What makes a return good? Obviously, higher is generally better, but it’s a misconception that it’s the only factor that matters. At the highest levels of investment professionals, the main point of conversation is usually what’s known as “risk-adjusted return.” That’s the idea that not all returns are created equal, and that a smart investor is looking to invest where they’re getting the best value for the risk that they are taking on — even if that means accepting lower returns.
Through that lens, you might prefer an investment that pays just 2% a year over one that’s returning 20%. Why? Because if the path to those 20% returns is investing in all sorts of risky bets that could just as easily plunge 40% the next year, that steady 2% could be a better value over time, based on its low risks.
For the individual investor, this balance is all the more important. After all, you only get one shot at building your nest egg. A catastrophe can mean losing your entire life savings and potentially having to make painful cuts in retirement or leave a child saddled with student loans. You want the highest returns possible, but not at the cost of taking on too much risk and upending the entire program because a few things in the markets don’t break your way. But if you understand how comparing investments requires looking at both returns and the risk with equal weight, you can understand how even a tiny return can be a great deal if the investment is really risk-free.
So, here’s a closer look at some of the safest investments with the highest returns. You’re unlikely to generate exponential growth with these, but you’re even less likely to lose the money you’re relying on to keep you and your family secure.
- High-Yield Savings Accounts
- Certificates of Deposit
- Money Market Accounts
- Treasury Inflation-Protected Securities
- Municipal Bonds
- Corporate Bonds
- S&P 500 Index Fund/ETF
- Dividend Stocks
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The bottom line: Federal Deposit Insurance Corp. insurance means your money is 100% safe and it’s easy to get a hold of in a pinch, making the 2% returns on many high-yield savings accounts a pretty outstanding deal.
Best for: Stashing your emergency fund; investors looking for options without any risks
The high-yield savings account is pretty much the gold standard of safe investments, offering you strong returns given the total absence of risk. The money you have stashed in almost any bank is FDIC-insured, meaning the government will make you whole on any losses up to $250,000.
While a 2% interest rate on a savings account might seem piddly when compared with the roaring returns of the stock market, it’s actually an astonishing deal based on the risk level — and there are a number of options offering that rate or better at this point. What’s more, it’s also a very liquid investment — meaning it’s easy to access without penalty if you need it quickly. That makes stashing your emergency fund — something you better have if you’re really looking to limit your financial risk — a pretty decent investment under the circumstances. So, if your bank’s interest rate on savings is lower than that — and most are; the national average is just 0.1% — consider switching banks or at least opening a separate high-yield account for your long-term savings and/or emergency fund.
The bottom line: CDs should offer higher returns than most savings accounts, but that comes at a loss of flexibility as you’ll owe a penalty for pulling your money out early.
Best for: Money you can be sure you won’t need for the prescribed time frame; investors with a stable financial picture looking to avoid any risk in their investments
Certificates of deposit are almost identical to savings accounts. Like a savings account, most are FDIC-insured, so there’s essentially zero risk involved. However, they differ in one key way: liquidity. With a CD, you accept a time horizon when you invest — usually anywhere from one month to one or two years — and you have to pay a penalty if you access your cash before then. On the one hand, that makes CDs much less valuable as a home for your emergency fund or savings you might need to tap into on short notice. On the other, it should mean you’ll get paid a higher rate of return in exchange for that loss of easy access. Basically, banks will have an easier time reinvesting your savings if you’ve promised to leave them alone for a set amount of time. In return, you should be getting a better rate.
Before you get a CD, consider at least two things: First, whether or not you might need that money before the CD’s maturation date. If the answer is yes, you’ll want to look elsewhere. Second, and equally important: whether you really are getting a better interest rate than is available with high-yield savings accounts. Your only advantage with a CD over a savings account is getting better returns, so if you can find a savings account that pays better than the CD at your banks, there’s just no point. That said, an FDIC-insured CD’s returns might seem modest, but they’re pretty stellar in the context of the near-total absence of any risk to you of losing money.
The bottom line: MMAs are very similar to savings accounts but offer the option to write a limited number of checks each month.
