Improving investment returns
For investors who don’t want to take much risk with their money, the current financial environment is challenging. Rates of return on low-risk investments are very low. Is there anything that safe investors can do to improve the situation? N.C. State University economist Mike Walden responds.
“Well … one answer is a straight no. There is a relationship between the risk that you take in your investments and how much you get back the rate of return for those investments. And if you’re not willing to take a lot of risks, your rate of return is going to be low. So, for some people the answer is no. They can’t do anything.
“Now, for others who are willing to push the envelope a little bit toward risk, they should consider diversification. Now all diversification means is taking part of your portfolio and putting it in a range of slightly risky investments.
“So for example, you may be someone — like you and I — who are at the point where we want to conserve our money. So we’re going to have the bulk of our money in savings investments, but get a low rate of return. But for some portion we may want to say buy some stocks, buy some corporate bond funds, buy some real-estate mutual funds. Those’ll all be slightly riskier.
“The point of buying a range of those investments is that one goes up, the other might go down. So you’re going to average out, it’s going to kick our rate of return up a little bit, but we’re not putting all our eggs in one basket, so to speak.
“So, diversification is the low-risk investor’s way to get a slightly higher rate of return, but you’re still never going to be as safe as you would be if you simply put all your eggs in that very, very low risk investment.”Category: Economic Perspective