer yields between 3 and 4%. Running down the list of holdings in the Dow Jones Industrial Average, the highest dividend yields are currently from AT&T and Verizon, which sport yields of 6.1% and 5.5%, respectively. (High-dividend stocks make excellent bear market instruments, but the payouts aren't a sure thing. For more, see Dividend Yield For The Downturn.)
Residential Real Estate
Residential real estate is certainly off its peak levels, which were reached back in 2005. The subsequent price plummet in many markets leaves the potential for upside, though it could take a few more years for that to happen. Especially depressed markets include many parts of Florida, Phoenix and Las Vegas. Other markets that recently qualified as the most affordable included Midwest markets in Michigan, Iowa and Ohio.
Like a stock, the appeal of housing can be measured through a price-to-earnings ratio. In housing, the price is a home price while the earnings figure is indicated by what it would cost to rent out a similar house in that market. By this measure, the housing P/E is quite low for the above markets and suggests that buying beats renting, be it to live or for investment purposes.
Continuing the P/E screen to determine if an asset class qualifies as low-risk, a number of emerging markets may hold decent upside potential and have less downside risk. Concerns over the sustainability of China's impressive growth run has pushed its market P/E to a single-digit level of just over 7. Brazil's market P/E is just over 10 and also looks appealing given its growth prospects. Other emerging markets with reasonable earnings multiples include Turkey (10.8), Poland (9.5), Taiwan (12.5) and South Korea (10.7). (For related reading, see What Is An Emerging Market Economy?)
Emerging markets are marked by their potential for above-average growth in their economies. Given the reasonable valuations in many markets, the best qualification could be growth at a reasonable price.
A number of developed markets, including many in Europe, are struggling with high unemployment, low growth and high levels of government debt. In contrast, other more mature markets may not be growing as rapidly as the emerging ones, but still offer a decent combination of growth prospects and reasonable valuations. These markets include Canada, with a P/E of 13.6, the United Kingdom at 10.2, and the U.S. at 13. Germany also looks appealing at 9. Returning to the downside protection argument, these markets should hold up better than emerging markets if the world does indeed return to recessionary levels.
Bonds as an asset class are currently unappealing given the low interest rate environment. The risk is that rates rise and would push bond prices down because they move in the opposite direction of yield. To lower the risk of bond prices going down, investors that still need to hold fixed income assets would be best served to buy individual bonds instead of bond mutual funds or exchange traded funds (ETFs). This lowers the risk of bond prices going down as the bond can be held to maturity, with the investor receiving his or her principal back and then reinvesting in a new bond at a higher coupon rate. (They may not be sexy, but bonds do have a place in every balanced portfolio. For more, see The Advantages Of Bonds.)
The Bottom Line
Negative sentiment on global economic growth prospects has actually pushed many asset classes into appealing territory. Potential lower-risk options are detailed above and within each asset class there can be individual holdings that also qualify as low risk.
At the time of writing Ryan C. Fuhrmann did not own shares of any company mentioned in this article.