Low-Risk Investment Options

  • June 9, 2022

Anytime you’re investing, you’re agreeing to take on a certain amount of risk. And as you probably know, there’s a direct correlation between risk and reward. The higher your expected return on an investment, the greater the amount of risk you’ll have to accept.

The good news is there are plenty of investments that provide relatively low risk but can still provide great returns for your investment portfolio. In this article, we’ll talk about a few  investments that have a relatively low risk that can make a great addition to your investment strategy.

Which Investments Are the Safest?

There’s a huge spectrum of risk for investments, ranging from the almost risk-free on one end to highly speculative and risky on the other end. Even with relatively safe investments, there are risks to consider, including the risk that they won’t keep pace with inflation. However, there are plenty of choices that have relatively low chances of losing your money,  but can still get you a return on your money.

The following options 1-5 are cash alternatives and technically not investments. The final five are higher on the risk scale and are subject to stock market volatility.

1. Savings Bonds

A savings bond is a debt security issued by the U.S. government. You purchase a bond, and you’ll receive the promised return for a period of 30 years. There are two types of savings bonds: Series I bonds and Series EE bonds.

A Series I bond earns interest based on two factors: a fixed interest rate and a rate of inflation. The fixed rate remains the same for the life of the bond, while the inflation rate is set twice per year. Series I bonds are available in amounts ranging from $25 to $10,000, with a maturity of 30 years or until you cash them (which can’t be until at least after the first year).

A Series EE bond has only a fixed interest rate. Like Series I bonds, Series EE bonds are available in amounts ranging from $25 to $10,000. They have a maturity of 30  years, but you can cash them in after the first year, with an interest penalty if you cash them in within the first five years.

Savings bonds require no risk of loss, since they’re backed by the federal government. However, you do run the risk that your investment won’t grow as fast as inflation.

2. Treasury Bonds, Bills, Notes & TIPS

The U.S. Department of the Treasury issues several types of securities that raise capital for the federal government and are an investment opportunity for individuals. The various Treasury securities — known as bills, notes, and bonds — differ primarily in their maturity.

Treasury bills: Mature in less than one year
Treasury notes: Mature in 1-10 years
Treasury bonds: Mature in more than 10 years

The Treasury Department also sells Treasury Inflation-Protected Securities (TIPS), which, as the name suggests, protect investors from inflation. These bonds pay interest every six months, and the principal is adjusted to reflect the current rate of inflation.

3. Money Market Accounts

A money market account is a type of banking product that combines some features of both savings and checking accounts. Like a savings account, a money market account earns interest, though it’s often at a higher rate than the savings accounts offered at a traditional bank. But like a checking account, a money market account often has check-writing privileges and a debit card.

Money market accounts do have some restrictions, including higher account minimums than savings accounts. Additionally, the rates of return aren’t as attractive as many high-yield savings accounts on the market.

Note: It’s important not to confuse money market accounts with money market funds. A money market fund is a type of mutual fund that invests in short-term debt securities.

4. High-Yield Savings Accounts

Savings accounts certainly aren’t a new concept, but it’s becoming increasingly common for online banks to offer high-yield savings accounts that offer returns many times higher than what you’d find at a traditional brick-and-mortar bank.

The rate on these accounts adjusts with the market interest rates, meaning they fell during the pandemic when the Federal Reserve slashed interest rates. However, as interest rates begin to climb, we may also see the rates in high-yield savings accounts rise.

5. Short-Term Certificates of Deposit

A certificate of deposit (CD) is a banking product that allows you to earn a small return on your savings, similar to a money market account or a high-yield savings account. The key difference is that a CD earns a fixed rate, but has a fixed maturity date.

Maturities on CDs usually range from just a few months to about five years. You can withdraw your money earlier, but may be subject to an early withdrawal penalty.

Note: Money market accounts, high-yield savings accounts, and CDs are all FDIC-insured usually up to the standard insurance amount of $250,000, meaning you don’t run the risk of losing all your money. Instead, the greatest risk of all three of these accounts is that your returns may not keep pace with inflation. For example, most high-yield savings accounts offer APYs of less than 1%, which is only a fraction of the inflation rate over the past year.

