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Focusing on low-risk investments doesn’t necessarily mean giving up great returns. Risk is everywhere, and investors are constantly trying to reduce it. Learn about different measures of risk to better evaluate the best low-risk investments, through our shortlisted list of 30 stocks and ETFs that have low-risk statistics but are also high-yield investments.
Remember that past performance is not a reliable indicator of future results.
In finance, investment risk is the variability between average and expected returns. For example, a bond that pays 2% every year can be considered low risk because the returns don’t vary. In contrast, a stock that returns 5% one year, 30% the second year and 10% the next year is riskier because the returns varied quite significantly.
To an investor, risk is typically associated with losing money. The stock above may not look so risky since it has tended to go up. Indeed, a stock that loses 2% every year has low variability. Therefore, the stock may be low risk, but that doesn’t mean it’s a wise investment.
Investors do consider variability in returns as a risk measure. However, they should also consider the risk and reward of their investments: What do they expect to make versus what they could lose?
Diversification is also an important part of risk control. The more assets that are held within a portfolio, the less impact any single one should have. If a company goes bankrupt but the position is only a small part of the portfolio, that event may have little negative impact on the portfolio.
Low-risk investments are assessed using several metrics. These metrics measure the movement or variability of returns over time and can include:
Beta, which measures how much a stock price moves in relation to an index, such as the S&P 500, and in which direction. For example, a beta of 1.0 means that the stock tends to move with the S&P 500. A beta of 2.0 means it has twice as much variance. A beta of -1.0 means the stock moves with similar volatility as the S&P 500 but in the opposite direction.
Standard deviation, which measures how much returns tend to fluctuate from the average yield. Stocks that produce returns that are near the average are considered less risky than stocks that have returns that fluctuate wildly.
Sharpe ratio, a metric which takes the stock’s return and then reduces it by the risk-free return (such as investing in US or UK government bonds). It then divides the result by the stock’s standard deviation. A Sharpe ratio above 1.0 means the reward justifies the risk. A ratio above 3.0 is extremely good, while a Sharpe ratio below 1.0 means excessive risk was taken to get the return.
Low-risk stocks typically have a competitive advantage within their respective industry, steady earnings growth, and a strong financial position. Stocks that are part of a major index, such as the S&P 500 or FTSE 100, have most of these traits.
The S&P 500 return over the last 10 years is 327%, based on Yahoo Finance data. Below are some of the best high-yield low-risk stocks that have produced much higher returns than the S&P 500 with similar or lower risk. This list will focus on stocks with a beta of near 1.0 or below and that have had strong stock price performance over the last 10 years.
As always, past performance is not indicative of future performance, so please do your own due diligence before investing. The following data is sourced from Yahoo Finance.
There are risks in all stocks. A stock may have a low standard deviation, but that doesn’t mean that can’t change in the future. And a stock that has a good Sharpe ratio or low beta could still fall. You should develop investing strategies for handling both the ups and downs of the market. Alternatively, opt for a passive investing strategy, such as a buy-and-hold approach.
These are some of the best-performing low-risk stocks listed on the London Stock Exchange (LSE). Each stock has a beta near 1.0 or less, and this list only features stocks that are held in the FTSE 100 as these companies are also generally financially stable with strong earnings potential.
Given that this list is sourced from just 100 stocks, it considers only 5-year returns. For reference, the Xtrackers FTSE 100 ETF (XDUK) had a total return of circa 29% over the last five years. Below are some of the best high-yield, low-risk investments.
The following data is taken from Hargreaves Lansdown and Yahoo Finance. Past performance is not indicative of future performance.
The list of top stocks will change over time. Learn how to invest in stocks so that over time you’ll know what to look for in order to find solid companies and quality investments.
These are ETFs that are listed around the world on various exchanges that have a combination of at least a 5-year uptrend, top returns over the last 10 years, and low betas. Leveraged or inverse funds have been excluded.
The following data is taken from Stock Rover and Yahoo Finance. Past performance is not indicative of future performance.
FAQs
Bonds issued by stable governments – such as the UK or US, for example – are considered some of the safest investments. These include US treasuries or UK gilts. Since there is little risk of these governments defaulting, they are low risk and low return investments (relative to stocks).
As someone nears retirement, and into retirement, they may choose to allocate more of the portfolio to lower-risk investments, such as bonds, with less allocated to stocks, which can be seen as a more risk-averse portfolio. Someone who is younger may choose to place more capital in stocks than bonds, as they have a longer time horizon to ride out the volatility.
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