Low-Risk Investments: Where To Put Your Money Safely

When it comes to investing, risk and return are two key areas to consider. While all investments carry some degree of risk, certain options are generally considered lower risk and can provide a level of stability for investors. These include cash and cash equivalents, such as high-yield savings accounts, money market funds, and Treasury bills. While these investments offer lower returns compared to riskier assets, they are less volatile and are often backed by governments or financial institutions, providing a level of security for conservative investors.

Another option for lower-risk investments is bonds, which are essentially loans made to governments or corporations. They are considered safer than stocks but typically provide lower returns. Government bonds, such as US Treasury securities, are seen as the safest due to the backing of the government. On the other hand, corporate bonds carry a higher risk as their ability to repay depends on the financial health of the issuing corporation.

For those seeking a middle ground between low-risk and high-risk investments, diversification is key. By investing in a mix of stocks, bonds, and cash equivalents, investors can potentially mitigate risk and maximise their returns. Additionally, mutual funds and exchange-traded funds (ETFs) offer a way to diversify across different types of investments and are managed by professionals.

It's important to remember that every investor's risk tolerance and financial goals are unique. Understanding your own risk tolerance is crucial in determining the right investment strategy for you.

High-yield savings accounts

Some high-yield savings accounts are online-only and operate on a standalone basis, while others are linked to checking accounts within the same bank. You can search online to find the best high-yield savings account rates, which can change over time.

The best high-yield savings accounts come with no monthly fees and low (or no) minimum deposit or balance requirements. Online institutions with high-yield savings accounts can offer higher interest rates than traditional banks because they have less overhead costs.

However, interest rates on high-yield savings accounts are variable and can change at any time. While you can grow your money with a high-yield savings account, it may not be the best way to generate long-term wealth for retirement because the yield often doesn't keep up with inflation.

Money market funds

• Treasury and government securities
• Commercial paper
• Municipal debt

Because their underlying investments are typically high quality, they are generally less volatile than other types of mutual funds, such as stock funds. Money market funds offer diversification and liquidity. However, as with any other investment, there are potential downsides. For example, the income you receive on your investment will fluctuate both up and down based on the yields available on the securities in which money market mutual funds invest. In addition, the money is not protected by the FDIC or NCUA.

You can purchase a money market fund from a brokerage or a fund company. Many brokerage firms offer their own money market funds as a proxy for a savings account. If you want a place to keep your cash within your brokerage account, then it will often go into what is known as a sweep account that invests your cash in money market funds. If you want to withdraw that money, you can typically sell your investment and receive cash the next business day.

Short-term certificates of deposit

CDs provide a fixed rate of interest, which is usually higher than the interest rates of high-yield savings accounts. This means that the longer you keep your money in a CD, the higher the annual percentage yield (APY) will be. If you withdraw your funds before the term ends, you will usually have to pay a penalty, but this usually just means forfeiting some of the interest you would have earned.

CDs are FDIC-insured (or NCUA-insured at credit unions), so your principal is protected, and you will almost always get back at least what you put in. However, one downside of CDs is that they lack liquidity. If you need to access your money early, you will typically face penalties for early withdrawal.

To find the best rates, you can shop around online and compare what different banks offer. Short-term CDs can offer better liquidity than a longer-term CD, and rates remain attractive even if the Fed has been lowering interest rates. An alternative to a short-term CD is a no-penalty CD, which lets you withdraw your money without paying a penalty.

Cash management accounts

A cash management account (CMA) is a feature-rich alternative to bank checking and savings accounts. They are offered by brokerages and provide checking and savings features. CMAs are a convenient strategy for consolidating all banking and investing under one roof. They typically provide higher yields and greater cash flow than ordinary savings accounts.

CMAs are distinct from bank accounts. They are often offered by the same institutions where you have an investment account, such as a brokerage like Fidelity or a robo-advisor like Wealthfront or Betterment. This makes transfers between investment and cash accounts easier.