What Are Some Higher Risk Investment Options?

6. Annuities

An annuity is an insurance product that provides a steady stream of income in the future. Annuities generally have two phases: the accumulation phase and the annuitization phase. During the accumulation phase, the annuity is funded and grows. During the annuitization phase, the investor receives their annuity payments.

Annuities can fall into several different categories:

Immediate annuity: This type of annuity provides an income stream immediately, allowing you to convert a lump sum into regular payments.

Deferred annuity: When you buy a deferred annuity, you’ll invest money now that will grow and provide payments in the future, similar to a 401(k).

Fixed annuity: A fixed annuity earns a fixed interest rate — and has fixed payments — that’s set by the insurance company.

Variable annuity: Unlike a fixed annuity, a variable annuity has a return that depends on market returns based on where the funds are invested.

7. Corporate Bonds

We’ve already talked about Treasury bonds, but there are also bonds issued by publicly-traded companies. These debt securities allow companies to raise capital when they need it while providing a return to investors.

Corporate bonds are higher-risk than Treasury bonds, since they aren’t backed by the government. Your return is dependent on the ability of the company to pay its debts. That being said, corporate bonds are still generally considered one of the lowest-risk investments, especially if you buy them from a creditworthy company.

Corporate bonds work like other types of investments where there is a range of risk levels ranging from high-grade bonds to junk bonds. The greater the bond risk, the higher the potential return.

8. Preferred Stocks

Public companies generally offer two types of stock: common stock and preferred stock. The benefit of preferred stock is that you have priority over common stockholders. If the company pays dividends, they pay them to preferred shareholders first. And if the company ends up going out of business, preferred stockholders are more likely to get their investment back.

The major downside of preferred stock is that, unlike common stockholders, preferred stockholders don’t usually have the right to participate in shareholder votes.

9. Dividend Stocks

A dividend is a payment that a company makes to shareholders to pass along its profits. Companies aren’t required to pay dividends, but many choose to do so as a way of rewarding investors and enticing them to hold onto their shares.

While any company can pay dividends, there are some that are well-known for doing so and have been paying dividends on a regular basis for years (or even decades). If you’d rather not pick individual companies to invest in, you can buy into dividend mutual funds and ETFs (more on those below).

Note: For both preferred stock and dividend stock, the investment is only as good as the company you buy it from. Some companies may have more volatile stock than others, resulting in greater risk to shareholders. And in the event of a stock market decline, preferred and dividend stocks aren’t likely to be spared.

10. Mutual Funds & ETFs

Stocks are some of the most popular investments available, and you’re likely to find them in just about every investor’s portfolio. Investing in individual stocks can be a risky move. After all, if the company you’ve invested in fails, you can lose all of your initial investment. But mutual funds and exchange-traded funds (ETFs) make it easy to add stocks to your portfolio with less risk.

Both mutual funds and ETFs are pooled investments, meaning they pool many different assets together under a single investment umbrella. When you buy into the fund, you gain exposure to every company within it. And many funds invest in hundreds — or even thousands — of companies.

Mutual funds and ETFs can be either passively managed or actively managed. A passively-managed fund, also known as an index fund, tracks the performance of an underlying stock index or sector, such as the S&P 500. An actively-managed fund has a fund manager who regularly buys and sells assets with the goal of beating the performance of the stock market.

Note: When you’re investing in mutual funds — especially actively-managed ones — it’s important to pay attention to their fees. Many mutual funds have notoriously-high fees compared to ETFs and passively-managed funds.

Our Take

Even if you’re focused on growing your investment portfolio, it’s worth considering some low-risk investments. They help reduce your overall portfolio risk. And some of the low-risk investments on this list can be excellent places to park funds you plan to use within the next few years, since they aren’t subject to the volatility of the stock market.

Keep in mind the risk involved with each of the investments above. It’s important to speak with your advisor to determine the appropriate approach for your financial life.

If you’re looking for an advisor, consider our fiduciary wealth managers who are available to work with qualified investors to design a portfolio aligned with your risk tolerance and your unique goals.

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