If you are looking for a low-risk, high-yield investment, welcome to the club: So is everyone else. The problem is, no such investment exists. All investments involve some level of risk, and the lower the risk, the lower the return. The converse is not always true, though. Higher risk doesn't always translate into higher reward. The best you can hope for is to balance an investment's risk and potential reward with your investment objectives and tolerance for risk.
Determine how much risk you are comfortable taking with your investment dollars. You might need to divide your investment dollars into different categories and assign different levels of risk tolerance for each category. For example, you might not be willing to accept much risk for your retirement investments, you might feel comfortable taking moderate risk with your regular investment dollars, and you might be willing to take even greater risks, with a small portion earmarked for speculation.
Determine what kind of return you need to earn on your money. Consider the tax ramifications of your investment returns. If you are in a high federal income tax bracket, you might consider securities with tax-advantaged returns, such as municipal bonds that offer tax-exempt interest. If you are in a lower tax bracket, you might do better with investment grade corporate bonds that pay a higher rate of interest, even if you have to pay taxes on the interest income.
Research your options with an eye for both risk and returns. The lowest risk investments are those that are either insured or guaranteed by the federal government, such as U.S. Treasury securities or FDIC-insured certificates of deposit. These investments won't earn high returns, but you don't risk losing any money. Investment-grade bonds, those with a top-four credit rating by an organization such as Moody's or Standard & Poor's, involve greater risk since they are not insured, but they also pay higher interest rates. Equities, such as stocks, give you the greatest opportunity for high returns, but involve the greatest risks.
Diversify your investments across different investment sectors and with different types of securities. For example, you might invest in bank certificates of deposit, municipal bonds, stocks and real estate investment trusts. Your stock investments might include companies in manufacturing, retail, energy and transportation. The U.S. Securities and Exchange Commission considers diversification one of the bedrock approaches to risk management. If one investment suffers a loss, the other investments in your portfolio can help to offset that loss.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.