There are two types of CMAs:

• Bank or money market sweep account: Cash from your investment account is automatically transferred or "swept" into the CMA and invested in a bank account or money market mutual fund.
• Stand-alone CMA: The account is funded with your contributions and not automatically swept from an investment account.

CMAs are safe and might be protected by Federal Deposit Insurance Corporation (FDIC) insurance or Securities Investor Protection Corporation (SIPC) insurance, which covers your investments and cash. The FDIC insures only banks, not credit unions, which are insured by the National Credit Union Administration. SIPC protection covers the value of your investments and cash up to $500,000, including $250,000 coverage against loss for cash.

The pros of CMAs include:

• Streamlined accounts: CMAs allow you to consolidate all your financial accounts, including investing, saving, and checking, under one brokerage platform.
• Higher interest rates: Most CMAs offer higher interest rates than typical bank savings accounts, which lead to greater cash flow.
• Passive income: CMAs earn interest and provide a passive income stream that can be reinvested in the financial markets or used for short and intermediate-term cash needs.
• Insurance protection: Your funds are insured by the FDIC or SPIC, ensuring your cash is safe up to the legal insurance limits.
• Additional features: Some CMAs provide debit ATM cards, bill pay, free wire transfers, and ATM reimbursements.

The cons of CMAs include:

• Higher rates elsewhere: You might receive higher rates from CDs, money market mutual funds, or high-yield savings accounts at other financial institutions.
• Withdrawal limits and fees: CMAs may have limits on withdrawals and/or high monthly management fees and minimums.
• Taxable interest income: All interest income is taxed on your 1040 income tax return.

When choosing a CMA, look for accounts with high interest rates, automatic fund transfers, overdraft protection, easy transfers between investment and CMA accounts, and mobile check deposit.

Overall, a CMA can be a good choice if you want to consolidate all your financial accounts with one provider and prefer the convenience of having checking and savings features in one product.

US Treasury securities

Overview

Types of US Treasury Securities

There are several types of US Treasury securities available, including:

• Treasury bills: Short-term instruments with maturity options ranging from 4 to 52 weeks.
• Treasury notes: Maturities ranging from 2 to 10 years.
• Treasury bonds: Long-term securities with maturities of 20 or 30 years.
• Treasury inflation-protected securities (TIPS): Maturities ranging from 5 to 30 years, with principal adjusting up or down based on inflation.
• Floating-rate notes (FRNs): Two-year maturities with variable interest rates.
• EE bonds: 30-year maturity, purchased directly from the Treasury.
• I bonds: Series I savings bonds with adjustable principal based on inflation.

Benefits of US Treasury Securities

• Negligible risk: Backed by the US government, there is a very low chance of losing your principal investment.
• Stable and guaranteed income: T-bonds provide fixed interest payments every six months for the duration of the investment.
• Diversification: Investing in T-bonds can reduce the overall risk and volatility of your investment portfolio.
• Tax advantages: Interest earned on T-bonds is exempt from state and local taxes, providing additional benefits for residents of high-tax states.
• Liquidity: US Treasury securities are highly liquid, meaning they can be easily bought and sold in the secondary market.

Risks of US Treasury Securities

While US Treasury securities are considered low-risk, there are still some potential downsides to consider:

• Price volatility: Market interest rate changes can affect the value of your T-bonds, leading to potential losses if new Treasuries offer higher yields.
• Inflation risk: Inflation can erode the returns on your T-bonds unless you invest in inflation-protected options like I bonds or TIPS.
• Opportunity cost: Investing in T-bonds might cause you to miss out on other investment opportunities with potentially higher returns, such as stocks.

How to Buy US Treasury Securities

You can purchase US Treasury securities directly from the US Treasury at TreasuryDirect.gov or through a financial institution like a bank or brokerage firm. When buying directly, you can participate in auctions held regularly for different types of securities. You can also purchase through a broker on the secondary market, which offers more flexibility in terms of price, yields, and liquidity.

Frequently asked questions