Even if inflation decreases and it seems that the U.S. Federal Reserve’s cycle of monetary discipline is about to end, the economy still faces the risk of recession. Building a portfolio that includes some low-risk assets can be beneficial in helping you navigate market volatility.
The trade-off, of course, is that by reducing risk exposure, investors are likely to achieve lower returns in the long run. This may be acceptable if your goal is to preserve capital and obtain a steady flow of interest income.
But if you are looking for growth, consider investment strategies that align with your long-term goals. Even high-risk investments such as stocks have branches (like dividend-paying stocks) that reduce relative risk while providing attractive long-term returns.
What to Consider
Depending on how much risk you want to take, there are a few scenarios that can occur:
No risk – you will never lose a single penny of your capital.
Some risk – it is reasonable to say that you will either break even or incur a small loss over time.
There are, however, two obstacles: low-risk investments typically yield lower returns than what you can find elsewhere with higher risk; and inflation can impact the purchasing power of the money in low-risk investments.
If you only choose low-risk investments, you are likely to lose purchasing power over time. This is also why low-risk investments are better suited for short-term investments or as a safe haven for your emergency fund. Conversely, high-risk investments are more appropriate for long-term goals.
It is easy to find a qualified financial advisor to guide you through the most important financial decisions in your life.
Try Bankrate’s free AdvisorMatch service to quickly connect with a CFP® professional who can help you achieve your financial goals.
Best Low-Risk Investments in January 2024
1. High-Yield Savings Accounts
Although it is not a technical investment, savings accounts offer a moderate return on your money. You will find higher-yield options by searching online, and you can gain a larger return if you are willing to check rate tables and shop around.
Why invest: A high-yield savings account is completely safe in the sense that you will not lose your money. Most accounts are insured by the government up to $250,000 per account type per bank, so you will be compensated even if the financial institution fails.
Risk: Cash does not lose dollar value, although inflation can affect purchasing power.
2. Money Market Funds
Money market funds are collections of certificates of deposit, short-term bonds, and other low-risk investments combined together to diversify risk, and are typically sold by brokerage firms and mutual fund companies.
Why invest: Unlike a certificate of deposit, a money market fund is liquid, meaning you can usually withdraw your money at any time without incurring a penalty.
Risk: Money market funds are typically very safe, according to Ben Wasek, founder and financial planner at Guide Financial Planning in Minneapolis. “The bank tells you the rate you will earn, and its goal is for the share value to not fall below $1,” he says.
3. Short-Term Certificates of Deposit
Bank certificates of deposit are virtually risk-free in an FDIC-insured account, unless you withdraw the funds early. To find the best rates, you will want to shop online and compare what banks offer. With interest rates having risen significantly in recent years, it may make sense to hold short-term certificates of deposit and then reinvest if rates increase. You will want to avoid being locked into below-market certificates of deposit for too long.
Alternative
A short-term certificate of deposit is a no-penalty certificate of deposit, which allows you to avoid the usual penalty for early withdrawal. So you can withdraw your money and then transfer it to a certificate of deposit that pays a higher rate without costs typically.
Why invest: If you leave the certificate of deposit until maturity, the bank promises to pay you a specified interest rate over the specified term.
Some savings accounts pay higher interest rates than some certificates of deposit, but those high-yield accounts may require a large deposit.
Risk: If you withdraw funds from a certificate of deposit early, you are likely to lose some of the interest you earned. Some banks also impose a partial loss of principal, so it’s important to read the rules and check the rates of certificates of deposit before investing. Additionally, if you lock yourself into a long-term certificate of deposit and general rates rise, you will earn a lower return. To get a market rate, you will need to cancel the certificate of deposit and typically have to pay a penalty to do so.
4. Series I Savings Bonds
Series I savings bonds are low-risk bonds that adjust for inflation, helping to protect your investment. When inflation rises, the interest rate on the bonds increases. But when inflation falls, the payment on the bonds also declines. You can purchase Series I savings bonds from TreasuryDirect.gov, which is managed by the U.S. Department of the Treasury.
Why invest: The inflation-adjusted Series I savings bonds pay interest every six months based on the inflation rate. With high inflation levels, the bonds pay a large return rate. This rate will increase if inflation continues to rise as well. Therefore, the bonds help protect your investment from the effects of rising prices.
Risk: Savings bonds are backed by the U.S. government, so they are considered almost as safe as an investment. However, don’t forget that the interest payment on the bonds will decrease if inflation stabilizes.
