Whether you’re new to the markets or a seasoned pro, low-risk investments are a great option for conservative investors who want to protect their money from potential losses while still benefiting from modest growth.
It’s important to understand that investing in low-risk assets can preserve your capital, but it also limits your returns. However, there are additional benefits to low-risk investing, such as diversification, which is especially helpful for people who are saving money for near-term financial goals like a home down payment.
Low-Risk Investments
1. U.S. Treasury Bills, Notes and Bonds
- Risk level: Very low
- Potential returns: Low to moderate, depending on maturity
U.S. Treasury securities are backed by the full faith and credit of the U.S. government, making them the lowest-risk investments you can own. There are a variety of maturities available, including Treasury bills, notes, and bonds. Treasury bills have maturities of four, eight, 13, 26, and 52 weeks and are sold at a discount to their face value. Treasury notes come in maturities of two and ten years, while Treasury bonds have maturities of 20 to 30 years. The market for U.S. Treasurys is the largest and most liquid in the world, making them easy to sell if you need access to your cash before the maturity date.
2. Series I Savings Bonds
- Risk level: Very low
- Potential returns: Depends on the rate of inflation
Series I Savings Bonds are a special type of U.S. savings bond designed to keep up with inflation. They offer returns based on two interest rates: a fixed rate that remains the same for the 30-year term of the bond and a variable interest rate that is updated every six months to match the prevailing rate of inflation. I bonds benefit from semiannual compounding and have tax advantages for individuals living in high-tax areas.
3. Treasury Inflation-Protected Securities (TIPS)
- Risk level: Very low
- Potential returns: Depends on the rate of inflation
Treasury Inflation-Protected Securities (TIPS) are issued by the U.S. Treasury and offer maturities of five, 10, or 30 years. TIPS ensure that returns keep up with the rate of inflation by adjusting the principal value of the bond. At maturity, you keep the increased principal amount if it’s higher than your original investment. TIPS pay interest every six months based on the adjusted principal.
4. Fixed Annuities
- Risk level: Very low
- Potential returns: Modest
Fixed annuities are popular for retirement planning and medium-term financial goals. They guarantee a fixed rate of return over a set period of time, regardless of market conditions. Fixed annuities have two stages: the accumulation phase and the payout phase. You make payments into your annuity during the accumulation phase and earn interest. In the payout phase, you receive either a single lump-sum payment or a series of regular payments. Some fixed annuities offer cost-of-living-adjustment (COLA) riders to help the value of your annuity keep up with rising prices.
5. High-Yield Savings Accounts
- Risk level: Very low
- Potential returns: Moderate, depending on prevailing interest rates
High-yield savings accounts offer a combination of modest returns, unlimited liquidity, and the backing of the Federal Deposit Insurance Corp. (FDIC). These accounts are an excellent choice for parking your emergency fund or cash you need for near-term purchases. The interest rates can vary, but you’ll never lose money on your principal and earned interest.
6. Certificates of Deposit (CDs)
- Risk level: Very low
- Potential returns: Similar to high-yield savings accounts or better
Certificates of Deposit (CDs) are time deposit accounts that offer a set interest rate for a fixed period. Withdrawing money before the maturity date may trigger an early withdrawal penalty fee. CDs are insured by the FDIC up to the statutory limits, making them a very low-risk investment option.
7. Money Market Mutual Funds
- Risk level: Low
- Potential returns: Modest
Money market mutual funds invest in fixed-income securities with short maturities and low credit risks. They offer a modest amount of interest and high liquidity. Although they are considered safe, they are not backed by the FDIC. Money market mutual funds are ideal for parking cash that you want to keep easily accessible for big purchases or investment opportunities.
8. Investment-Grade Corporate Bonds
- Risk level: Moderate
- Potential returns: Modest to high
Corporate bonds are fixed-income securities issued by public companies. Investment-grade corporate bonds are considered low-risk because the issuing companies have very good credit ratings. Credit rating agencies assign these ratings based on in-depth research on the companies’ finances and stability. However, it’s important to note that companies’ credit ratings can change, so there is still some risk involved.
9. Preferred Stocks
- Risk level: Moderate
- Potential returns: Modest to high
Preferred stocks combine characteristics of stocks and bonds, providing investors with dependable income payments and potential share appreciation. Preferred stock dividends receive preferential tax treatment, and they have a set face value. However, in the case of company profit loss, preferred stock dividends may be lowered or eliminated.
10. Dividend Aristocrats
- Risk level: Moderate
- Potential returns: Moderate to high
Dividend aristocrats are public companies that have increased their annual dividend payments for a minimum of 25 years in a row. These companies have demonstrated long-term stability and reliability in their dividend payouts. Although owning shares of a public company can be more risky, dividend aristocrats can provide dependable cash flow despite stock market fluctuations.
What is Risk?
Risk within the context of investing is the potential for your investments to lose all or part of their value. Risk tolerance is your personal comfort with uncertainty and the potential for loss. It’s important to understand your risk tolerance so you can choose investments that align with your comfort level.
Considerations for Low-Risk Investors
Understand Your Risk Tolerance
Although each investment listed is considered low risk, there is still a sliding scale of risk associated with them. Determine your risk tolerance and pick investments accordingly.
Know Your Time Horizon
Consider when you will need to access your money. Certain investments have penalties for early withdrawals, while others offer more flexibility. Align your investments with your time horizon and financial goals.
Investing in low-risk investments can provide stability and peace of mind while still allowing for modest growth. Evaluate your risk tolerance and time horizon to make informed investment decisions. Remember that no investment comes without some level of risk, and it’s important to diversify your portfolio and seek professional advice when needed. Happy investing!
This article is for informational purposes only and does not constitute investment advice. Please consult with a professional investment advisor before making any investment decisions.
Learn more about low-risk investments on our investment website.
