Low-Risk Investment Strategies: Safe Ways To Grow Your Money

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. While there is no such thing as a completely risk-free investment, some options are considered safer than others. Here are some of the best low-risk investment options to consider:

- U.S. Treasury Bills, Notes, and Bonds: Backed by the full faith and credit of the U.S. government, these securities are considered the lowest-risk investments available. They offer a wide range of maturities, from a few weeks to 30 years, and are easily sold if needed.

- High-Yield Savings Accounts: These accounts offer a modest return on your money, unlimited liquidity, and the backing of the Federal Deposit Insurance Corp. (FDIC), making them a safe option for your emergency fund or short-term savings goals.

- Certificates of Deposit (CDs): CDs are time deposit accounts that offer a fixed rate of return over a set period. They are FDIC-insured and can provide higher returns than savings accounts, but withdrawing money early may incur penalty fees.

- Money Market Funds: These mutual funds invest in short-term, low-risk assets and offer diversification and liquidity. While they may not be FDIC-insured, they are generally less volatile than other types of mutual funds.

- Fixed Annuities: Sold by insurance companies, fixed annuities provide a guaranteed rate of return over a set period, making them popular for retirement planning. They offer tax-deferred growth and no contribution limits, but early withdrawal may result in penalties.

- Investment-Grade Corporate Bonds: Issued by public companies with strong credit ratings, these bonds are considered low to moderate risk. They offer modest to high potential returns but carry the risk of default if the issuing company experiences financial troubles.

- Dividend-Paying Stocks: While not all dividend-paying stocks are considered low-risk, established companies with a history of stable dividend payouts can provide more stability than stocks that rely solely on share price appreciation.

It's important to remember that even within these low-risk investment options, there are varying degrees of risk. It's essential to consider your risk tolerance, time horizon, and return expectations when deciding where to invest your money.

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. Many of the rates in this list top 4%.

Some high-yield savings accounts require a higher minimum opening balance compared to regular savings accounts. While they can be opened online, some are online-only, so face-to-face customer service is not an option.

• SoFi Checking and Savings
• American Express High Yield Savings Account
• CIT Bank Platinum Savings
• Openbank High Yield Savings
• Barclays Tiered Savings Account
• Capital One 360 Performance Savings
• Axos ONE Savings
• Forbright Bank Growth Savings
• UFB Portfolio Savings
• Discover Online Savings
• Marcus by Goldman Sachs Online Savings Account

Money market funds

While money market funds are considered low-risk, they are not entirely without risk. They are not insured by the FDIC, and there have been rare instances where money market funds have dipped below the target value of $1 per share ("broken the buck"), usually during severe financial crises. However, regulatory changes have been made to increase their stability since the 2008 financial crisis.

Short-term certificates of deposit

When you open a CD, you agree to leave your money in the account until it matures. This provides a guaranteed return on your investment, making CDs a relatively safe option. Additionally, short-term CDs offer the advantage of higher interest rates compared to regular savings accounts. The best short-term CD rates can offer around 5.00% APY or even higher.

However, it's important to consider the potential drawbacks of short-term CDs. Firstly, you may be subject to early withdrawal penalties if you need to access your funds before the maturity date. These penalties can result in losing some or all of the interest earned, and in some cases, a portion of your principal as well. Therefore, it's crucial to carefully review the rules and regulations associated with the CD before investing.

Another factor to keep in mind is that short-term CD rates are typically lower than those of long-term CDs. Banks often reward investors who opt for longer-term CDs with higher interest rates. Consequently, if you choose a short-term CD and interest rates rise, you may find yourself earning less than you could have with a longer-term option.

When considering a short-term CD, it's essential to shop around and compare the rates offered by different banks. Additionally, pay attention to any minimum deposit requirements, account fees, and other features that may impact your decision. Remember, by choosing a short-term CD, you benefit from greater flexibility and accessibility to your funds, making it a suitable option for short-term savings goals or if you anticipate rising CD rates in the near term.

US Treasury bills, notes and bonds

US Treasury bills, notes, and bonds are a safe investment option, backed by the US government. They are a low-risk choice, as the US government has never defaulted on its debt.

Treasury bills, or T-bills, are short-term investments, with maturities of one year or less. They are sold at a discount to their face value and do not pay periodic interest. Instead, investors receive the full face value at maturity, with the difference representing their return. T-bills are often used for short-term cash management or as a near-cash holding in a portfolio.

Treasury notes, or T-notes, have maturities ranging from two to ten years. They pay interest every six months and return the principal upon maturity. The interest is paid every six months until the note matures, and you can hold a note until it matures or sell it before.

Treasury bonds, or T-bonds, offer the longest maturity, taking 20 to 30 years to mature. They pay the highest coupons or interest, paid out twice a year. Like T-notes, you can hold a T-bond until it matures or sell it before maturity in the secondary market.

All three options can be purchased directly from the US government via the TreasuryDirect platform or from a bank or broker.

Treasury bills, notes, and bonds are a good choice for investors seeking a safe haven for their money, particularly during volatile market periods. They are also a good option for those seeking to diversify their portfolios and are an attractive choice for income-focused investors due to their predictable interest payments.

Fixed annuities

During the distribution phase, the company holding the annuity distributes regular payments to you. The size of these payments depends on multiple factors, including the type of annuity selected and the amount contributed over time. With a fixed annuity, you lock in an interest rate and receive guaranteed minimum payouts later in life, with the amount specified in your contract.

There are two types of fixed annuities: immediate and deferred. With an immediate fixed annuity, you will typically begin collecting payouts within a year of signing the contract. With a deferred fixed annuity, you will have to wait longer to begin receiving payouts—generally until you reach retirement.

Pros of Fixed Annuities

• Tax-deferred gains: Fixed annuities grow tax-deferred, meaning you won't owe taxes until you begin withdrawing funds. As a result, your money can gain more compound interest over time than it might in a regular savings account or certificate of deposit.
• Regular monthly income: Fixed annuities offer stable payouts that can supplement Social Security and retirement income. They can also provide a cushion if your savings and other assets run out, ensuring a comfortable retirement.
• Reliable distributions: Unlike other annuity options, fixed annuities offer a guaranteed minimum payout and a fixed interest rate. They are generally considered the most reliable type of annuity. While you might earn more if the annuity company's investments perform well, you are always guaranteed at least your minimum payment.
• No contribution limits: Unlike a 401(k) or traditional IRA, fixed annuities have no contribution limits imposed by the Internal Revenue Service. The amount you pay in premiums is limited only by the terms of your contract.

Cons of Fixed Annuities

• No protection against inflation: Fixed annuities don't offer built-in protection against inflation, which can be a major downside given that they are generally long-term investments. While you may be able to purchase a cost-of-living rider for your annuity to help account for inflation, these riders are typically expensive.
• Surrender charges and tax penalties: Most fixed annuities include surrender periods—a length of time during which withdrawals trigger a fee called a surrender charge. These charges can total up to 20% of your contributions. If you withdraw funds before the age of 59 1/2, you may also be subject to a 10% tax penalty in addition to the standard income tax.
• Limited liquidity: Due to surrender fees and other penalties, fixed annuities can be difficult to convert to cash. You are usually limited to an annual withdrawal of no more than 10% of your annuity's value, making them inaccessible in the event of a financial emergency.
• High fees: Annuities may be more expensive than other investment options, and fixed annuities are no exception. You may face administrative fees, mortality expense risk charges, and commission fees. Additionally, you may need to supplement your annuity with expensive riders that account for inflation or extend payments through the end of your life.

Frequently asked questions