Low-risk investments provide financial security, especially in uncertain markets. They offer stable, predictable returns, making them ideal for long-term goals without the stress of high volatility.
If your priority is keeping your money safe and earning steady interest, these options are worth considering. Let’s explore them further.
What You Should Know About Low-Risk Investments
A low-risk investment refers to financial instruments that offer relatively stable returns with minimal potential for capital loss. These investments are typically favored by conservative investors or those seeking to preserve their principal while earning a modest return.
Low-risk investments often include savings accounts, government bonds, and other instruments backed by strong entities like governments or large corporations.
While they offer lower returns than higher-risk options, the primary advantage is their safety and predictability, making them ideal for those looking for security over rapid growth.
When deciding how much risk you’re comfortable with, here are a few scenarios to think about:
- No risk: Your principal (the amount you invest) is completely safe.
- Some risks: You might break even or take a slight loss, but nothing too drastic.
There are two things to keep in mind:
- Low-risk investments usually mean lower returns compared to riskier options.
- Inflation can chip away at the value of your money over time, even with low-risk investments.
If you stick only with low-risk investments, your money might lose some purchasing power.
These options are typically better for short-term goals or an emergency fund, while higher-risk investments are better for long-term goals like retirement.
Best Low-risk Investments
Are you looking for safe ways to invest? Here are the best low-risk investments to help protect your money while still earning steady returns.
High-Yield Savings Accounts
While not technically an investment, high-yield savings accounts give you a safe place to park your money with some interest. You can find the best rates by checking online banks and comparing offers.
- Why it’s worth it: These accounts are super safe, with most government-insured up to $250,000. Your money stays secure, even if the bank goes under.
- Potential risk: While your balance won’t decrease, inflation could affect your purchasing power.
Money Market Funds
Money market funds are pools of low-risk investments like CDs and short-term bonds. They’re designed to reduce risk through diversification and are usually sold by brokers or mutual fund companies.
- Why it’s worth it: Money market funds are liquid, meaning you can take out your money anytime without penalty.
- Potential risk: They’re generally considered safe, but you’ll want to check that the value of each share stays above $1.
Short-Term Certificates of Deposit (CDs)
Bank CDs are another low-risk option. They’re protected by the FDIC as long as you don’t take the money out early. Short-term CDs can be a good choice with rising interest rates, allowing you to reinvest if rates go up.
- Why it’s worth it: Holding the CD until maturity locks in a guaranteed interest rate.
- Potential risk: Taking your money out early usually means you’ll lose some of the interest or, in some cases, part of your principal. Also, if rates rise and you’re stuck in a lower-rate CD, you’ll miss out on better opportunities.
Series I Savings Bonds
Series I bonds are a great low-risk option that adjusts for inflation. When inflation rises, the bond’s interest rate goes up, too.
- Why it’s worth it: These bonds help protect your investment from inflation. The U.S. government backs them, so they’re about as safe as possible.
- Potential risk: The bond’s interest rate will decrease if inflation drops. And if you cash out before five years, you’ll lose the last three months of interest.
Treasury Bills, Notes, Bonds, and TIPS
Treasury securities, such as bills, notes, bonds, and Treasury Inflation-Protected Securities (TIPS), are all government-backed and have different maturities.
- Why it’s worth it: These are highly liquid so you can sell them quickly. Plus, if you hold them until maturity, you’re guaranteed not to lose money.
- Potential risk: Selling them before maturity could lead to a loss, significantly if interest rates have risen since you bought them.
Corporate Bonds
Corporate bonds can range from relatively safe to very risky, depending on the company issuing them. High-quality bonds from big companies tend to be less dangerous, while high-yield or “junk” bonds carry much more risk.
- Why it’s worth it: You can lower risk by choosing bonds with shorter maturities or from well-established companies.
- Potential risk: Bond values fluctuate with interest rates, and the company could default on its payments.
Dividend-Paying Stocks
While not as safe as cash or bonds, dividend stocks are usually less volatile than high-growth stocks. They pay out regular dividends, which can help offset market downturns.
- Why it’s worth it: Dividend stocks offer income through dividends and the potential for stock price growth.
- Potential risk: If the company experiences difficulties, it could reduce or eliminate its dividend, which could also hurt the stock price.
Preferred Stocks
Preferred stocks are a hybrid between bonds and common stocks, offering regular payouts like bonds but trading on stock exchanges like stocks.
- Why it’s worth it: They typically pay higher dividends than common stocks and are paid out before ordinary stock dividends.
- Potential risk: Preferred stocks can be more volatile than bonds, and companies can suspend dividend payments in tough times.
Money Market Accounts
Money market accounts function similarly to savings accounts but may offer higher interest rates. They often require a higher minimum deposit.
- Why it’s worth it: You get the benefits of a savings account but with potentially higher interest. Plus, they’re FDIC-insured.
- Potential risk: Like savings accounts, inflation can affect your returns over time.
Fixed Annuities
A fixed annuity is a contract with an insurance company that provides guaranteed income in exchange for an upfront payment.
- Why it’s worth it: Fixed annuities give you predictable income, which can be especially useful in retirement. They also grow tax-deferred.
- Potential risk: Annuities can be complex, and it’s easy to overlook critical details. They’re also less liquid, meaning it can be hard to get your money out without paying penalties.
Secure Your Future with Low-Risk Investments
At Lukrom, a Phoenix-based real estate investment company, we specialize in private lending and offer opportunities for accredited investors. Our team’s experience spans residential and commercial properties. We can help you invest with confidence!
