When building wealth and planning for retirement, many carefully consider the decision between investing and saving. Investing has the potential for higher returns, but there’s always a risk since values often fluctuate. On the other hand, saving doesn’t produce a high return, but it’s a safe bet. So what’s the better option? GOBankingRates spoke with financial advisors who shared what high-risk investments to avoid and how to diversify with savings accounts.
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Minimizing Investment Risk
“When investing assets in a long-term strategy, it is critical to diversify as a solution to minimize volatility,” Michael Norber, Financial Portfolio Advisor with The Snyder/Balducci Group, told us.
“The stock market has traditionally returned +8-10% annually across the broader S&P 500 index,” he added. “However, in every year since 1994, there has been a plus 10% increase coupled by a -10% decrease in performance during the year. A prudent way to limit those peaks and troughs in a portfolio is by diversifying assets in a portfolio to incorporate less volatile investment options.”
High-Risk Investments to Avoid
All investments carry some risk, but according to Shawn Plummer, Financial Advisor and CEO of The Annuity Expert, the top ones to avoid are as follows:
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Emotional decision-making driven by market volatility. Plummer explained, “Market fluctuations can tempt investors to buy or sell impulsively, often at the wrong times. To avoid this, stick to a well-thought-out investment strategy and maintain a long-term perspective, avoiding knee-jerk reactions to short-term market movements.”
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Lack of proper research. “Many investors dive into high-risk investments without fully understanding them,” Plummer stated. “Thoroughly investigate each asset, understand its risks and potential returns, and consider consulting a financial advisor who can provide a professional assessment of the investment’s suitability for your goals.”
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Significant losses. According to Plummer, “Investors can avoid this by diversifying their portfolios. By spreading investments across various asset classes, you reduce the impact of any single investment’s poor performance on your overall portfolio.”
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Liquidity issues can arise, meaning you can’t access your funds when needed. Plummer said, “High-risk investments, like private equity or real estate, can tie up your money for long periods. Ensure you have a mix of liquid (easily sold) and illiquid assets to maintain financial flexibility so you’re not caught short in a financial emergency.”
High Yield Savings
When considering the best move for savings, Plummer suggested “high-yield savings accounts for better returns while maintaining security.” He explained, “They provide higher interest rates than regular savings accounts, contributing more effectively to your portfolio’s growth. This option maximizes the earning potential of your liquid assets without compromising safety.”
Norber agreed and stated, “More recently, with the spike in federal interest rates to 5.5%, money market or “high-yield” savings accounts have become increasingly attractive to investors. These strategies act similarly to a traditional savings account, with the caveat being that the institution will pay you a much higher interest per year to hold that cash.”
He added, “For example, if a client has $50,000 as a cash portion of their total portfolio that they like to keep liquid on a daily basis, we recommend they hold it in a money market, high-yield savings vehicle.”
Norber explained, ” At current rates, this would provide an additional $2,500 per year (5% of $50,000), while maintaining the daily liquidity access that suits their needs. Additionally, and perhaps most importantly, this portion provides a great diversifier to their stock investments because cash will not decrease in value with market volatility.”
Have Multiple Savings Accounts
Having access to cash when needed is vital, and Plummer recommended having multiple savings accounts for long-term and short-term goals. He explained, “This approach ensures that funds for immediate needs and future investments are both adequately managed. You can avoid dipping into long-term investments for short-term needs by segmenting your savings.”
Emergency Funds
You never know when you’ll need to cash fast, and Plummer emphasized how emergency funds should always be in a savings account. “This ensures easy access and protects other investments from being liquidated during unforeseen circumstances,” he said. “Keeping your emergency fund in a savings account helps maintain the integrity of your overall investment strategy.
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This article originally appeared on GOBankingRates.com: I’m a Financial Expert: Avoid These Pitfalls in High-Risk Investments — Diversify with Savings Instead