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In today’s volatile markets, many investors are looking to put at least some of their money into safer, more stable assets. While high-risk investments offer the potential for bigger returns, they also come with a greater chance of losing your principal. For those seeking reasonable profits without as much uncertainty, here are some of the best low-risk investment options to consider this year.
Some investment categories are consistently safer than others. For example, certificates of deposit (CDs), money market funds, municipal bonds and Treasury Inflation-Protected Securities (TIPS) are among the safest types of investments. Below, we list these and other conservative investments that can help you preserve capital
Key Takeaways
- Safe assets are those that allow investors to preserve capital without a high risk of potential losses.
- Such assets include treasuries, CDs, money market funds, and annuities.
- There is, of course, a risk-return tradeoff, such that safer assets typically offer comparatively lower expected returns.
The Risk/Reward Tradeoff
When making investment decisions, there is always a tradeoff between risk and return. Generally, assets with higher potential returns also come with greater risk. The key is finding the right balance for your goals and risk tolerance.
At one end of the spectrum are low-risk investments like savings accounts, CDs and high-quality bonds. These provide modest but stable returns with minimal risk of losing your principal. The gains, however, may not keep pace with inflation.
On the other end are higher risk investments like stocks, commodities, high-yield bonds and alternative assets. These have potential for much higher returns, but have significant volatility and a real risk of major losses.
Most experts suggest constructing a diversified portfolio that includes a mix of low, moderate and high risk assets. The exact allocation depends on factors like your investment time-frame, goals, age and psychological comfort with risk. Younger investors with longer time horizons can often take on more risk, knowing they have time to recover from periodic downturns in volatile assets. Older investors nearing retirement may shift toward more low-risk securities to preserve capital. No matter your risk tolerance, some mixture of safer and riskier assets is advisable. Having at least some holdings with high return potential provides opportunities for growth. Maintaining sufficient stable investments hedges against volatility while still providing income.
Finding the right balance ultimately comes down to your specific situation and risk tolerance. Be sure to thoroughly assess your goals, timeline, and psychological & emotional ability to handle swings in portfolio value. And don’t forget to diversify across asset classes to avoid overexposure to any one type of risk.
Cash
Cash, including demand cash deposits, represents the epitome of safety in the asset world. There’s virtually no risk of loss (unless it is lost or stolen), making it a very reliable asset. However, its safety comes at a cost – it generally yields minimal returns, especially when considering the erosion of purchasing power due to inflation.
Cash is ideal for immediate or short-term financial needs due to its unparalleled liquidity. It’s perfect for maintaining an emergency fund or paying for immediate and upcoming expenses. Indeed, the biggest benefit of holding cash that it is instantly accessible and pretty much universally accepted.
High-Yield Savings
High-yield savings accounts offer a low-risk bank account option, but with higher interest rates than regular savings accounts. Online banks that have lower overhead expenses compared to traditional brick-and-mortar banks are often able to offer such products with attractive rates.
These accounts are ideal for short-term savings goals where you want to earn a bit more interest than a regular savings account without compromising on safety. One major perk is FDIC insurance, which covers potential losses of up to $250,000 per institution, and the ability to withdraw funds at any time, providing both security and liquidity. To get one, simply open an account with a bank that offers high-yield savings accounts.
Money Market Funds
Money market funds are low-risk as they invest in stable, short-term debt instruments. They usually offer higher yields than savings accounts, though rates are still relatively modest. These funds are suitable for investors seeking a bit more yield than a savings account, but who also value liquidity and safety.
To invest, one must buy shares in a money market fund through a brokerage or a mutual fund company.
Money market funds and money market accounts are two common low-risk savings vehicles often confused with each other.
Money market funds are securities managed by fund companies. They invest in highly liquid, short-term debt instruments and certificates of deposits, with fund shares targeted to $1 per share. Returns are variable based on holdings, and money market funds are not FDIC insured.
Money market accounts are deposit accounts offered by banks. Returns are generally comparable to or a bit lower than money market funds. However, money market accounts are FDIC insured up to $250,000 per depositor, per bank. This makes them slightly less risky than money market funds.
Certificates of Deposit (CDs)
CDs are low-risk, FDIC-insured investments that offer fixed interest rates over a set period (often six months to five years). Their returns are usually higher than savings accounts, but still fixed and predictable. CDs can be well-suited for investors who don’t need immediate access to their funds and are looking for relatively higher, guaranteed returns over a specific period.
To invest, purchase a CD through a bank, choosing the term and rate that best fits your financial timeline.
