Everything in life is based on compromises. You are unlikely to lose your principal with low-risk investments, but you are also unlikely to earn a high rate of return. If you're looking for a risk-reward trade-off, seven low-risk investment options are to consider.
Important Points to Remember
- Treasury securities, such as Treasury bonds, bills, and notes, are low-risk investments.
- Because the insurance company that issues the policy guarantees a fixed interest rate, fixed annuities are considered a low-risk investment.
- As long as they're purchased from a reputable insurance company, immediate annuities are also considered low-risk investments.
- Low-risk investments are unlikely to yield high returns.
7 Low-Risk Investing Alternatives
1. A savings account at a bank
Savings accounts are low-risk investments, whether at a bank or a credit union. Your account's value will remain unchanged. You can, however, lose money slowly and steadily, similar to how erosion works. If your savings account pays you 1% and inflation is 3%, you will lose 2% per year in purchasing power. Bank savings accounts are the best option when you need instant access to your money.2. Deposit Certificates (CDs)
Banks issue certificates of deposit (CDs), which guarantee you a fixed interest rate for a set period of time, such as six months, a year, or five years. A penalty may apply if you withdraw the money before the end of the term. CDs, like savings accounts, are low-risk investments. CDs are a good place to invest money aside for a purchase you know you'll need to make at a later date.3. Treasury Securities
The United States government issues a variety of securities, all of which are considered low-risk investments. EE Bonds, I Bonds, TIPS, Treasury Bonds, Treasury Bills, and Treasury Notes are examples of these. You can purchase these types of investments directly from the United States Treasury through an online account. Linking it to a checking account is a simple process for many people.4. Accounts in Money Markets
A money market account, which pays a slightly higher interest rate than a regular savings account, may be available through your bank. To qualify for the higher interest rate, you might have to maintain a minimum balance. Money market accounts and money market funds are not exactly the same.5. Funds with a Long-Term Value
Stable value is a type of investment that is available in most 401(k) plans but not all. It's a low-risk investment to preserve your principal, provide liquidity so you can get out at any time, and generate returns similar to short and intermediate-term bonds—but with less volatility (less up and down fluctuations). Most near-retirees should include stable value in their 401(k) plan as part of their portfolio.6. Annuities with a Fixed Return
An insurance company creates fixed annuities. Because the insurance company has agreed to pay you a fixed interest rate, they are low risk. A fixed annuity is the same as a CD, with the exception that the interest is tax-free. If you withdraw the interest before reaching the age of 59 1/2, you'll have to pay a penalty tax. The insurance company issuing the interest rate guarantee is only as good as it is. If the insurance company goes out of business, your money in an annuity is potentially at risk. Your money should be safe even if you aren't within the state's guaranty limits. Fixed annuities are a good option if you're in a high tax bracket, want to keep your money safe, and won't need it until you're 59 1/2 or older.7. Immediate Annuities
An immediate annuity ensures that you will receive a set amount of money each month. Like the fixed annuity, the guarantee is only as good as the insurance company issuing it. If an insurance company goes out of business, your money in an annuity is at risk. Your money should be safe even if you are below the state's guaranty limits. When you're older and want income that'll last the rest of your life, immediate annuities are the best option.Low-Risk Investment Returns and Risk Expectations
Expecting high returns from low-risk investments is unrealistic. Higher-returning investments also come with a higher level of risk. To better understand risk, consider rating investment risk on a scale of one to five, with five indicating a high-risk option and one indicating a low-risk option. On this scale, the investments described in the preceding list would be a 1 or 2.When to Take the Low-Risk Option
- For all of the following scenarios, low-risk investments are the best option:
- You're at a loss for what to do with your money right now.
- The funds will be used to supplement your emergency fund.
- You might need the funds in less than ten years.
- If you're investing money that you won't need in the next ten years, you might want to consider something with a higher potential return. This could also mean taking on more risk.
- Building a portfolio entails selecting investments with varying levels of risk in order for them to work together toward a common goal.
