How to Invest Conservatively

You don't have to take wild risks to invest effectively.
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Investments present you with a challenge. Low risk equals low returns on your money. That means the more conservatively you invest, the less likely you are to make significant profits. However, you don't have to resign yourself to measly returns. You can invest conservatively and still prosper. You simply have to take a balanced approach and choose your investments based on protecting yourself from losses, while taking on enough risk to give yourself a chance to increase your wealth.

Step 1

Split your money into four equal portions. The simple act of putting your money into different types of investments -- such as stocks, bonds, CDs or bonds -- is a conservative move. The idea is that if one investment doesn't do so well, the others can make up for it. With each portion, you can invest in something fairly conservative and watch it to see whether it grows the way you want it to.

Step 2

Consider Treasury Inflation Protected Securities. TIPS have a unique feature. They keep up with inflation. The U.S. government pays low interest rates on this investment, but their value goes up twice a year to keep up with the consumer price index. Because TIPS are backed by the U.S. government, they are considered very safe. Note that your income doesn't rise, but the value of your investment does.

Step 3

Add I-Bonds to your portfolio if you can tolerate a variable interest rate. These bonds change interest rates with inflation. You get the initial rate plus the rate of inflation. Your income goes up as prices rise. You pay an early-redemption penalty if you don't keep I-Bonds at least five years.

Step 4

Buy shares in a short-term bond fund if you want to protect your investments from rising interest rates. The reason a short-term bond fund protects you is that the fund isn't locked into interest rates for a long period. As the short-term bonds mature, the fund can buy new bonds at a higher interest rate.

Step 5

Stash some cash in a certificate of deposit if you seek the greatest protection possible. You can earn interest on your investment, and the Federal Deposit Insurance Corp. insures your investment for up to $250,000. The FDIC considers your CD a deposit with the bank. You have to select a maturity for the CD, such as three months, six months, one year, two years or more. If you withdraw your money before the CD matures, you have to pay a penalty.

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