With the economy facing high inflation, the Federal Reserve has begun to raise interest rates. Investors should prepare for a bumpy ride in the months ahead, and so it's crucial that investors stay disciplined. Building a portfolio that has at least some less-risky assets can be useful in helping you ride out volatility in the market.
The trade-off, of course, is that in lowering risk exposure, investors are likely to earn lower returns over the long run. That may be fine if your goal is to preserve capital and maintain a steady flow of interest income.
But if you're looking for growth, consider investing strategies that match your long-term goals. Even higher-risk investments such as stocks have segments (such as dividend stocks) that reduce relative risk while still providing attractive long-term returns.
What Are Low Risk Investments?
Low-risk investments are financial opportunities with only a small chance of losing some or all of the money you put in. A few common examples of low risk investments are bonds or Certificates of Deposit (CDs). Low risk investments are typically recommended for individuals who are new to investing, preparing for retirement, or diversifying their portfolios.
The appeal of low risk investments is in the name, and they generally perform as predicted. This benefit does come with a tradeoff: low risk investments do not appreciate in value as quickly compared to high-risk investments, such as stocks. Because of this, it is generally recommended that investors choose a mix of low and high-risk investments if they want to maximize returns.
High-Yield Savings Accounts
When it comes to low-risk investment options, a high yield-savings account is one of the best ways to invest money. Although the potential for high earnings is typically lower than it is in the stock market, up to $250,000 of your money is insured by the FDIC per account – provided you deposit the money with an FDIC insured institution.
While a savings account isn't technically an investment, you the best high-yield savings accounts earn a modest rate without the risk of losing your money. It's super easy to manage since there isn't much to do after opening your account.
Currently, our favorite savings account on the market is with CIT Bank. They have competitive interest rates on most of their products, and their Savings Builder account offers a 0.40% APY.
Money Market Accounts
If you're looking for a relatively safe investment option that's similar to a savings account, you might consider opening a money market account. They're FDIC insured and typically offer higher interest rates than traditional savings accounts, though they also require higher minimum balances.
There is some flexibility in accessing your funds with a money market account, and you can usually withdraw money a few times a month. If your balance dips below the minimum, however, banks can charge a fee or reduce the rate you earn on your deposit.
When it comes to stashing cash for your emergency fund, a money market account is considered one of the best ways to invest money. It combines the best of checking and savings accounts by offering instant access to your money along with an interest rate that could deliver relatively high returns.
Keep in mind that a money market account is not the same thing as a money market fund. The key difference is that a money market fund is not FDIC insured. Again, with a money market account, your balance is FDIC insured up to $250,000.
Certificates Of Deposit
Certificates of Deposit (CDs) are a low risk investment type offered by banks as a way for them to secure capital. When you purchase a CD, you are giving the bank permission to use your funds however they need to. In exchange, you will receive a higher interest rate than you would from a savings account. Note that you cannot withdraw funds from a CD before its expiration, or you risk losing some of the interest earned (and, in some cases, part of your initial investment).
Series I Savings Bonds
A Series I savings bond is a type of low risk investment bond that adjusts for inflation. Investors often worry that their return-on-investment is essentially pointless if their interest growth can't keep up with inflation. Luckily, Series I bonds automatically adjust their interest rates relative to inflation. However, keep in mind that this means that the interest rate will fall along with the inflation rate. Overall, it's a safe investment that can give an investor peace of mind that they'll at least be keeping pace with inflation.
Treasury Notes, Bills, Bonds, & TIPS
The U.S. Treasury issues a few different investment options that mature over time. These include treasury notes, treasury bills, bonds, and treasury inflation-protected securities (TIPS). These opportunities are thought to be low-risk because they are issued and backed by the U.S. government. They offer potential profits in the form of interest.
Corporate bonds are an alternative to U.S. Treasury bonds and allow investors to earn interest by working with private companies. There can be some risk involved, as private companies can default or go out of business. The best way to minimize risk while investing in corporate bonds is to research stable, profitable companies.
