Sleep well at night with these conservative dividend payers.
With times as tough as they are, it's more important than ever to make the right decisions about saving and retiring for your retirement. Yet many people are either avoiding shares entirely or picking flashy high-risk shares that could crash and burn at any moment. Unless they change their ways soon, both groups will cause irreversible damage to their financial future.
Post-crash syndrome
It's no surprise that after all the problems in the financial markets over the past two years, investors still feel shell-shocked about their investments right now. Looking back to mid 2007, it hardly seemed possible that major stock indexes like the FTSE 100 could almost half their value within 20 months. Regardless of warnings about the risks of owning shares, few investors really grasped the possibility until it actually happened.
Now, it seems as though many investors have taken their toys and gone home, dumping their shares and sticking with gilts and cash. Meanwhile, others look at the rally and wonder if they shouldn't be greedy and pile in while the getting is good. Unfortunately, either misstep could lead to financial disaster. The right answer is somewhere in the middle.
This one's too safe
Confronted with huge losses in the stock market during 2008, you may have asked one simple question: is anything going up? At the time, there was pretty much one answer: Bonds.
In response, investors loaded up on bond funds during 2009. There's no denying that bonds give investors more certainty than shares. With bonds, you know when and how much you'll get in interest every year and how much you'll get repaid when the bond matures. With shares, you can never be certain you'll get anything back, let alone how much.
If you're already close to or in retirement and have more than enough money squirreled away in savings, then you might be able to afford to move most of your money into bonds. But what high-quality bonds won't do is help your money grow. So if you're like the vast majority of investors who still need at least some growth in their portfolios, bonds won't cut it. You can't afford to give up on shares.
This one's too risky
That said, gambling on the wrong shares isn't the right move either. But given the way things turned out last year, you may think otherwise. Those who were willing to put their entire investment at risk in highly-indebted shares like Punch Taverns (LSE: PUB) and Pendragon (LSE: PDG) were richly rewarded, as predictions of financial armageddon didn't come to pass.
We're not saying that all of those high-risk shares are necessarily bad investments right now. But you won't see the same performance from them in the future, if for no other reason than that they've already seen such huge gains. For Pendragon to go from 2p to 26p is one thing, but you can't realistically expect to see its shares at 300p+ anytime soon. The easy money has been made, and so those who expect to duplicate those returns year in and year out are deluding themselves.
5 shares that are just right
That's why more conservative shares might be the right play right now. Blue-chip companies like Unilever (LSE: ULVR) and Tesco (LSE: TSCO), both of which held up reasonably well during the worst of the financial meltdown, have failed to keep up with the overall market in the current rally.
Similarly, many steady dividend paying shares like Admiral Group (LSE: ADM), GlaxoSmithKline (LSE: GSK), and British American Tobacco (LSE: BATS) offer very attractive yields to investors.
Sure, a conservative approach may not seem exciting right now. You probably won't see your shares double or triple in the next year, as many investors saw with riskier shares last year. But conversely, you also probably won't lose your shirt if shares start to fall again -- and with all the uncertainty in the market right now, there's every reason to think there's further pain to come.
As tough as things are right now, though, make sure to take a measured approach to investing. Don't let uncertainty scare you out of the market, but don't let a false sense of security persuaded you to take big risks that you can't really afford.
More on the economy and the markets:
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> A version of this article, written by Dan Caplinger, was originally published on Fool.com. It has been updated by Bruce Jackson.
