Investing Wisely: Minimizing Risk For Maximum Returns

Investing is a great way to grow your money, but it always comes with some risk. Low-risk investments are a good option for those who want to protect their money from potential losses while still benefiting from modest growth. While low-risk investments can preserve your capital, they also limit your returns. They are a safe way to grow your money more quickly than a traditional savings account, especially in a low-interest-rate environment. Some examples of low-risk investments include high-yield savings accounts, money market accounts, certificates of deposit (CDs), dividend-paying stocks, and government bonds. It's important to remember that even within the category of low-risk investments, there are varying degrees of risk, and what's considered safe can differ from person to person. Additionally, low-risk investments may provide lower returns than riskier options, and inflation can erode the value of your money over time.

High-yield savings accounts

The best high-yield savings accounts have annual percentage yields, or APYs, that are many times higher than the national average rate. They are ideal places to park your money when you want your savings to grow.

• SoFi Checking and Savings: Best for High-Yield Online Savings Accounts, 3.80% APY
• American Express® High Yield Savings Account: Best for High-Yield Online Savings Accounts, 3.80% APY
• CIT Bank Platinum Savings: Best for High-Yield Online Savings Accounts, 4.30% APY
• Openbank High Yield Savings: Best for High-Yield Online Savings Accounts, 4.75% APY
• Barclays Tiered Savings Account: Best for High-Yield Online Savings Accounts, 4.25% APY
• Capital One 360 Performance Savings™: Best for High-Yield Online Savings Accounts, 3.70% APY
• Axos ONE® Savings: Best for High-Yield Online Savings Accounts, 4.86% APY
• Forbright Bank Growth Savings: Best for High-Yield Online Savings Accounts, 4.25% APY
• UFB Portfolio Savings: Best for High-Yield Online Savings Accounts, 4.01% APY
• Discover® Online Savings: Best for High-Yield Online Savings Accounts, 3.75% APY
• Marcus by Goldman Sachs Online Savings Account: Best for High-Yield Online Savings Accounts, 3.90% APY

Money market accounts

MMAs are a type of deposit account that can be opened at banks or other financial institutions, such as credit unions. They are a hybrid of a checking and savings account, offering the flexibility of a checking account with the interest-bearing features of a savings account. This means that you can write checks, make transfers between accounts, and conduct debit card transactions—up to a certain limit.

MMAs are a safe investment option because banks use the money deposited in these accounts to invest in stable, short-term, low-risk securities that are highly liquid, such as certificates of deposit (CDs), government securities, and commercial paper. Once these investments mature, the bank splits the return with you, which is why you get a higher interest rate than with a standard checking or savings account.

While money market accounts are considered safe investments, your account balance could fluctuate due to fees. For example, some money market accounts have an annual maintenance fee, and if you make too many withdrawals in a month, you may be charged a fee that could cause you to pay more than what you earn in interest.

It is important to note that money market accounts are different from money market funds, which are a type of mutual fund. Money market funds are not insured by the FDIC and are considered slightly riskier than money market accounts.

Short-term certificates of deposit

CDs are ideal for those seeking a guaranteed rate of return, typically higher than a savings account. The best CD rates can earn above 4% APY, with the top rate tracked by Bankrate at 4.50% offered by multiple banks on short-term CDs. This is around two and a half times higher than the national average of 1.83% on a one-year CD.

There are several options for those seeking a short-term CD. For example, Bask Bank offers a three-month CD with a $1,000 minimum deposit, while America First Credit Union offers a three-month CD with a $500 minimum deposit. Synchrony Bank also provides a three-month CD with no minimum deposit.

It is important to note that CDs may not be suitable for everyone. Funds are tied up for the duration of the term, and there may be penalties for early withdrawal. Additionally, if you lock into a longer-term CD and overall rates rise, you may earn less than you could have with a shorter-term CD or other investment.

Dividend-paying stocks

Dividend stocks can be a good choice for investors looking for passive income. Dividend-paying companies tend to be well-established, and dividends are usually a sign of financial health and stability. Dividend stocks may also add stability to your portfolio, making them a good choice for investors who want to lower the risk of investing in stocks.

There are two main ways to invest in dividend stocks: through funds, such as index funds or exchange-traded funds (ETFs), or by purchasing individual dividend stocks. Funds offer instant diversification, while investing in individual stocks requires more research and work on the part of the investor.

When deciding whether to invest in dividend-paying stocks, it's important to consider the risks. Dividends are not guaranteed, and companies may lower or suspend dividend payments in response to earnings losses. Additionally, companies that pay dividends are not usually leaders in growth, and there may be tax implications for dividend income.

Before investing in dividend stocks, it's crucial to do your research and evaluate the stocks based on various metrics, such as dividend yield, dividend payout ratio, dividend coverage ratio, and dividend growth rate. Chasing the highest dividend yields can be counterproductive, as a consistently growing yield is usually more sustainable.

In summary, dividend-paying stocks can be a good low-risk investment option, providing a regular income stream and potentially lowering volatility. However, it's important to carefully evaluate and diversify your portfolio and be aware of the risks involved.

Treasury bills, notes and bonds

Treasury bills, notes, and bonds are fixed-income securities issued by the US Department of the Treasury to finance government operations. They are very low-risk investments, as they are backed by the full faith and credit of the US government, which has never defaulted on its debt.

Treasury Bills (T-bills)

Treasury bills are short-term investments with maturities of one year or less, often ranging from four to 52 weeks. They are sold at a discount to their face value, and investors receive the full face value at maturity. T-bills are attractive for those who need to preserve their capital, as they are highly liquid.

Treasury Notes (T-notes)

Treasury notes have maturities ranging from two to ten years. They pay interest every six months but usually offer lower yields than T-bonds. The 10-year Treasury note is the most closely watched government bond, often used to lower the volatility of investment portfolios.

Treasury Bonds (T-bonds)

Treasury bonds have the longest maturity, typically 20 or 30 years. They offer the highest coupons or interest, paid twice yearly. Treasury bonds usually pay the highest interest rates as investors want more money for the longer term.

All three types of securities can be purchased directly from the US Department of the Treasury's platform, TreasuryDirect, or through a bank or broker. They are also available indirectly through mutual funds or exchange-traded funds (ETFs) that focus on Treasury securities.

Frequently asked questions