Conservative Investments to Consider During Market Downturns

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Over a long period of time, the stock market tends to offer great returns. But within those long periods of time, there are plenty of ups and downs — and these days, we're seeing mostly downs. As the country (and the world) braces for more economic hits to come, it isn’t a bad idea to have a portion of your portfolio in lower-risk investments, depending on your goals.

But even during the upswings, it never hurts to be prepared for an unexpected market downturn. Keep reading to learn more about conservative investments that may protect your money — if you’re worried about a continued stock market downturn.

Why Should You Build a Conservative Investment Portfolio?

You don’t need a very long memory to recall times of extreme stock market volatility. Thinking back a bit further, you may remember major market downturns such as the dot com bubble, the fallout from the September 11 terrorist attacks, and the financial crisis of 2007-2008. Hopefully, we don’t have a recurrence, but history tells us that we should always be prepared for market conditions to sour.

Rather than build a conservative investment portfolio right away, it usually makes sense to adjust your portfolio risk based on your investment time horizon, planned use of the funds, and personal risk tolerance. As your investment time horizon shrinks, it usually makes sense to move into more conservative investments, as you have less time to recover from a market downturn.

Whatever your reason for avoiding risk, there is a large menu of low-risk assets to consider, both in the traditional financial markets and elsewhere.

Examples of Conservative Investment Assets

Conservative investments are designed to protect your assets in the event of a market downturn. In exchange for that low risk, you also likely have to settle for lower returns. In some cases, those returns may be less than inflation. That’s why some investors don’t think conservative investments are worth the lower risk. Again, it’s up to you to decide what investments make the most sense for your goals.

  1. U.S. Government Bonds
  2. Investment Grade Corporate Bonds
  3. Cash and Cash Equivalents
  4. Blue-Chip Dividend Stock
  5. Gold

1. U.S. Government Bonds

Government bonds are about the closest thing you’ll find to a risk-free investment. The U.S. Department of Treasury guarantees government bonds. As long as the United States government is good for its debts, these will be repaid. However, they also carry among the lowest yield of any investment you’ll encounter.

Within the realm of government bonds, you can invest in these subcategories:

  1. Savings bonds: Typically, savings bonds are held for 20 years, at the end of which you'll receive their face value (usually double what you paid for them initially).
  2. Treasury notes: These bonds reach their maturity in 2 to 10 years, depending on the terms. They are sold in increments of $100.
  3. I-Bonds: I Savings Bonds (or simply I Bonds) were developed to help combat inflation. They can grow tax-deferred for up to 30 years, with a $10,000 annual limit. It's best to take advantage of them when return rates are high (like now).
  4. T-bonds: Also known as Treasury bonds, these bonds take 10 to 30 years to mature. They have a face value of $1,000 and pay interest twice a year.
  5. Treasury inflation-protected securities: You might have heard of these referred to as “TIPS.” Their values “float” with inflation rates, so you'll be at less of a risk of losing money over time.

Learn more >>> How to Invest in Bonds: Diversify Your Portfolio

2. Investment Grade Corporate Bonds

Corporate bonds are debt issued by large companies. Investment-grade usually refers to bonds issued by companies with excellent credit and an extremely low risk of default. If a bond has a rating of BBB or above with S&P 500 or earns a BAA or better with Moody’s, it’s considered investment grade.

Bonds with lower ratings are riskier and get the lovely title “junk bonds.” These pay higher interest rates but also carry a higher likelihood of default. Do you see the trend here?

3. Cash and Cash Equivalents

A dollar will always be worth a dollar. Again, if you believe in the U.S. government and the overall economy of the United States, there is almost zero risk when holding dollars in a savings account, certificate of deposit (CD) or money market savings account. However, your interest rate will likely be less than inflation.

A perk of keeping money in the bank or credit union is federal deposit insurance. The FDIC protects bank accounts for up to $250,000 per depositor per institution. Credit unions get similar protection from the National Credit Union Administration. In either case, your money is guaranteed even if your bank goes out of business, as long as your balance is within insured limits.

4. Blue-Chip Dividend Stock

Every stock has a different risk level, and blue-chip dividend stocks are among the lowest risk in the stock market. Blue-chip refers to large, stable companies. Those that pay dividends are likely to maintain a small cash flow for you while potentially appreciating as well.

One particularly stable subgroup is called the “Dividend Aristocrats.” These are S&P 500 stocks that have increased their dividends for at least 25 consecutive years — a great track record that will hopefully extend well into the future.

Related >>> How to Invest in the S&P 500 Index

5. Gold

Some people are not big fans, but others love gold as a store of value. Gold has been sought after for thousands of years and will likely be valuable far into the future. However, gold markets can be volatile, and some gold sellers are more interested in a quick buck than integrity.

How to Invest Conservatively

With any of the assets above, you can usually make conservative asset investments directly through a stock brokerage, bank or other sellers. However, buying individual bonds, individual stocks, and physical gold all carry their own risks. You can further mitigate risk with a diverse portfolio.

Low-cost index funds are ideal for investing in stocks, bonds or commodities like gold with less risk. For example, you could buy a dividend stock fund that focuses on large, stable companies and charges minimal fees. Large fund companies also offer index funds for government bonds, corporate bonds, municipal bonds and a mix of different types of bonds.

When investing in index funds, mutual funds or any other type of fund, it’s a good idea to look at the following to make sure it’s the right choice for your money:

  • The Total Fees
  • Past Performance
  • Fund Ratings
  • Top Holdings
  • Competing Funds

The Takeaway: Stay Calm And Invest On

Although there's no such thing as a risk-free investment, these conservative investment ideas are about as safe as they come during this year of market uncertainty. These time-honored investments have track records that go back decades — or even more than a century. If you want to get more insight into your portfolio and if you're on track to meet your financial goals, you can use a service like Personal Capital.

Warren Buffet famously said that investors should be “fearful when others are greedy, and greedy when others are fearful.” If you see too much greed in an overheated market, you may want to move to more conservative investments.

Nervous? Don't be. Here's how to pivot your investments >>> 

Eric Rosenberg

Eric Rosenberg is a finance, travel and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full time. He has in-depth experience writing about banking, credit cards, investing and other financial topics and is an avid travel hacker. When away from the keyboard, Eric enjoys exploring the world, flying small airplanes, discovering new craft beers and spending time with his wife and little girls.

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