Market swings are inevitable, but low-risk, income-focused investments can help you weather downturns.
When markets turn volatile, which has certainly been the case lately, protecting your portfolio should become a top priority.
That doesn’t mean rushing for the exits and hiding out entirely in cash. Instead, capital preservation strategies help minimize losses and keep you positioned for the inevitable market recovery while generating a better return than cash.
Andrew Davis, a chartered financial analyst and director of macroeconomics research at Bryn Mawr Trust in Philadelphia, says the recent market unpredictability has added new layers of concern for investors. “For those seeking more flexibility or the potential to capture attractive short-term yields, alternatives like high-yield savings accounts, money market funds or short-term Treasury bonds could be appealing,” he says.
From cash alternatives to fixed-income securities to dividend-paying stocks, here are some investment options to help safeguard your money when the market takes a turn:
High-Yield Savings Accounts
As the name tells you, these are savings accounts that deliver a higher yield than a regular bank account. They’re available through online banks and brick-and-mortar banks. Credit unions have a virtually identical product called share certificates.
“High-yield savings accounts are an ideal place for emergency savings as they provide stability, liquidity, a higher yield than traditional savings accounts and FDIC insurance coverage,” says Ty Johnson, a financial planner at Peak Financial Management in Broomfield, Colorado.
Many of these accounts have no fees and offer yields competitive with certificates of deposit and money market funds.
“Unlike CDs, high-yield savings accounts don’t have a lock-up period; this can be an advantage or disadvantage depending on your situation,” Johnson says.
“If you are looking for a place to keep a rainy day fund and aren’t sure when you’ll need to access the money, these accounts are a great option,” he adds.
However, anyone saving for a major purchase a couple of years away may want to consider an investment with a fixed term, such as a CD or bond that can lock in a potentially higher interest rate.
Certificates of Deposit
The lock-up period for a CD can range from a few months to a few years. If investors withdraw their money early, they’re not entitled to the full interest amount they’d otherwise receive.
“This is a risk-free account that is great if you want to lock in a higher interest rate,” says Jason DeLorenzo, principal and owner of Ad Deum Funds and the Volland trading platform in Chantilly, Virginia.
But if you think inflation is going to take hold or the Federal Reserve will raise rates, a CD is not the way to generate the best return from your money.
Treasury Bills
U.S. Treasurys are generally viewed as ultra-safe investments, especially during volatile markets. However, investors should understand some potential pitfalls.
“U.S. Treasurys are often considered the safest investment in terms of credit risk, given they’re backed by the full faith and credit of the U.S. government,” says Jason Gilbert, managing partner and president at RGA Investment Advisors in Great Neck, New York.
But they’re not without risk, particularly interest rate risk, he adds. “If you buy a Treasury and interest rates rise, the market value of your bond may decline. This matters if you need to sell before maturity, as you could realize a loss,” he says.
Holding a Treasury to maturity guarantees the return of principal and the stated yield, but liquidity needs or market shifts can create unintended consequences for investors who don’t plan ahead, Gilbert adds.
Series I Savings Bonds
Series I savings bonds can be a smart hedge against rising inflation, but as with any investment, they come with trade-offs. They’re generally well-suited for long-term savers who don’t need immediate access to their cash.
“Series I savings bonds are great if you believe inflation could go up,” DeLorenzo says. “The interest rate changes with inflation, but if you need liquidity, your money is locked up for at least a year, so only invest in this vehicle if you don’t need the money right away and are unsure of the inflation direction.”
Money Market Funds
This is a type of fixed-income mutual fund that invests in liquid, short-term debt.
Money market funds are considered low-risk investments. A money market fund can be a vehicle to help save for short-term goals that you know are coming up, such as a new car or new roof on the house.
“These funds invest in short-term Treasurys and commercial paper, but act as mutual funds,” DeLorenzo says. Putting money into these vehicles offers high liquidity while allowing investors to earn interest from the underlying short-term investments, he adds.
Treasury Inflation-Protected Securities (TIPS)
If you’re concerned about long-term inflation and preserving your buying power, TIPS may offer a suitable solution.
Brian Rhoads, founder of Checkpoint Financial Planning in Highland Park, Illinois, says he often recommends buying TIPS for capital preservation and holding them to maturity. “You preserve purchasing power of your money and receive a modest real, or inflation-adjusted, return, all backed by the U.S. Treasury,” he says.
“By buying and holding individual TIPS to maturity, versus buying TIPS through a mutual fund or ETF, you eliminate the risk of price fluctuations caused by changes in market interest rates,” he adds.
Short-Term Bond ETFs
Short-term fixed-income ETFs can be an effective way to generate income while aiming to preserve capital, especially in volatile markets or rising-rate environments.
These funds typically invest in bonds with maturities of one to five years. That reduces interest rate sensitivity relative to longer-term bonds.
For example, the iShares Short-Term Treasury Bond ETF (ticker: SHV) offers low-risk exposure to government bonds, while the Vanguard Short-Term Bond ETF (BSV) is a blend of government and corporate bonds.
The SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) has a focus on capital preservation with minimal volatility.
All these funds offer more liquidity than either individual bonds or bond mutual funds.
Municipal Bonds
Municipal bonds are debt securities issued by states, cities or counties to fund public projects. Municipal bonds’ interest income is often exempt from federal income taxes, and sometimes state and local taxes as well. For that reason, they are frequently suitable for high earners who are looking for ways to slash their tax bills.
“Municipal bonds are not as safe as U.S Treasurys but have tax benefits. You need to do more research based on default risk, and these are also not exceptionally liquid vehicles,” DeLorenzo says.
However, the tax advantage to investing in municipal bonds can be particularly attractive to high-income investors in the top tax bracket.
Preferred Stocks
Preferred stocks are equity investments, but they have some characteristics of debt. They pay regular dividends and have payment priority over common stocks in the case of a company liquidation, but they fall behind bondholders in that pecking order.
“Preferred stocks, while often viewed as a stable income source, carry their own mix of risks,” says Gilbert. “They typically offer higher yields than Treasurys, often in the 5% to 7% range, but behave more like long-duration bonds, meaning they can decline in value sharply when interest rates rise,” he says.
He adds that preferred dividends can be suspended without triggering a default, and the lack of voting rights can leave investors with limited recourse. “In volatile markets, preferreds can trade more like risk assets than safe havens, so selectivity and credit quality are key,” Gilbert says.
That said, preferred stocks often have higher, more stable yields than the regular dividend stocks or bonds issued by the same firm. Though common stocks carry higher risk, they also offer higher price appreciation potential.
Dividend-Paying Stocks
High-dividend stocks, which often hail from defensive sectors, can have an advantage over growth stocks during bouts of market turbulence. The steady income they provide can serve as a buffer against market fluctuations and, to a degree, can help offset price declines.
“Low-volatility dividend-paying stocks, like utility stocks, move inverse to Treasury interest rates, since the dividends in stocks like this are typically stable and the risk-free rate matters to these stocks,” Gilbert says. When Treasury yields rise, these stocks often decline in value, as their relatively fixed income becomes less attractive compared to safer government bonds.
Their sensitivity to interest rates is especially noticeable when yields are rising quickly or unexpectedly, and not all dividend stocks react the same way. For example, a high-growth dividend payer, such as Microsoft Corp. (MSFT), may behave differently from a slow-growth utility.
In addition, Gilbert notes that the value of these stocks doesn’t fluctuate as much as the overall market. However, price moves can be driven by demand for specific stocks, such as those within the utilities sector, combined with Treasury interest rates.
