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When investing, there is always a balance between risk and reward. But that balance can run a wide spectrum, ranging from YOLO your money to Dogecoin to investing in various index funds.
But for many investors, the most important thing is to reduce risk and focus on income generation and capital preservation. And the great news is that you don’t always have to give up significant returns to reduce risk.
In fact, there are several low-risk investments that you can use to put your money to work while reducing or virtually eliminating risk altogether. And while you may not always beat the market, these strategies have their place in many portfolios where growth isn’t the only goal.
The best low risk investment ideas
What to consider before investing
Before jumping into various low-risk investment strategies, there are some important factors that you should consider before making any investment.
- Time period: Investors generally gravitate to lower risk investments if they are investing for the short term. Instead, for long-term investing, you can take a little more risk and trust time and compound interest to work in your favor.
- Income goals: Many low-risk investments generate fixed income, but the way the income is paid out can vary. For example, some investment products include annual, semi-annual or daily interest, while others pay investors at the end of the term or quarterly. Decide whether income generation is important to your portfolio, but also consider how returns are paid.
- Passive versus active investing: How much time are you willing to spend monitoring your portfolio? Passive investors generally prefer to invest in dollar cost averaging or fixed income investments to keep things simple. But more active investors might enjoy searching for the best interest rates or researching different index funds or bonds to invest in.
The best low-risk investments right now
If you want to balance risk while still earning significant returns, you’re in luck. Here are some tried and true low-risk investments that you can use to build a solid and safe portfolio.
1. High yield savings accounts
Historically, parking your cash in a savings account hasn’t been a great “investment.” And this is especially true if you’re investing during periods of high inflation, as you need even greater returns to offset the impacts of inflation.
However, the rise of mobile banking and rising interest rates means that high-yield savings accounts can be a pretty solid, low-risk investment. And they’re the perfect vehicle to stash away your emergency fund or extra cash you may need in the near future.
Some leading online banks with excellent high-yield savings accounts include:
- aspiration: Earn up to 5% APY using Aspiration’s Spend & Save account.
- CIT Bank: Earn 2.10% APY with the Savings Connect account.
- current: This mobile bank pays 4% APY up to $6,000.
- Precautionary: Earn up to 5% APY on up to $5,000.
To maximize your returns, you can spread your cash between two or more high-yield accounts to avoid the cash limits that some of these banks have. But even keeping most of the extra cash you have in a high-yield savings account beats most mainstream banks.
2. And Bonds
I-bonds are another low-risk investment that also help you invest during inflationary periods. That’s because I-bonds earn interest based on a combined fixed rate and inflation rate. In other words, these bonds are specifically designed to help offset the impact of inflation and provide a haven for your cash.
At the time of writing, I-bonds purchased through October 2022 are earning 9.62%. This rate changes every 6 months to adjust for the rate of inflation and interest is compounded semi-annually.
The main downside to I Bonds is that you can only buy $10,000 in e-bonds and $5,000 in paper bonds per year. And if you withdraw them before five years, you lose the previous three months of interest. However, they are still a safe investment with high returns that you can rely on to protect some cash.
3. CD without penalty
Certificates of deposit, or CDs, are another popular, low-risk investment that are useful for generating fixed income. CDs are savings products that usually have a specific term for which you deposit your money to earn interest. The advantage is that you can reliably count on your CDs to generate specific performance. The main drawbacks are that CD rates are generally low, and fixed-rate CDs have penalties if you withdraw your money early.
For a truly low-risk investment, we prefer no-penalty CDs to regular fixed CDs. That’s because you can withdraw your money from a penalty-free CD before the end of the term without paying penalties. So you still earn fixed interest on your cash while maintaining flexibility.
Online banks like CIT Bank and Ally have some of the best penalty-free CDs right now. You can also explore various credit unions or check with your current bank to see if they offer competitive CDs.
4. Treasury Bills
A Treasury bill (T-Bill) is a short-term US debt obligation issued by the US Treasury Department. These notes are safe as they are backed by the US Treasury. Plus, T-Bills have terms that vary from a few days to 52 weeks, so you don’t have to lock up your money for years like you do with many other fixed income investments.