Treasuries
Treasury securities like T-bills and T-notes are very low-risk as they’re issued and backed by the U.S. government. They provide a safe means to earn a return, albeit generally lower than more aggressive investments. In general, treasuries are consider “risk-free” securities since the federal government guarantees them and has never (yet) defaulted.
These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market. You can purchase these securities through your broker, or via the government’s TreasuryDirect website.
TIPS
TIPS (Treasury Inflation-Protected Securities) offer low-risk investment opportunities, with the added perk of its principal adjusting with inflation, thus providing a hedge against inflation. Like treasuries, these are also backed by the US government.
TIPS offer high liquidity and inflation protection, but can underperform during periods of low inflation or when real interest rates are rising, as their value is directly tied to inflation trends. Additionally, their returns may not be as high as other fixed-income securities in a stable or deflationary economic environment. You can buy TIPS through TreasuryDirect or your brokerage account.
AAA Bonds
Investment grade bonds, particularly short-duration ones and those with the highest AAA-rating, are considered low to moderate risk. They are highly rated, indicating a lower default risk, and offer moderate returns. Still, bond prices are sensitive to interest rate changes and can become riskier if the issuer faces financial troubles or insolvency later on.
Corporate bonds are suitable for investors seeking steadier, but potentially higher returns than government securities, with a reasonable level of risk (depending on the bond). To invest, buy these bonds through a brokerage account.
Bond Funds
Bond funds, which are managed portfolios of various bonds packaged into mutual funds or ETFs, have low to moderate risk, depending on their particular investment strategy. Diversification within the fund reduces risk, and returns are generally steady. These are particularly attractive for investors looking for diversified bond exposure without having to buy individual bonds.
You can buy bond funds through mutual fund companies or brokerage accounts.
Municipal Bonds
Municipal bonds are low to moderate risk and are funded by tax collection or other government revenues (such as toll roads or bridges). They can offer tax-free income at the federal (and sometimes state & local) level. As such, “munis” are particularly attractive to investors in higher tax brackets.
A drawback is that munis are somewhat liquid, with a less active secondary market compared to other securities. To invest, buy municipal bonds through a specialized municipal bond dealer, or in same cases directly from the issuing municipality. Municipal bond funds are also available, which may be more liquid, but which may not cater to your particular tax situation.
Blue-Chip Dividend Stocks
These stocks are from large, established companies (i.e., blue-chips) that provide stable dividend income, offering low to moderate risk. These stocks are good for investors seeking a balance between moderate growth and income generation, especially over the long term – and can be purchased through a brokerage account.
However, even the most stable of companies can experience a loss of profitability during periods of recession or due to changing consumer behaviors, which can negatively impact their stock prices.
Utilities Stocks
Utility stocks, representing essential services companies like those that provide electricity and gas, offer low to moderate risk. Their stable and predictable revenues often lead to consistent dividends and steady profits. While there is some risk associated with the equity markets, utilities often feature lower level of risk compared to other stock sectors. These stocks, too, can be bought through a brokerage account.
Annuities
Annuities are low-risk investments that provide fixed, steady income in return for an upfront investment — guaranteed either for a set period of time, or for life. The returns are backed by the insurance company issuing the annuity. However, the funds put into an annuity are often locked up or exchanged for the flow of future cash flows. Therefore, they are not liquid. Indeed, annuities are often best suited for older individuals looking for a steady, guaranteed income stream, particularly during retirement.
The process of buying involves selecting an annuity type and making an investment through an insurance company or agent.
Cash-Value Life Insurance
Cash Value Life Insurance is a unique financial product that combines the protection of life insurance with the benefit of a savings component. The risk level is generally low, as it not only guarantees a payout to beneficiaries upon the policyholder’s death but also allows the cash value to grow at a set interest rate and without the risk of loss, often tax-deferred. This growth rate is often more favorable compared to traditional savings vehicles, though it typically offers lower returns than more aggressive investment options.
The cash value grows tax-deferred, and beneficiaries receive the death benefit tax-free. Additionally, policyholders can borrow against the cash value tax-free, though loans can reduce the death benefit and cash value.
This type of insurance is best suited for individuals who are looking for a long-term investment that provides both a death benefit and a potential cash accumulation. It’s particularly appealing to those who have maximized other retirement savings options and are seeking additional tax-advantaged ways to save. It can also be a strategic tool for estate planning.
