This post was written by the Frugal Dad of FrugalDad.com. The site provides personal finance advice, visual journalism and.
Investing can be a dangerous game, especially if you’re just starting out in the current, relatively volatile market. Here are some guiding tips and some examples that should help you build a safe portfolio for these risky times:
- Although no investment is truly 100% safe, you can begin with these historically stable choices—
- Bank Savings Accounts – designed to simply hold money without the capacity for immediate access, usually pay slightly higher rate than checking accounts
- Certificates of Deposit – insured, virtually risk-free, and low on the risk/reward spectrum
- Government Issued Securities – well-insured; the sector of the economy controlled by the government is generally considered to be the most secure
- Money Market Accounts – a good cash-management tool, somewhat riskier than the above options but a good choice for smaller quantities of cash
- Fixed Annuities – a contract with an insurance company that yields a guaranteed return;usually not liquid so funds are not as accessible post-investment as in other options
As you get more adventurous in your investing, bear in mind some basic strategies—Warren Buffett’s “KISS” approach – “Keep It Simple, Stupid “ – advocates never investing in a venture that you can’t immediately understand: don’t let your funds go anywhere out of your control. Do your own fact-checking and use common sense rather than only relying on public opinion polls; put some personal thought into where and how you spend your money.
- High-quality, large companies with a lot of cash – these will be in a good position to not only ride out the potential ups and downs of a volatile market, but to pay dividends should the market experience unexpected growth in 2012
- Telephone companies, utilities, technology – these had a good run in 2011 and generally considered safe sectors; again, for technology, take a look not at the successful recent upstarts like Pandora but rather the older, large, established companies like Microsoft, IBM, and Apple – these companies are low on debt, high on available cash, and sell services and products that are now considered essentials by consumers and corporations
- Yacktman (YACKX) – a fund with a sturdy history whose management looks for undervalued companies with healthy debt structures and which ranks in the top 1% of its peer group over the past 10- and 15-year periods—currently, the team is focusing on large brand-name companies like PepsiCo, Procter & Gamble, and Johnson & Johnson
- Sequoia (SEQUX) – a similar fund that focuses on large, well-managed companies with cash on their balance sheets like Google; its portfolio historically outperforms in times of distress but lags in up markets
Basically, apart from allocating some of your funds to the most secure, best-insured investment options, experts recommend focusing on large resource-rich companies during periods of volatility in the stock market. These companies have the double advantage of being able to withstand bad turns and actually paying dividends in times of growth, and have historically done well. You can place some of your money into funds like Yacktman and Sequoia to be managed by professionals, but those professionals are basically following the guidelines above—with an eye additionally influenced by experience.