Investing is a financial topic that fills a lot of people with uncertainty. Sometimes, this uncertainty comes from simply not knowing the basics of investing. At other times, that sense of uncertainty comes from the fear of risk, of losing your hard-earned money in an investment.
One way out of the fear of losing your money in an investment is to utilize investments with very low risk for part of or all of your investing. Here are several of the best low-risk investment options that do just that.
The best low-risk investments
High-interest savings accounts
A savings account is a common offering from most banks and credit unions. It’s simply a place to securely deposit your money and earn a small return on it while it’s safely held, and you can withdraw it with minimal restrictions, often at the convenience of an ATM. Savings accounts are FDIC insured or NCUA insured, which means that your money is safe up to $250,000.
Banks and credit unions compete to attract savers with higher interest rates, but these rates tend to be a few percentage points lower than prevailing mortgage rates, so these investments won’t have a great rate of return until interest rates rise again.
Here’s where you can open a high-yield savings account:
- CIT Bank offers a great simple online banking experience and competitive rates.
- Ally offers a lot of good online tools for goal-setting and is usually among the interest rate leaders.
- Synchrony Bank offers an incredibly robust ATM network.
Money market accounts
Money market accounts are very similar to savings accounts. They’re FDIC or NCUA insured up to $250,000 and offer easy deposit and withdrawal access from credit unions or banks.
So, what’s the difference between a money market account and a savings account? Money market accounts typically require a minimum balance, but they also tend to offer a slightly higher return for your money. In short, if you have significant money to park in savings for a while, a money market account is a great tool for you. MMAs also typically come with check-writing abilities, much like a typical checking account.
As with savings accounts, banks and credit unions compete to attract savers with higher interest rates, but these rates tend to be a couple of percentage points lower than prevailing mortgage rates.
Here’s where you can find the best money market accounts for low-risk investing and open one:
Certificates of deposit
A certificate of deposit is another type of bank and credit union offering, perfect for low-risk investing. They’re also FDIC or NCUA insured up to $250,000, just like savings accounts and money market accounts, and they tend to offer rates that are a bit lower than but highly tied to mortgage rates.
So, what’s the difference here? With a CD, you’re agreeing to lock down your money with that financial institution for a certain period of time in exchange for a better rate. In general, the longer the term, the better the rate, usually exceeding savings and money market rates. If you need to withdraw your money before the end of the term, you will typically pay a penalty — usually the interest that was accumulated in the CD. Much as with other account types, banks and credit unions compete on CD rates.
You can open a CD online in a number of places, including
Treasury securities are issued directly by the federal government in order to finance our national debts. They are extremely low-risk ( with the full backing of the federal government), but offer a very low return most of the time. They tend to be a rock-solid investment, but don’t offer spectacular returns right now, though that can change in the future.
Treasury securities come in three different types — bills, notes and bonds. The only difference between them is the length of time until maturity. Bills are issued for less than a year, notes last from between one to 10 years, and bonds last for 10 to 30 years. In each case, the term is specified when you buy it, along with when and how it pays out interest to you.
You can buy Treasury securities directly from the federal government. You can also buy them from brokerages, though you’ll typically pay a small fee for doing so. On the other hand, if you want to sell treasury securities before they mature after buying through TreasuryDirect, you’ll have to transfer it to a brokerage (this is easy to do online).
A municipal bond is issued by a state, city or county to finance its expenditures, like constructing highways, schools, bridges or other facilities. These tend to be low-risk but not risk-free, as state or local governments could potentially default on the bond. They tend to be very low-risk when offered by stable local and state governments in good financial shape.
The big advantage of municipal bonds is that the returns on them are almost always tax-free in terms of federal income tax, and are usually exempt from state and local taxes as well. Although their returns are low, the tax savings can make a big difference if you’re in a high tax bracket. Municipal bonds are bought through brokerages, though larger banks often offer an assortment of municipal bonds and bond brokers also exist.
You can buy municipal bonds through online brokerages, including:
Highly rated corporate bonds
Corporate bonds are similar to municipal bonds, except they’re issued by companies that want to raise money without issuing stocks (because the owners want to retain full ownership of the company). They differ from municipal bonds in that the returns are typically a little higher, though they’re not tax-free, and the risk level of a corporate bond is tied to the stability of the company issuing the bond.
So how do you figure out which bonds are trustworthy? A number of companies exist to offer bond ratings, which give you a quick indication as to the financial health and stability of the company issuing that bond. For secure investments, you’ll want highly rated bonds, though these tend to have relatively low rates of return.
Just like municipal bonds, brokerages offer corporate bonds — also known as individual bonds — which you can buy with:
Index funds are a collection of investments run by an investment firm in which the goal is to invest very widely using simple rules to maximize diversification and keep costs low, seeking to match the overall market cheaply rather than trying to beat it.
While index funds are usually centered around stocks, they are offered for other types of investments. They tend to be as low risk as stock investments can be, particularly when you buy a very highly diversified index fund like the Vanguard Total Stock Market Index.
Investing in index funds typically happens by depositing your money directly with an investment firm, such as:
ETFs, or exchange-traded funds, are versions of index funds sold by investment brokerages. Much like index funds, they contain small amounts of a wide array of investments, enabling you to diversify widely with a single investment. Most ETFs are stock ETFs, meaning that they contain a wide array of different stocks in a single investment, meaning that they do entail risk, but the risk is quite low compared to investing in the shares of a single company.
You’ll need a reputable brokerage to work with if you’re interested in ETFs, consider some brokerages, including:
When should I consider a low-risk investment?
Low-risk investments are the best option in situations where you will need the money quickly, as they minimize volatility. If you are in a situation where you will need money in the very near future from that investment, you should move it into a very low-interest investment quickly so that you aren’t at risk of an abrupt market drop.
They are also great for situations where you simply cannot afford to lose any of the balance, such as if you’re holding money for a known upcoming expense. This is usually a short-term situation too, but not always.
Low-risk investments are also a good option when you want to diversify in retirement, spreading some of your investments into lower-risk options so that you’re not caught in a crisis if some of your higher-risk investments are struggling in the short term.