When markets are volatile, many investors look for low-risk investments so they can love their hard earned money more. If you want to reduce your risk, read on.
Which investments are low-risk?
When people talk about low-risk investments, they usually mean those investment vehicles in which you lose nothing or very little of your investment.
Here are some low-risk investments to consider now:
High-yield savings accounts
Money Market Accounts
Series I Savings Bonds
Treasury bonds, notes and notes
These investments may not earn much in terms of returns, but most or all of your principal will be intact.
7 of the best low-risk investments
Here’s an in-depth look at some low-risk investments to consider right now.
1. High Yield Savings Accounts
A high-yield savings account at an online or physical bank is a safe place to put some money. Interest rates are still low, but rising. Be sure to shop around for the best price. On October 24, 2022, bank of Americamember FDIC, paid between and annual percentage return based on aggregated account balances. Ally Bankwhich is online only paid APY on the same date.
2. Money Market Accounts
A money market account is similar to a savings account, and you can write checks on it. Money market accounts, such as savings accounts, are typically insured by the FDIC — or, if you get one from a credit union, by the NCUA. This means that even if the bank or credit union fails, your money is protected by the US government.
3. Certificates of Deposit
A certificate of depositor CD, is purchased from a bank or credit union, so it is also FDIC or NCUA insured. CDs offer a fixed interest rate for a predetermined period of time. The interest is usually higher if the term is longer, but sometimes the difference can be quite small. With interest rates rising, it’s probably best to buy a short-term CD if you’re going this route. You don’t want to be stuck with a five-year CD that pays 1% if the rates are 3% from now on.
4. Series I Savings Bonds
Series I Savings Bonds are published and supported by the United States government. They pay interest every month. The interest is a combination of a fixed rate plus a variable rate based on inflation, which is calculated twice a year. Until the end of October 2022, the interest is 9.62%. According to Bloomberg, yields are expected to fall to 6.47% from Nov. 1, but you can hold the rate at 9.62% for six months by buying the bonds before Nov. 1. Savings bonds continue to earn interest for 30 years, although you can cash them in as early as one year from the date of purchase. If you cash them out before five years have passed, you will pay a penalty equal to three months of interest.
5. Treasury Bonds, Notes and Accounts
government bonds, notes and bills are debt issued by the US government. When you buy these, you are essentially borrowing the money from the government, which you pay back with interest.
The difference between bonds, notes and bills is the term. Treasury bills are short-term securities with a maturity of one year or less.
When you buy a Treasury bill, you are buying it at less than its face value. When it expires at the end of the term, you get the face value. For example, you can buy a one-year Treasury bill with a face value of $100 for $95. A year later, it matures and you get $100.
Treasury bonds and notes work a little differently. Treasury notes have a term of two to ten years and government bonds have a term of more than ten years. They pay a fixed interest rate twice a year and at maturity they pay the face or face value.
6. Fixed annuities
The US Securities and Exchange Commission describes a annuity as a contract between you and an insurance company under which you make a lump sum or series of payments, and in return the insurance company agrees to make periodic payments to you that begin immediately or at a future date and for a specified amount of time — 10 years, 20 years or your life, for example. A fixed annuity has a certain interest rate and the insurer must pay you at least that rate as your account grows. The installment amount and the frequency are also determined in advance.
The interest and benefit amounts stated in your contract are guaranteed as long as you hold the annuity until maturity.
Fixed-rate annuities are the type of annuity with the lowest risk, so they generally offer the lowest return. However, you can earn more than the minimum if the insurer’s investments perform better than expected. And if they don’t, the insurer takes care of the damage. Anyway, offer annuities predictable, guaranteed income during your retirement, with virtually no risk of losing the money you put in.
7. Corporate Bonds
Just as the U.S. Treasury Department issues bonds to raise money, companies also issue bonds. They are more risky than US bonds because there is always a chance that the company will go bankrupt. However, if that is the case, bondholders are paid before shareholders, so corporate bonds are: less risky than stocks.
corporate bonds are issued at face value, or face value, which is the amount the company must repay. The face value is usually $1,000, but the bond can be sold for more or less than that amount.
Bonds also have a maturity, which is the amount of time before the bond matures, and a coupon rate, which is the interest that the company will pay the bondholder over the life of the bond. Interest is paid every six months.
A bond can sell at, above or below its face value, but the investor can compare bonds by looking at the yield to maturity. This is the annual return on the bond’s face value if you hold it to maturity, and it’s calculated using a formula that takes into account the coupon rate, face value, price you paid, and maturity.
Here’s an example: If you pay $1,000 for a $1,000 bond that matures in 10 years and has a coupon rate of 4.00%, you’ll get $40 in interest each year — paid as $20 every six months, because bond interest is paid twice a year. Because the bond was sold at face value, the yield to maturity is 4%, equal to the coupon rate. If you paid $900 for the bond, you would still receive 4.00% interest each year, but because you bought the bond at a discount, the yield is higher – 5.31% in this case.
On the other hand, if you pay $1,100 for that bond, your yield to maturity is 2.84%. You get the same $40 in interest each year and you get $1,000 at maturity, but you paid more for the bond when you got it, so your yield is lower.
What is the safest investment with the highest return?
Investing is all about risk, so the safer the investment, the lower the return. As an investor, it is important to understand how much risk you are willing to take. You should also think about whether you need access to your money.
If you don’t want to lose a cent of principal under any circumstances and want to be able to withdraw money when you need it, then look for the highest money market or savings account rate you can find.
Is there an investment that is risk-free?
If you ask a group of people this question, some of them may say, “Cash in the couch” or “Put it in the mattress.” But even that is not entirely without risk. You are still exposed to inflation risk, which, for example, is the risk of inflation growing faster than the interest or other gains you earn on your investment. While you may not see your balance diminish, your real purchasing power is being eroded.
Here’s an example, let’s say you have $1,000 in a savings account and earn 2% interest. After one year you will have $1,020. But if the cost of groceries has gone up, even from $100 to $103 a week, you’ve lost purchasing power.
The best low-risk investment for you is the one that helps you sleep at night. If you’re lying awake worrying about losing money, it’s time to switch to lower-risk investments.
Daria Uhlig contributed to the reporting for this article.
The information is correct as of October 24, 2022.