Three low-risk, high-reward investment ideas

US stocks – which make up around 70% of global indexes – are expensive. Their forward price-to-earnings ratio (which is based on next year’s earning predictions) is 22x, according to FactSet. That puts them ahead of their own ten-year average of 18.1x.

Now, that higher valuation should indicate lower future returns. In fact, Vanguard thinks that valuations of US companies are “stretched”. That’s why the investing house is forecasting an annual return of between just 3.2% and 5.2% over the next decade.

Makes you wonder what to do then. Sure, some cash accounts pay 5%, but keeping money on the sidelines isn’t a sensible move for long-term investors.

Look at it this way: fund group Janus Henderson calculates that cash savings have risen $64 billion year-to-date to reach $2.6 trillion. And that means those savers have missed out on $210 billion in returns since January – when you compare cash interest and the return on global stocks. Take the longer view, and it’s even uglier: over the past 30 years, cash has lagged inflation by 3.4%, while global shares have risen seven-fold in real (i.e. inflation-adjusted) terms.

Yes, moving money out of cash does lead to more portfolio risk. And that’s why I turned to a few fund managers to flag some lower-risk investment ideas that could still lead to strong returns.

Here are three assets they believe fit the bill:

1. Short-dated bonds.

Bonds that are set to mature soon are generally less risky. That’s because their prices are less sensitive to interest rate changes. Rate rises aren’t likely to cause their prices to plunge, and that’s a plus. And falling rates won’t likely cause their prices to rise, and, well, that’s a trade-off.

Stephen Snowden is the manager of the Artemis Short Duration Strategic Bond fund. He says that while the outlook for bonds of almost every variety is attractive, the outlook for short-dated, investment-grade bonds looks good on a risk-adjusted basis.

And he’s got a point: these types of bonds have lower volatility compared to other bond types, at around half the level of British pound investment-grade bonds and one-third the level of British government bonds, or gilts.

As central banks lower interest rates, cautious investors may look to the bond market to secure a higher level of income. At the same time, they may be wary of exposing themselves to the volatility that comes with owning an all-maturity bond fund. By buying short-dated, investment-grade bonds, investors can receive a healthy yield, but with a lot less volatility than they’d experience in the wider bond market.

Still, Snowden warns that markets are unpredictable. Interest rates in the UK, US, and Europe are widely expected to go down from here – not up. But if the past three decades have taught investors anything, it’s that predicting interest rates over any length of time is difficult. And experts often get it wrong.

Yields on short-dated UK bonds are roughly similar to those on the wider investment-grade market, at around 6%, so investors aren't sacrificing income by taking less risk.

2. The UK’s smaller companies.

Another area of opportunity could be the UK’s small-cap companies. Their valuations are historically cheap – which could give investors some peace of mind about the possibility of further stock price falls.

Abby Glennie manages abrdn UK Smaller Companies Growth fund. She says that with the somewhat sour sentiment that global investors have had toward the UK in recent years, investors can grab some promising stocks at pretty appealing valuations. And those low prices offer some downside insurance, even if things get tougher.

The earnings growth forecasts among UK small-cap companies make those shares attractive – more so than UK big-cap growth stocks and comparable to other small-cap firms in other places. And that shouldn’t come as a huge surprise, since UK small-cap firms generate half of their revenue overseas.

What’s more, Glennie says UK small-cap firms, at a 15x price-to-earnings ratio, are actually cheaper than they were six months ago, while global big-cap stocks, at 20x, are more expensive.

Despite being cheap, Britain’s smaller companies can be hugely volatile, so unlike short-duration bonds, small-cap funds and shares mightn’t be a smooth ride for investors. They’re sensitive to the health of the UK economy too, so a recession could send their stock prices tumbling.

3. Real estate.

One of the investments that suffered the most during the recent stretch of rising interest rates was real estate. Higher mortgage rates put pressure on income-producing assets – i.e. rental properties – and caused investors to question the valuations of unlisted investments, which are set by asset managers themselves.

It was tough for landlords and homeowners, and the wide discounts and falling share prices also took a toll on real estate investment trusts (REITs). Thankfully, there’s been a modest recovery and discounts did narrow as interest plateaued, then began to drop.

HSBC Asset Management says a core theme for the next 12 months could be “alternative” assets returning to form, offering portfolio “diversification” and “resilience”.

Joanna Munro is the CEO of HSBC Alternatives. She said she expects to see some persistent volatility in stocks and bonds in the year ahead and sees alternative investments emerging as a critical way for folks to diversify and strengthen their portfolios.

And the real estate sector offers a lot of promise – with economic conditions improving alongside investor confidence in private and listed real estate markets.

JPMorgan Asset Management echoes those thoughts: it pointed to real estate as a likely bright spot for 2025 – noting that rising inflation could help boost returns from the sector, where rents often rise with prices.

The property sector’s intrinsic value and tangible nature make it less susceptible to the downside effects of rising prices, which helps it hold purchasing power and protect real (inflation-adjusted) returns during inflationary periods, the fund group said.

TR Property Ord owns listed and unlisted assets. The shares yield 5% and have delivered a 6% total return over the past 12 months.

-

Capital at risk. Our analyst insights are for educational and entertainment purposes only. They’re produced by Finimize and represent their own opinions and views only. Wealthyhood does not render investment, financial, legal, tax, or accounting advice and has no control over the analyst insights content.