Best for: Money you might need to use infrequently; investors looking for a little more flexibility than their savings account offers
The last of this trilogy of commercial banking products is the money market account, which operates on similar principles to the CD or savings account. Again, in most cases you’re getting FDIC insurance, which means you don’t have to worry about losing any of that money up to $250,000. That alone makes this the sort of rock-solid option that you don’t have to worry about.
Some key differences do exist, though. Again, money market accounts usually offer better rates than savings accounts, but they also come with more liquidity and might even let you write checks or use a debit card with the account. That additional flexibility means that an MMA could play an important role in your finances alongside a savings account. If you’re using the account just to make deposits and write a monthly rent check, for instance, the MMA could be ideal. However, once again, it has everything to do with the return, so shop around and compare the options not just with other MMAs but with CDs and high-yield savings accounts as well.
Also, note that the main caveat with a money market account is that you’re limited by law to six transactions a month. Exceed that and you’ll be fined; keep exceeding it and the bank will have to convert your account to a checking account.
Learn More: What Is a Money Market Account?
One important note: The FDIC insurance limit of $250,000 is applied per-bank, per-person — not for each account. So, if you have a savings account, CD and MMA at the same bank that have a combined $300,000 in them, you’re not insured on $50,000 of that money.
The bottom line: Debt issued by the Treasury is backed by the full faith and credit of the U.S. government, making it similarly as free from risk as FDIC-insured bank accounts.
Best for: Money you know you won’t need prior to the maturity date of the bond; funds in excess of the $250,000 insured by the FDIC; investors willing to give up some flexibility in search of slightly better returns
So, once you exit the realm of the FDIC-insured, basically sure-bet investments, you are stepping into a different world. However, as great as a 2% return on your savings account is, you will probably need at least some investments that are taking a bit more risk if you want to build a strong portfolio. The next tier up from banking products in terms of higher risk and higher returns are bonds, which are essentially structured loans made to a large organization.
Fortunately for the risk-averse investor, there’s an option for a bond that — just like your FDIC-insured bank accounts — is guaranteed by the full faith and credit of the U.S. government: These are the bonds issued for government debt, known as T-bills, T-notes or T-bonds, depending on how long they take to mature. On your end, treasuries will act just like a CD in many ways. You invest with a set interest rate and a date of maturity anywhere from one month to 30 years from when you buy the bond. You’ll get regular “coupon” payments for the interest while you hold it and then your principle is returned when the bond matures.
The important caveat here involves the liquidity of treasuries. Unlike a CD, you can’t pull out your money before the maturity date, not even for a penalty. That doesn’t mean you’re stuck — you can easily go out and sell the bond on the secondary market. But at that point, you’ve gone from buying and holding treasuries to maturity (incredibly safe) to trading bonds (vastly less safe). While your coupon payments are completely predictable and secure, the face value of your bonds will rise and fall over time based on the prevailing interest rates, stock market performance and any number of other factors. Granted, that could work out in your favor, but only because you’ve taken on additional risk. So, if you aren’t reasonably certain you can hold the bond to maturity, they’re definitely a riskier investment.
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The bottom line: TIPS offer lower yields, but the principle will increase or decrease in value based on the prevailing inflation rates while you hold the bond.
Best for: Money you know you won’t need prior to the maturity date of the bond; funds in excess of the $250,000 insured by the FDIC; investors looking for treasuries but interested in removing inflation-based risk from their portfolio
There’s one risk that the four previous options aren’t really accounting for: inflation. Remember that money is naturally, gradually losing buying power. So while you might face almost no risk of losing money in real terms with a treasury, you do face the risk that inflation will increase and make the value of that money lower, relatively speaking.
That’s why many people turn to Treasury Inflation-Protected Securities, or TIPS. Here, your interest payments are going to be considerably lower than what you would earn on a normal treasury of the same length. However, you’re accepting that lower rate because your principle will increase (or decrease) in value to match inflation as measured by the Consumer Price Index. So, if inflation suddenly spikes to 5%, anyone with TIPS is sitting pretty while people who bought bonds at a fixed 2% rate are basically losing 3% a year.
