Using Low Risk, High Return Assets to Protect Your Portfolio

As an investor, some loss is inevitable—the only way to guarantee you'll never lose money is to not invest at all. You want to protect as much of your wealth as possible. At the same time, take too little risk, and you're losing out on potential returns that could help you build wealth. 

Here are some ways to add low risk, high return investments to your portfolio and protect against market crashes and inflation.

There are ways to manage your risk level so that you minimize the chances of your investments taking a huge hit if the market crashes. These risk management strategies can also smooth the volatility of your portfolio out so you can more predictably build wealth.

If you dial back your investments too much, though, you stand to lose money in a different way—to inflation. As prices go up, the purchasing power of your money goes down. You can put your money in a high-interest savings account, but even those won't outpace inflation.

To protect your investments against loss to market crashes, volatility, and inflation, you want to do three things: diversify, allocate to uncorrelated assets, and invest in inflation hedges.

Diversification

Diversification is key to protecting your investments. In short, it involves spreading your investments across a variety of different sectors and asset classes. If you've got all your money in tech stocks, and the tech industry takes a hit, your portfolio will tank similarly. However, if you had spread your investments out across many different sectors of the economy, only a small portion of your portfolio would dip along with the tech companies.

Similarly, you can diversify your portfolio by investing in different asset classes. Stocks are a no-brainer, but if you really want to protect your wealth against another market crash, put some of it into other assets like bonds, real estate, or crypto.

Uncorrelated assets

Incorporating uncorrelated assets into your portfolio is like diversification on crack. Uncorrelated assets are assets that aren't correlated with the stock market—they move independently of the market's ups and downs. In other words, dips in the market aren't likely to cause these assets to also tank. There are even negatively correlated assets that move in the opposite direction of the stock market, so they go up when the market goes down and vice-versa. While these tend to offer lower returns, they come in handy when the market falls.

Investing in these assets gives your portfolio added protection against a market crash. Examples of uncorrelated assets are real estate, art, and farmland. Bonds tend to be negatively correlated to stocks (although not always), which is why investors traditionally add them to a portfolio to balance out stocks.

Inflation hedges

To protect your portfolio against inflation, which can devalue your investments, you want to invest in assets that are considered inflation hedges. Inflation hedges are investments that tend to hold their value during times of inflation. Some inflation hedges are even correlated with inflation, which means they tend to gain value as prices rise.

Popular inflation hedges include gold, real estate, commodities, treasury inflation-protected securities (TIPS), and some stocks. If you've created a diversified portfolio, chances are you've already got some investments that can help you protect your investments against inflation.

The difficulty in protecting your portfolio against loss is that many protective strategies involve sacrificing the high returns you'd get from more risky investing strategies. Well, what if you can have your cake and eat it too?

As it turns out, there is a handful of low risk, high return investments that have the potential to help you out during a market crash or inflationary period without leaving your portfolio growing at a snail's pace. Of course, there are no guarantees in investing, and it's always possible to lose money even with investments deemed safe. But it's worth considering these assets that have historically been low risk and high return.

Real estate

Real estate has historically provided returns that are comparable to the stock market. What's more, it's significantly lower in risk than stocks and tends to rise in value with inflation. 

Research also shows that the real estate market hasn't been correlated with the stock market since before World War II. And while the housing bubble of 2008 partially caused the subsequent financial crisis, it's rare for a market crash to cause a real estate crash. In fact, residential real estate, warehouse and distribution facilities, medical facilities, and data centers all tend to be recession-resistant forms of real estate, which means they usually hold up well during a recession.

You can invest in real estate by purchasing a rental property or, if you don't want to manage property, buying shares in a real estate investment trust (REIT). You can also invest in commercial real estate properties, like warehouse and medical facilities, through crowdfunding platforms such as CrowdStreet.

Farmland

Regardless of how bad the stock market is doing, everyone needs to eat. This is why US farmland tends to be a fairly resilient asset, even during the worst market downturns. In fact, it's less volatile than most asset classes, having experienced only five down years in the last 50.

At the same time, a study comparing Iowa farmland to the S&P 500 found that if you invested $1,000 in each in 1960, your Iowa farmland investment would have outperformed your stock market investment by now. It's also positively correlated with inflation, which means it tends to perform well when prices are on the rise.

All of this might explain why Bill Gates is the largest investor in US farmland in the country. Luckily, you don't have to be the next Gates to buy a piece of farmland. Investing platforms like FarmTogether let you pool your money with other investors to invest in farms that are already operating and generating revenue.

Bonds

While bonds aren't necessarily a high return investment, they are one of the best low-risk investments. They're one of the most popular ways to diversify your portfolio and protect against market crashes, and some bonds (like treasury inflation-protected securities or TIPS) are great hedges against inflation. Bonds can also provide a reliable source of income during a recession.

If you're looking for a little more on the return side of things, Worthy bonds provide a fixed 5% return that's compounded daily. These bonds are slightly riskier than others because the money is lent to businesses, which could fail in the case of a market crash. That said, Worthy secures their loans with assets and inventory that can be used to recoup your investment in the case of default.