When the investment markets are volatile, many investors look for low-risk investments so they can keep more of their hard-earned money. If you’re looking to reduce your risk, read on.
What Investments Are Low-Risk?
When people talk about low-risk investments, they typically mean those investment vehicles in which you will lose none, or very little, of your investment. These investments may not earn much in terms of return, but most or all of your principal will be intact.
Here are some low-risk investments to consider right now.
High-Yield Savings Accounts
A high-yield savings account at an online or brick-and-mortar bank is a safe place to put some money. Interest rates are still low, but they are on the rise. Be sure to shop around for the best rate though. On July 21, 2022, Bank of America was paying between % and % APY based on aggregate account balances. Ally Bank, which is online-only, was paying % APY on the same date.
Money Market Accounts
A money market account is similar to a savings account, plus you can write checks on it. Money market accounts, like savings accounts, are typically insured by the FDIC — or if you’re getting 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 U.S. government.
The interest rate for money market accounts is typically similar to that of savings accounts. CIT Bank was paying .00% on their money market account as of June 22, 2022, with a minimum opening deposit of $100.
Certificates of Deposit
A certificate of deposit, or CD, is purchased from a bank or credit union, so it is also FDIC or NCUA insured. CDs offer a fixed rate of interest for a pre-determined period of time. Typically, the interest rate is higher if the term is longer, but sometimes the difference can be quite small. With interest rates rising, it’s probably best to get a short-term CD if you’re going to go this route. You don’t want to be locked into a five-year CD paying 1% if rates are 3% a year from now.
Series I Savings Bonds
Series I savings bonds are issued by and backed by the U.S. government. They pay interest every month. The interest rate is a combination of a fixed rate of interest plus a variable rate based on inflation, which is calculated twice a year. Until the end of October 2022, the interest rate is 9.62%. Savings bonds continue to earn interest for 30 years, although you can cash them in as early as one year from the date you purchased them. If you cash them in before five years have passed, you will pay a penalty equal to three months’ interest.
Treasury Bonds, Notes and Bills
Treasury bonds, notes and bills are debt issued by the U.S. government. When you buy these, you are essentially loaning the government money, which it agrees to pay back to you with interest.
The difference between bonds, notes and bills is the term. Treasury bills are short-term securities with a term of one year or less.
When you buy a treasury bill, you buy it at less than face value. When it matures at the end of the term, you get the face value. The difference between what you paid for it and the face value is the interest you earn. For example, you might buy a one-year Treasury bill with a face value of $100 for $95. A year later, it matures and you get $100. The $5 difference is your interest.
Treasury bonds and notes work a little differently. Treasury notes have a maturity between one and ten years, and Treasury bonds have a maturity of more than ten years. They pay a fixed rate of interest twice a year and at maturity, they pay the face, or par, value.
Just as the U.S. Treasury issues bonds to raise money, corporations also issue bonds. They’re riskier than U.S. bonds since there is always the chance that the company could go bankrupt. If it does, however, bondholders are paid before stockholders, so corporate bonds are less risky than stocks.
Corporate bonds are issued with a face, or par value, a maturity and a coupon rate. The par value is typically $1,000, but the bond may sell for more or less than that amount. The maturity is the length of time before the bond matures and the company must pay back the par value. The coupon rate is the rate of interest the corporation will pay the bondholder during the term of the bond. Interest is paid every six months.
Because a bond can sell at, above or below its par value, the investor can compare bonds by looking at the yield to maturity. This is the amount of interest you will make plus the par value, compared to the price you pay for the bond.
Here’s an example, if you pay $1,000 for a $1,000 bond that matures in 10 years with a coupon rate of 4.00%, you’ll get $40 in interest every year. Because the bond is sold at par value, the yield to maturity is 4%, equal to the coupon rate.
If you pay $900 for that same bond, however, your yield to maturity will be 5.31%. You paid less when you purchased the bond, but you still got the $40 of interest per year, plus the $1,000 par value at maturity. You earned a higher yield to maturity.
On the other hand, if you pay $1,100 for that bond, your yield to maturity will be 2.84%. You’ll get the same $40 in interest each year, and you’ll 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’s important to understand how much risk you’re willing to take. You also need to think about whether you might need access to your money.
If you absolutely do not want to lose a penny of principal under any circumstances, and you want to be able to withdraw money when you need it, look for the highest money market or savings account rate you can find.
Is There Any Investment That Is Free of Risk?
If you ask a group of people this question, some of them might say, “Cash in the bank” or “Put it in the mattress.” But even that is not entirely free of risk. Inflation risk means that the money you are earning on your investment doesn’t keep up with inflation. While you may not see your balance decline, your real purchasing power is being eroded.
Here’s an example, suppose you have $1,000 in a savings account earning 2% interest. After a year, you’ll have $1,020. But if the cost of groceries has risen, even from $100 to $103 per week, you’ve lost buying power.
The best low-risk investment for you is the one that helps you sleep at night. If you’re lying awake worrying that you’ll lose money, it’s time to move to lower risk investments.
Information is accurate as of July 21, 2022.