A widely accepted principle of investing holds that high reward generally is accompanied by high risk. However, there are some relatively low-risk investments that offer at least moderate high returns. By providing stability in tandem with potentially substantial returns, such investments can represent attractive options for cautious investors.
Government bonds, preferred stocks, high-yield savings accounts and certificates of deposit (CDs) are some of the low-risk strategies available to those who want to minimize exposure to market volatility without sacrificing attractive returns.
Preferred Stock
Preferred stock is a type of equity investment that has bond-like features plus the prospect of price appreciation. Companies typically issue preferred shares with a fixed dividend rate, providing preferred shareholders with a steady income stream. This distinguishes them from common shares, which may also pay dividends but at rates that can vary over time.
Owners of preferred shares also get their dividends before common stockholders receive theirs. In addition, if the company goes bankrupt, preferred stockholders are in line to be paid off ahead of common shareholders.
Preferred stock is considered less risky than common stock due to these features. It’s still subject to market fluctuations and may be impacted by the financial health of the issuing company. However, its blend of fixed income and potential for appreciation makes it a relatively low-risk investment with the potential for high rewards.
Money Market Funds
Money market funds pool money from multiple investors to purchase short-term, high-quality securities like Treasury bills and commercial paper. They aim to offer higher yields than traditional savings accounts while maintaining liquidity and stability.
These funds are typically considered low-risk because they invest in short-duration, low-credit-risk instruments. Although their returns are modest when compared with some other investments, they provide a reliable option for conservative investors seeking a balance between risk and reward.
High-Yield Savings Accounts
High-yield savings accounts pay higher interest rates than standard savings accounts. They are typically offered by online banks, which have low overhead costs and can pass these savings on to customers through better rates. These accounts are considered low-risk investments because they are FDIC-insured up to $250,000, protecting your money even if the bank fails.
While the returns may not be as high as riskier investments, the safety and steady interest earnings make high-yield savings accounts an attractive option for conservative investors seeking reliable returns.
Certificates of Deposit
Certificates of deposit (CDs) are popular with conservative investors seeking higher interest without venturing away from banks, credit unions and similar financial institutions. In exchange for locking up their money for a set term, typically ranging from a few months to several years, investors can earn a fixed return higher than they would get with an on-demand deposit account.
The FDIC insures up to $250,000 of principle per depositor per institution, making CDs an exceptionally safe investment.
Treasury Bonds
Treasury bonds are long-term debt securities issued by the U.S. government. Washington’s backing makes a Treasury Bond one of the safest of all investments, with an extremely low risk of default. They offer semi-annual payments at a fixed rate of interest and have maturities ranging from 10 to 30 years.
Treasury bonds may be well-suited to investors looking to preserve capital while earning a steady income over time. As a further enhancement, the interest earned is exempt from state and local taxes, although federal income taxes still apply.
Index Funds
Index funds pool money from many people and invest it with the goal of tracking the performance of a specific market index, such as the S&P 500. Buying shares in one of these funds supplies diversification across a broad range of securities, reducing the overall investment risk.
The passive management style of index funds requires little buying, selling or security analysis, which lets them charge lower fees than actively managed funds. Historically, index funds have provided consistent returns and, partly due to the low fees, may outperform actively managed funds over the long term. They may be suitable for investors seeking low-cost exposure to the stock market with reduced risk.
Fixed Annuities
Fixed annuities are insurance products that provide a guaranteed return on investment, making them a stable and predictable option for risk-averse investors. When purchasing a fixed annuity, the investor pays a lump sum or a series of payments in exchange for periodic payments in the future.
The insurance company guarantees a fixed interest rate and the payment consists partly of interest and partly of return of some of the purchase amount. Fixed annuities can be attractive to retirement planners and others who place a high premium on reliable income.
Corporate Bonds
Corporate bonds are debt securities issued by companies to raise capital. These bonds provide regular interest payments and also return the investor’s principal at maturity. They typically offer higher yields than government bonds, which reflects the higher risk associated with corporate debt.
The highest-quality corporate bonds, issued by financially stable companies and known as investment-grade bonds, are considered relatively low risk, however. Investors can evaluate the credit ratings of corporate bonds to gauge the level of risk and potential reward. Higher-rated bonds generally present a safer investment.
Building a Balanced Investment Strategy
Investing in low-risk options can help you provide a balanced approach for growing your wealth while minimizing financial exposure. From the stability of government bonds and the security of FDIC-insured high-yield savings accounts to the steady income from preferred stocks and fixed annuities, these investments offer reliable returns without excessive risk.
Diversifying across several of these asset classes can further enhance stability while still providing opportunities for growth. It's important to align your investment choices with your individual financial goals, time horizon, and risk tolerance. 👉 Explore more strategies for building a resilient portfolio
Frequently Asked Questions
What makes an investment "low-risk"?
Low-risk investments typically preserve capital and offer stable, predictable returns. They often involve government backing, insurance protection, or investment in high-quality debt instruments with minimal volatility.
Can low-risk investments really provide high rewards?
While low-risk investments generally offer more modest returns than high-risk alternatives, some can provide attractive rewards relative to their risk level. Preferred stocks, corporate bonds, and certain index funds may offer higher returns while maintaining lower risk profiles.
How do I choose between different low-risk options?
Consider factors such as your investment timeline, liquidity needs, and income requirements. Short-term goals might favor money market funds or CDs, while long-term objectives might be better served by Treasury bonds or fixed annuities.
Are FDIC-insured accounts completely safe?
FDIC insurance protects up to $250,000 per depositor per institution against bank failure. While this provides exceptional safety for principal, it doesn't protect against inflation eroding purchasing power over time.
How can I diversify with low-risk investments?
You can diversify by combining different types of low-risk investments across various sectors and maturities. This might include mixing government securities with corporate bonds, adding preferred stocks, and maintaining liquid assets in high-yield savings accounts.
Do low-risk investments require professional management?
Many low-risk investments like savings accounts, CDs, and Treasury bonds can be accessed directly without professional management. However, for more complex instruments like fixed annuities or corporate bond portfolios, consulting with a financial professional might be beneficial. 👉 Get advanced methods for portfolio optimization