Is it Safe? A Hint of Risk Can Boost Returns
BOSTON (TheStreet) -- "Is it safe?"
Setting aside memories of that line amid the dental torture of the 1976 movie Marathon Man, that same question is being asked more and more by investors as they plan where to put their money -- if anywhere at all.
|Investors seeking safety may consider bets on big companies that aren't going anywhere.|
The hazard of going defensive and keeping your money in "safe" investments is that you typically lose upside in the pursuit of security.
Risk is often paired with reward, so does that mean "yield" and "safe" rarely intersect?Mike McGervey, president and founder of McGervey Wealth Management in North Canton, Ohio, challenges such black-and-white thinking. "Typically cash in a money market earns next to nothing," he says. "Sometimes I will have a client ask, 'What's our cash going to earn when it is on the sidelines?' and I'll stop and tell them they are missing the point. If we are preventing a 30% decline in your portfolio then maybe, in effect, your cash has earned you 30% because it kept you out of the fire." For those not willing to merely ride out market tumult in CDs and money markets, stomaching just a little more volatility and surrendering some liquidity can lead to higher returns that, at the very least, keep pace with inflation. If you can't decide between stocks or bonds, a hybrid of sorts can be found in preferred stocks (as opposed to the common stock most invest with). These share have built-in protections that can help mitigate risk. If a company is pushed out of existence by bankruptcy, those with preferred shares are right behind bondholders and ahead of common stock investors in recouping their share of the divvied-up assets. Also, even though a company can suspend dividend payments, those with preferred stock must be recouped for what they lost before any dividend is restored or paid to holders of common stock. A byproduct of the low interest rate environment is that even companies that are sitting on massive cash reserves are borrowing. This may make investing in high-grade corporate bonds a suitable alternative to Treasurys, especially after the S&P downgrade of U.S. debt.
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