| Safe Investments at a Glance | ||||
|---|---|---|---|---|
| Investment | Description | Risk Level | Why It’s Low Risk | Liquidity |
| Cash | Cash or demand cash deposits | Very Low | No risk of loss – however, it can lose purchasing power to inflation | Very high – cash is the most liquid asset by definition |
| High-Yield Savings Accounts | Savings accounts with higher interest rates than normal. FDIC insured up to $250k. | Low | FDIC insurance protects against losses | Very High – can withdraw funds any time |
| Money Market Funds | Mutual funds investing in short-term debt instruments. Higher yield than savings accounts. | Low | Invests in stable short-term assets | High – Shares can be sold daily |
| CDs | Certificates of deposit pay fixed interest over set periods, usually 3 months to 5 years. | Low | FDIC insured, fixed rates | Low – Funds locked up until maturity; early withdrawal penalties |
| Treasury Securities | Bonds issued by the US Treasury like T-bills, T-notes, savings bonds. | Very Low | Backed by US government | High – Active secondary market |
| TIPS | Treasury Inflation-Protected Securities. Bonds whose principal adjusts with inflation. | Low | Backed by US government; inflation protection | High – Active secondary market |
| Investment Grade Bonds | Highly rated corporate bonds. Short duration bonds are safest. | Moderate | High credit ratings mean lower default risk | Moderate to High – Can sell but may take time depending on the bond |
| Bond Funds | Bundles of bonds in mutual funds or ETFs provide diversification. | Low to Moderate | Diversification reduces risk | High – Shares can be sold daily |
| Municipal Bonds | Bonds issued by local governments to fund projects. | Low to Moderate | Funded by tax collection or other gov’t revenue | Moderate – Secondary market not highly liquid |
| Dividend Paying Blue–Chip Stocks | Stocks of large, established companies with steady dividend payouts. | Low to Moderate | Stable large companies with consistent dividends | High – Active secondary market |
| Utility Stocks | Stocks of essential services companies with reliable revenues. | Moderate | Predictable demand for services | High – Active secondary market |
| Annuities | Insurance contracts providing fixed income in return for an upfront investment. | Low | Guaranteed fixed payments from insurance companies | Low – Funds locked up, early withdrawal penalties |
| Cash Value Life Insurance | Permanent life insurance with savings component. | Low | Guarantees payout to beneficiaries; savings grow tax-free at favorable dividend rates | Moderate – Usually must request withdrawal or loan, or else surrender policy to access cash value |
What Is the Safest Asset of All?
The concept of the “safest investment” can vary depending on individual perspectives and economic contexts, but generally, cash and government bonds, particularly U.S. Treasury securities, are often considered among the safest investment options available. This is because there is minimal risk of loss.
That said, it’s important to note that no investment is entirely risk-free. Even with cash and government bonds, there is a risk of inflation outpacing the yield, leading to a decrease in purchasing power over time.
Why Is there A Risk-Return Tradeoff?
There are several reasons proposed for the risk-return tradeoff, which is a cornerstone concept of financial economics. It implies that lower-risk investments will also offer lower expected returns.
Higher returns are often required by investors as compensation for the increased uncertainty and potential for loss associated with riskier investments. When investors put money into an asset with a high level of risk, such as a new tech start-up, they face a higher chance of losing their investment. Therefore, they expect higher returns to justify this risk.
The time-value of money further states that money available now is worth more than the same amount in the future due to its potential earning capacity and opportunity costs. Riskier investments must offer higher returns to compensate for the possibility that the future value of the investment might be lower than expected or even negative.
Can Money Market Funds Ever Result in a Loss?
While money market funds are considered very low-risk, they are not entirely risk-free. Unlike bank savings accounts, they are not insured by the FDIC. There have been rare instances, such as during severe financial crises, where money market funds “broke the buck,” meaning their value dropped below the target $1 per share, leading to losses for investors. However, regulatory changes have been made to increase their stability since the 2008 financial crisis.
Are There Any Safe Assets that Are Also Socially-Resonsible or ESG Conscious?
Yes, there are safe investment options that also consider social or environmental impacts. Green bonds, for example, are often issued by governments and corporations to fund environmentally-friendly projects. They typically carry lower risk, similar to other government or corporate bonds, while contributing to positive environmental outcomes. Additionally, some municipal bonds will finance projects with social or environmental benefits, combining safety with social responsibility.
The Bottom Line
Safe assets such as U.S. Treasury securities, high-yield savings accounts, money market funds, and certain types of bonds and annuities offer a lower risk investment option for those prioritizing capital preservation and steady, albeit generally lower, returns. While they may not provide the high returns of riskier assets like stocks, they play a crucial role in a diversified portfolio, offering stability, predictable income, and protection against market volatility. These assets are particularly appealing for risk-averse investors, those nearing retirement, or anyone looking to balance out higher-risk investments. However, it’s important to be mindful of their limitations, such as lower returns that may not keep pace with inflation and the varying degrees of liquidity and tax implications. Ultimately, the choice of safe assets should align with individual financial goals, risk tolerance, and overall investment strategy.
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