Understanding the real returns from “safe” investments

By IG Wealth Management

Many investors like to fill the bulk of their portfolio with so-called “safe” investments, often for a variety of reasons. They may have an innate distrust or fear of the markets; their key goal is to maintain their savings’ value; they’re in or about to enter retirement and don’t want to risk losing any of their savings; or recent market volatility has spooked them.

Given that investors typically can’t afford for their savings to lose value, how can their investments make sufficient gains to overcome the effects of inflation, without taking on undue risk? Let’s take a look. 

Alternatives to investing only in “safe” investments

As with any investment portfolio, diversification is key to minimizing risk while sufficiently growing your savings so that your money maintains (or exceeds) its buying power. Also, there are several types of investments that, while not as safe as those mentioned above, are designed to be less impacted when the stock markets fall.

Investment grade and high yield bonds: unlike the government bonds mentioned earlier, these bonds are issued by companies and therefore typically offer better rates of return. Investment grade bonds usually have a “BBB-” rating or higher, meaning they are among the less risky of corporate bonds. High yield bonds have a rating below “BBB-”, so while they’re riskier, they usually provide a higher return.

Preferred shares: these are often called hybrid securities, because they nestle somewhere between a bond and regular stock (shares in a company). Preferred shareholders usually enjoy better returns than bond holders, but get paid out before regular stockholders if the company goes under.

Low-risk stocks: not all companies are high-risk investments. Companies that are in stable industry sectors and which pay out consistent, sustainable dividends, can be a good option for risk-averse investors. Known as dividend stocks, these investments can capture most of the gains of the overall stock market and less of the losses.

As an example of how dividend stocks perform, let’s look at the S&P 500 Dividend Aristocrats Index. This index is made up of a selection of companies chosen from the S&P 500 (the biggest companies in the U.S.) that are worth over $3 billion and that have increased their dividends consistently over the last 25 years. In 2022, when the S&P 500 as a whole lost around 18% of its value, the Dividend Aristocrats only fell by 9% — a huge difference. Also, investing in this group of companies means that you’re getting consistent income in the form of dividends, which in turn boosts your money’s buying power. 

Alternative investments: there is an increasing number of sophisticated alternative investments becoming available to individual investors. Previously available only to large, institutional investors, assets such as private credit (loans to privately owned companies) and private infrastructure can provide returns that have little relation to the ups and downs of the stock market. 

What are the best safe investments for you? 

You IG Advisor will be able to provide recommendations for safer investment options that are designed to ensure that your savings keep up with (or overtake) inflation. Most importantly, they’ll make suggestions based on your overall financial plan and your savings goals.

Your IG Advisor has access to a huge range of investment options and the expertise to create a diversified portfolio that’s designed to maximize growth while keeping to the risk level that you’re comfortable with. Talk to your IG Advisor at Jeff Somers & Associates today to discuss investments that will protect your savings from inflation.