If you redeem Series I savings bonds before five years, a penalty of the last three months’ interest is imposed.
5. Treasury Bonds, Notes, and Securities Protected from Inflation
The U.S. Department of the Treasury also issues Treasury bonds, notes, and Inflation-Protected Securities, or TIPS:
– Treasury bills mature in one year or less.
– Notes have maturities of up to 10 years.
– Government bonds mature in up to 30 years.
– TIPS are securities whose principal value rises or falls depending on inflation trends.
Why invest: All of these highly liquid securities can be bought and sold either directly or through mutual funds.
Risk: If you hold government bonds until maturity, you are unlikely to lose any money unless you purchase a bond with a negative yield. If you sell them before maturity, you may lose some principal as their value will fluctuate with rising and falling interest rates. Rising interest rates decrease the value of existing bonds, and vice versa.
Corporate Bonds
Corporations also issue bonds, which can range from low-risk types (issued by large profitable companies) to those with very high risk. The lowest grade is known as high-yield bonds or “junk bonds.”
Why invest: To mitigate interest rate risk, investors can choose bonds that mature in the next few years. Long-term bonds are more sensitive to changes in interest rates. To reduce default risk, investors can select high-quality bonds from reputable large companies, or buy funds that invest in a diversified portfolio of these bonds.
Risk: Bonds are generally considered less risky than stocks, although no asset class is free from risk.
8.
Dividend Stocks
Stocks are not as safe as cash, savings accounts, or government bonds, but they are generally less risky than options or futures. Dividend stocks are considered more secure than high-growth stocks because they pay cash dividends, which help reduce volatility, although they do not eliminate it. Therefore, dividend stocks will fluctuate with the market but may not decline as much during market downturns.
Why Invest: Stocks that pay cash dividends are generally less risky than those that do not pay.
Risk: Dividend stocks are at risk if the company faces tough times and announces a loss, forcing it to cut or eliminate its dividends entirely, which will affect the stock price.
Preferred Stocks
Preferred stocks are more similar to bonds than common stocks. However, their values can fluctuate significantly if the market declines or interest rates rise.
Why Invest: Like bonds, preferred stocks pay a regular cash payment. However, unusually, companies that issue preferred stocks may be able to suspend dividends in some cases, although the company typically has to make up for any missed payments. The company must pay dividends on preferred stocks before common stockholders receive dividends.
Risk: Preferred stocks are considered a more risky version of bonds, but they are generally safer than stocks. Preferred stocks are often traded on stock exchanges like common stocks and should be analyzed carefully before purchase.
Money Market Accounts
Money market accounts can feel similar to savings accounts and offer many of the same benefits, including debit cards and interest payments. A money market account may require a higher minimum deposit than a savings account, however.
Why Invest: Money market account interest rates can be higher than those of comparable savings accounts. Additionally, you will have the flexibility to spend the cash if you need it, although a money market account may have a limit on your monthly withdrawals, similar to a savings account. You will want to shop around for the best rates here to ensure you are maximizing your returns.
Risk: Money market accounts are insured by the FDIC, with guarantees of up to $250,000 per depositor per bank. Therefore, money market accounts pose no risk to your principal. The biggest risk may be the cost of having too much money in your account and not earning enough interest to outpace inflation, which means you could lose purchasing power over time.
Fixed Insurance
An insurance policy is a contract typically entered into with an insurance company, which will pay a certain level of income over a specified period in exchange for an upfront payment. Insurance can be structured in various ways, such as paying over a specific period like 20 years or until the death of the policyholder.
With fixed insurance, the contract promises to pay a specific amount of money, usually monthly, over a defined period. You can contribute a large sum and start receiving payments immediately or pay over time and start receiving payments at a specified future date (such as your retirement date).
Why Invest: Fixed insurance can provide you with guaranteed income and a steady return, giving you greater financial security, especially during periods when you are not working.
Risk: Insurance contracts are notoriously complex, so you may not get exactly what you expect if you do not read the fine print in the contract carefully. Insurance is not liquid, meaning it can be difficult or impossible to get out of without incurring a significant penalty. If inflation rises significantly in the future, your guaranteed payment may not seem attractive either.
Disclaimer
Editor: All investors are advised to conduct their own research into investment strategies before making any investment decision. Additionally, investors are cautioned that past performance of investment products does not necessarily guarantee future price increases.
Source: https://www.aol.com/10-best-low-risk-investments-041433828.html
Leave a Reply