Preferred stocks represent shares in a private company, and they typically pay investors quarterly in the form of dividends. While preferred stocks trade on an exchange, they are more similar to bonds than traditional stocks. This is because preferred stocks offer fixed returns regardless of market performance (though there is still some risk associated with investing in private companies).
Dividend Paying Stocks
On a scale of low to high-risk investments in the stock market, dividend-paying stocks can be considered one step above preferred stocks. This is because dividend stocks are subject to traditional stock market fluctuations, though they do pay regular cash dividends (making them less risky than traditional stocks). If you mind your due diligence when selecting a company, dividend-paying stocks can be a low to moderate risk addition to your portfolio.
Mutual funds represent the opportunity to diversify your portfolio with a single investment. They can be thought of as a pool of investor funds, which are then used to buy various other investment types such as stocks, bonds, and securities. The purpose of mutual funds is to maximize returns for each investor while minimizing overall risk. Sounds perfect, right? Choosing the right mutual fund involves a lot of research, and with any investment type, there is still some risk involved. Read our guide to mutual funds to learn more about how to get started.
Stable Value Funds
Does your employer offer a 401(k) plan for retirement? If yes, stable value funds are one way you can invest within your retirement account. These funds are essentially contracts issued by banks or insurance companies that generate interest over a predetermined amount of time. They are an excellent low risk option because they typically offer shorter terms than bonds or CDs.
Fixed annuities can be thought of as similar to CDs, though they are issued by insurance companies rather than banks. These low risk investments allow you to accumulate interest in a tax-deferred account. They can be paid out as a lump sum or over time, depending on the contract. Fixed annuities are typically best used as a way to prepare for retirement, as funds are not accessible without a penalty until you turn 59½.
If you are looking for a low risk investment with regular income, immediate annuities might be the right option. They are more frequently used as a way to guarantee retirement income. There is some risk involved when purchasing annuities, for example, if the insurance company were to go out of business. However, this risk can be minimized by researching and comparing different companies.
4 Best Low Risk Real Estate Investments
When investors think real estate, “low-risk” is not always the first thing that comes to mind. However, there are several real estate strategies that are thought to be lower risk when compared to other investment types. These investments can be a great way to increase your reward, while still shouldering a minimal amount of risk. Here are the best low risk real estate investment types:
- Long-Term Rental Properties
- Short-Term Rental Properties
- Buy-and-Hold Real Estate
- Multi-Family Homes
Long-Term Rental Properties
Real estate is an interesting asset class because it is always in demand. This is what makes long-term rental properties such a great investment opportunity. There is a need for rental houses in almost every market in the country, though you should always research your market before getting started. When managed correctly, they can provide consistent cash flow for as long as you own the property.
Short-Term Rental Properties
Thanks to the creation of platforms like Airbnb and VRBO, short-term rental properties have become easier to manage than ever before. In certain markets, they can be extremely profitable, even after cleaning and maintenance costs are factored in. Short-term rentals are often considered low risk because their demand is predictable. They can be priced differently based on the season to maximize profitability (for example, higher prices in the summer for a beachfront property).
Buy-and-Hold Real Estate
Buy-and-hold real estate refers to the strategy of purchasing a property, typically for below market value, and selling it for a profit after it goes up in value. Buy-and-hold properties can take years to appreciate, depending on how fast the market moves in your area. However, in the meantime, the property can be rented out for a profit. Buy-and-hold is thought of as a low risk investment because it can be executed without difficulty with the right market research.
Multi-family homes represent a great first step into real estate investing while also being relatively low risk when compared to other investment types. Multi-family properties can even be purchased using FHA loans, which are backed by the government to provide low interest rates to qualifying buyers. For example, you could purchase a duplex to live on one side and rent out the other (thus generating long term cash flow).