Low-Risk Investments: Where Should Your Money Go?

Investing is inherently risky, but some options are safer than others. 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. These include high-yield savings accounts, money market funds, treasury securities, certificates of deposit, and dividend-paying stocks. While these options are generally safe, it's important to remember that they come with lower returns and may not always be liquid. Additionally, inflation can erode the purchasing power of money in low-risk investments. When considering low-risk investments, it's crucial to understand your financial goals, risk tolerance, and investment horizon.

High-yield savings accounts

You can distinguish high-yield savings accounts from traditional savings accounts by their higher yields. They are also more commonly found at online banks, so be prepared for a primarily digital banking experience. However, some smaller local institutions and new online banking divisions don't have mobile apps for their high-yield savings accounts, which can make managing your account more challenging.

When choosing a high-yield savings account, look for one that pays a high-interest rate and doesn't charge monthly service or excess withdrawal fees. You may also want to consider the minimum deposit required to open the account and whether there is a monthly service fee. Some accounts will let you waive the fee if you meet certain requirements.

• DCU Primary Savings Account: 0.05% to 6.17% APY
• Varo Savings Account: 2.50% to 5.00% APY
• Axos ONE Savings and Checking Bundle: up to 4.86% APY
• Openbank High Yield Savings: 4.75% APY
• Pibank Savings: 4.60% APY
• Newtek Bank Personal High Yield Savings Account: 4.55% APY
• BrioDirect High-Yield Savings Account: 4.55% APY
• Jenius Savings Account: 4.50% APY
• Barclays Tiered Savings: 4.25% to 4.50% APY
• LendingClub LevelUp Savings Account: up to 4.50% APY

Money market funds

The Net Asset Value (NAV) Standard

All the features of a standard mutual fund apply to a money market fund, with one key difference. A money market fund aims to maintain a net asset value (NAV) of $1 per share. Any excess earnings generated through interest on the portfolio holdings are distributed to the investors as dividend payments.

Short-term certificates of deposit

CDs are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), meaning that your principal is protected. If you withdraw funds before the maturity date, you will likely have to pay a penalty fee, but this usually just means forfeiting some of the interest you would have earned.

There are different types of CDs, including brokered CDs, which can offer greater returns than traditional bank CDs, but they come with additional risks. You can sell your CD without incurring an early withdrawal penalty, but you may get less than your original investment.

When considering a CD, it is important to shop around online and compare what banks offer. Short-term CDs can offer better liquidity than a longer-term CD, and rates remain attractive even if interest rates are lowered.

Dividend-paying stocks

Dividend stocks can be a great choice for investors looking for passive income. Dividend stocks are shares of companies that regularly pay investors a portion of the company's earnings. Some pay dividends annually, semi-annually, or quarterly, while others pay monthly. The average dividend yield of some of the top dividend stocks is 12.69%.

When investing in dividend-paying stocks, it is important to evaluate the stock's payout ratio, which tells you how much of the company's income is going towards dividends. A payout ratio above 80% means the company is putting a large percentage of its income into paying dividends, which may be unsustainable.

It is also important to note that dividends in taxable brokerage accounts are taxed as ordinary income, so for investors in high tax brackets, dividend stocks may not be the most tax-efficient option.

Overall, dividend-paying stocks can be a good choice for those looking for a less risky investment option that provides a steady income stream and some protection in volatile or declining markets.

US Treasury securities

Treasuries are considered to have very low credit risk due to the backing of the US government. The government's ability to raise tax revenues and print currency ensures that investors will receive their interest and principal payments in full and on time. This makes Treasuries widely considered the safest of all investments.

One of the primary advantages of US Treasury securities is safety. They carry a strong guarantee that interest and principal will be paid on time, making them predictable and reliable for investors seeking to preserve and increase their capital. The absence of "call" provisions, which allow issuers to pay off a bond early, further enhances their predictability.

Another benefit of US Treasury securities is their wide range of maturity dates, allowing investors to structure their portfolios according to specific time horizons. Additionally, their interest payments are generally exempt from state and local income taxes, increasing their after-tax benefits.

The US Treasury market also offers a high level of liquidity, making Treasuries easy to buy and sell. The large volume of trading in this market results in lower trade transaction costs and more efficient price discovery for buyers and sellers.

While US Treasury securities offer safety and predictability, it's important to consider the potential risks associated with them. Although they have very low credit risk, they are subject to interest rate risk and inflation risk. Changes in market interest rates can affect the underlying value of the bonds, impacting their market price. Additionally, inflation can erode the returns from Treasuries, unless investors opt for inflation-protected options like TIPS or I bonds.

In summary, US Treasury securities are considered a safe and secure investment option due to the backing of the US government. They offer predictability, a wide range of maturity dates, tax advantages, and high liquidity. However, investors should also be mindful of the potential risks associated with interest rate changes and inflation.

Frequently asked questions