However, like any other treasuries, you expose yourself to all sorts of additional risk if you have to sell them before they mature, so you should make sure you won’t need to access that money prior to maturity.
The bottom line: These debts issued by state and local governments are a little riskier than treasuries, but come with the bonus of being untaxed at the federal level.
Best for: Taking on marginally more risk in pursuit of marginally better returns; investing while also keeping your tax bill as low as possible; investors looking for relatively safe bonds
Although you won’t get much safer than treasuries, you will get better returns from bonds that represent money borrowed by riskier entities. But you can get slightly better returns with only slightly more risk. Municipal bonds, which are issued by state and local governments, are a good option for just that. Munis, as they’re known in the business, are definitely riskier. After all, there’s almost no chance the U.S. government defaults, but there are definitely cases of major cities filing for bankruptcy and losing their bondholders a lot of money.
But most people are probably aware that a bankruptcy by a major city is pretty rare, and it’s never happened to a U.S. state — though if you want to be extra safe you could steer clear of any states with large, unfunded pension liabilities. And because the federal government has a vested interest in keeping borrowing costs low for state and local governments, it’s made munis tax-exempt at the federal level. So not only are they usually still safe, but they come with the added bonus of reducing your tax bill when compared with many other options.
The bottom line: These debts issued by corporations are just a bit riskier than munis, but usually offer just a bit more interest income.
Best for: A measured increase in your portfolio’s risk to improve returns; investors looking to diversify their bond holdings
Like governments of various sizes, corporations will also issue debt by way of selling bonds. Like munis, this can mean you’re still in safe territory, but it’s also no sure bet. Plenty of corporations that are teetering on the edge of solvency will offer high yields for the high risk — usually referred to as “junk bonds” — and those aren’t a great call if you’re looking for something really safe.
However, like munis, there are also plenty of cases where the financial stability of the company is so sound that you can feel very confident that a default is extremely unlikely. A public company will regularly issue financial reports detailing assets, liabilities and income, so you can get a clear sense of where it stands. And if you, like most people, don’t really know your way around a balance sheet or income statement, you can rely on rating agencies like Moody’s or Standard and Poor’s. In most cases, an AAA-rated bond represents minimal risks if you hold it to maturity.
In general, corporate bonds are inherently riskier than treasuries and often riskier than munis, but if you’re sticking to major, blue-chip public companies, they’re still in the realm of being very safe. After all, what are the odds that a company like Apple or Google really has to file for bankruptcy at some point in the next few years? So, if you steer clear of the lower-rated options and hold them to maturity, you’re most likely only taking very marginal amounts of risk on losing part or all of your principle.
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The bottom line: Stocks are riskier than bonds, but by purchasing large funds that represent hundreds of stocks and holding them for very long time periods, you can mitigate much of that risk and enjoy strong returns compared with bonds.
Best for: Long-term investments you won’t be cashing in for years or even decades; younger investors with plenty of time to be patient with the fluctuating markets; investors interested in growing their money at a faster rate than bonds and banking products can provide
It’s worth taking a pause to note that investing in the S&P 500 and ETFs is a step into another tier of risk entirely. Owning stocks is much riskier than buying and holding most bonds. Stock markets can be incredibly volatile, and on any given day you might gain or lose a big chunk of your investment. And given that a GOBankingRates survey of non-investors found that the primary factor keeping more people from buying stocks is a lack of funds to commit, it’s hard for many families to put at risk money they only freed up for saving by making major sacrifices elsewhere.
It’s next to impossible for a working family to build up a nest egg that can secure a comfortable retirement or send kids to college without the additional growth stocks provide, making for something of a catch-22 for many investors: They can’t afford to take chances with their hard-won savings, but in another crucial way, they also can’t afford not to take chances. Fortunately, there are two basic strategies you can incorporate that help defray much of the risk of investing in stocks.
The first strategy is using index funds or ETFs to build diversification into your portfolio. Any one company can befall a disaster, but if you own shares of a fund holding stock in hundreds — or even thousands — of different companies, you’re spreading that risk out by a lot. All the better if you’re getting shares in hundreds of the sort of large, stable companies that are known as “blue-chip stocks” in investing parlance. One company might sink due to a disaster, but a few hundred at the same time? Really unlikely.