There is a $100 minimum purchase for T-Bills, so it’s also a viable investment if you don’t have a lot of cash. As for how you earn interest, you buy T-Bills at a discount from their face value and then receive the full face value at the end of the term.
Like many other low-risk investments, the main downside to T-Bills is that you’re typically looking at a 2-3% return. However, the short-term nature of this investment more than makes up for the lower returns, and T-Bills are about as safe an investment as you can find.
5. Preferred Shares
A common drawback of low-risk investments is that you usually sacrifice growth for safety. This is not always a drawback, especially if you are investing for the short term and protecting your money is what matters most.
That said, preferred stocks offer a good middle ground between investments like bonds and investing in regular stocks. With preferred stock, you have higher rights than common stock that result in receiving dividend payments first. And in the event of liquidation, preferred stockholders are paid first over common stockholders. The main drawbacks are the lack of voting rights and less room for capital appreciation in many cases.
In short, preferred stock has the benefits of dividend income and provides some protection in the event of liquidation or cash flow disruptions. However, you have less room for appreciation as you would with regular stocks. But if your goal is to reduce risk, preferred stocks still allow you to enter the market while reducing some risk.
6. Money market accounts
A money market account (MMA) is a deposit account that is a hybrid between a high-yield savings account and a checking account. MMAs generally pay higher interest rates than most savings accounts, and you also get check writing and debit card capabilities. The main downside is that many MMAs limit the amount of withdrawals you can make per month, and some also have minimum deposit requirements.
But like high-yield savings accounts, MMAs are good vehicles for stashing emergency funds or some idle cash. And the best money market accounts pay 2% APY or more at the time of this writing and have very low or no minimum deposit requirements.
7. Corporate and municipal bonds
Not surprisingly, bonds are another low-risk investment that are very popular for generating retirement income or fixed income in general.
Two main types of bonds you can consider are corporate and municipal bonds. As the names suggest, corporations issue corporate bonds to help finance business-related projects, while state and local governments issue municipal bonds to finance their own projects.
Bonds are considered low-risk investments because the entities that back them are generally sound. Corporate bonds are slightly riskier than municipal bonds, as corporations can go bankrupt, but they are still a lower-risk investment that you can mix into your portfolio.
The downside to bonds is that yields are generally lower than the market in exchange for reduced risk. And bonds have multiple maturities, so you’re locking up your money for a set period of time. However, more conservative investors can still use bonds to build income and a more diverse portfolio that isn’t just stocks and ETFs.
Professional advice: For higher returns you can also look for platforms like decent bonds. These private bonds have a term of 36 months and currently pay 5% interest. The bonds are backed by assets owned by the lending companies that Worthy Bonds lends to, in addition to US Treasuries, real estate and CDs.
8. Cash management accounts
One last low-risk investment you can consider is cash management accounts. These accounts are alternatives to the checking and savings accounts offered by many online brokers and robo-advisors to allow clients to have extra money on their platforms. This makes it easier to move money around, and the top cash management accounts are also FDIC insured and pay pretty competitive interest rates.
Some cash management accounts you might consider include:
- Wealthfront Cash Account: This popular robo-advisor currently pays 2.00% APY and has a funding requirement of $1. You can also read our Wealthfront review to learn more about investing through Wealthfront.
- Betterment Cash Reserve: Like Wealthfront, Betterment lets you earn 2% APY on its cash reserve account.
- personal capital: With Personal Capital Cash, you earn 2.02% APY and 2.15% APY if you are a client of their investment management service. There are also no minimum balance requirements or fees. And Personal Capital has a number of other great free features, including budgeting tools, a net worth tracker, and an investment fee analyzer.
Again, these cash management accounts are most useful if you’re an existing customer, as you can move funds around quickly. But they are still a low-risk independent investment that you can try.
bottom line
Low-risk investing may not deliver the same results as growth stocks or private equity. But in many cases, protecting your capital and achieving a fixed income is more important than pure growth.
Ultimately, you need to decide which asset allocation is right for you and proceed from there. Low-risk investments can have a place in any portfolio, and there’s certainly no shortage of investment options.