The second strategy to defray much of the risk of stock investments is to own stocks for a very, very long time. While stock markets are incredibly chaotic over any one week, month or even year, they actually become remarkably predictable when you start to look at them in terms of decades. Over its history, the S&P 500 has returned roughly 10% a year. And although there have been years where stocks plunged 30% or even 40%, the markets have always rebounded over the following years.
If you had owned an S&P 500 ETF during the 2008 financial crisis, your investment would have lost almost half its value in just a few months, but you would have recovered all of it within about three years and would have been up a little over 25% by five years out. So, if you’re treating stock investments as being illiquid and only investing money you can be confident you won’t need to tap into for at least a few years, you’ll have the flexibility to just wait out a nasty downturn in the economy and get a piece of the recovery that has always followed.
As for which index to invest in, the S&P 500 is one of the most popular options. The index includes almost all blue-chip stocks and that long history of returning roughly 10% a year — an incredible return for how little risk is involved over a long time frame. You might also consider the Russell 1000, which is made up of the 1,000 most-valuable American companies — giving you double the diversification.
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The bottom line: Owning stock in an individual company is much riskier than the other options, but dividend stocks will provide a steady return whether markets are up or down.
Best for: Long-term investments that still produce passive income; investors looking to invest in order to create a regular income stream; younger investors reinvesting dividends to maximize growth
Owning stock in an individual company is much riskier than anything else on this list. You’re just one massive, systemic organizational failure away from losing your entire investment, and it’s hard to say when and where that might happen. After all, Enron investors likely felt pretty spiffy about their holdings right up until the end. And even short of that, one company can easily go into a downtrend or start reporting poor earnings and underperform the market. That said, investing in the sort of stalwarts that have decades of history, make loads of money and pay a regular dividend might be riskier than your savings account by orders of magnitude, but it’s also still a relatively safe bet, especially if your portfolio is balanced with other, less risky options.
And dividend stocks present some especially strong options for a few reasons. A dividend is a regular cash payment issued to shareholders — really the most direct way a stock can direct business success back to its investors. It also, typically, means some important things for the risk profile of that stock.
First, that dividend is much more consistent and gets paid out whether the stock is up or down. So even if your stock is underperforming in terms of its share value, you’re still getting something back, making it easier to hold onto the stock and wait out a downswing. Second, the dividend acts as something of a bulwark against falling share prices. Dividends are set as a per-share payment, but investors typically focus on the “dividend yield,” which is the percentage of your investment that will be returned as dividends in a given year. So, as stock prices fall, you’re paying less and less money for that same dividend, meaning the yield keeps climbing. And the higher that yield gets, the harder it’s going to be for bargain-hunting dividend investors to pass it up. That’s not going to mean much for a company that’s obviously headed for bankruptcy — a bad investment regardless of the dividend yield — but it will help prop up the share price for a company that’s just going through some tough times.
Companies can and will slash their dividends in times of extreme hardship. It’s rare, as it usually results in the stock plunging — consistency is what people like about dividends, so they tend to react very poorly when a dividend appears less secure — but dividend payments are less secure than the coupon payment on a bond, for example, which is fixed. That said, if you shop around for companies that not only offer a strong yield but have a long track record of consistently increasing their dividend on a regular basis — sometimes referred to as “dividend aristocrats” — you can mitigate a lot of that risk.
How Safe Investments With the Highest Returns Compare
The ideal portfolio is one with both minimal risk and maximum returns, but in reality, there’s always some compromise necessary to find the right balance. Although the relative certainty provided by your savings account is great, the following infographic should make it clear that the returns it will provide aren’t quite enough on their own to really build wealth. Likewise, while the returns provided by an S&P 500 fund are much better, it’s important to look at them in the context of the risk that you could suffer losses — especially in the short term — that banking products just don’t have.
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Joel Anderson is an investing writer who has been watching and writing about markets for almost a decade. His focus is on synthesizing complicated topics in the financial world into something understandable to the relative investing novice, helping more Americans understand more about their money.
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