There is no single best way to invest money for a risk-averse investor. Even the best investments carry some level of risk. A “low-risk” investment generally refers to an investment that is unlikely to lose money. When examining how to invest in low-risk investment options, it’s important to balance risk and reward, as lower-risk investments typically have lower returns. Nevertheless, there is a place for low-risk investments in investor portfolios, especially for money you can’t afford to lose.
10 Low-Risk Investment Options
All 10 of these investment options have a low probability of losing the investors’ money, but it’s important to understand that money can be “lost” in various ways — like an investment trading down in value or losing purchasing power. Review this list of secure investments and choose which ones match your investment objectives and risk tolerance.
Here are 10 low-risk investment options for your money:
Certificates of deposit are called time deposits because you invest your money for a certain period, during which you’re paid a stated interest rate that is usually fixed, although some CDs do have rates that change over time. The FDIC insures each bank CD up to $250,000.
CDs are good for investors who want to protect their principal and are willing to tie up their money for the specific period. They usually pay higher interest rates than savings accounts, but you’ll typically pay a penalty of a few months’ interest if you withdraw your money before the CD matures.
2. Treasury Bills
Treasury bills are U.S. government securities with maturity dates from a few days to 52 weeks. A public auction determines the rates.
Treasury bills are backed by the “full faith and credit” of the U.S. government. This makes Treasury securities the closest thing available to a risk-free asset, because the government can always borrow more money to pay off existing obligations.
Treasury bills are best for short-term investors who need secure investments paying high interest compared with savings accounts. Because they are exempt from state and local income taxation, Treasury bills also appeal to investors in higher tax brackets.
3. Treasury Bonds
The federal government issues Treasury bonds in 30-year maturities, paying a fixed interest rate every six months for their entire term. This interest is state- and local-tax-free, just like with Treasury bills, and they also share the “full faith and credit” backing of the U.S. government.
Treasuries do carry interest rate risk — bond prices fall when market interest rates rise. And Treasury bonds, like all fixed-income investments, are subject to inflation risk, which refers to an investment’s loss of purchasing power over time.
Learn More: Advantages and Disadvantages of Treasury Bonds
Treasury Inflation-Protected Securities are government investments that adjust their return based on inflation. TIPS are issued in terms of five, 10 and 30 years and pay fixed interest rates twice per year. But the principal rises and falls regularly based on the inflation rate, as measured by the Consumer Price Index. TIPS are backed by the full faith and credit of the government.
TIPS appeal to investors who want to protect their investments against rising inflation. But initial stated interest rates can be low. The 10-year TIPS auction held on Jan. 31, 2018, resulted in an interest rate of 0.50 percent.
5. Fixed Annuities
Fixed annuities represent the promise of an insurance company to pay you a fixed rate of interest for a specified period. Growth within the annuity is tax-deferred until you begin taking out payments. Some fixed annuities guarantee payments for the rest of your life, ensuring you don’t outlive your money.
Annuities come with a host of restrictions, including surrender charges that typically prevent you from selling the annuity for several years. And because annuities are primarily used for retirement savings, you’ll pay a 10 percent penalty on money you withdraw before age 59.5. Fixed annuities carry inflation risk because your payments typically don’t change over time. Costs of an annuity, including the commission you pay to your broker, are often high as well.
6. Money Market Account
A money market account is very similar to a savings account, and it registers at the same level of risk because both options carry FDIC insurance of up to $250,000. Rates tend to be similar as well. As of Feb. 5, 2018, the national average money market rate was 0.10 percent versus the national average savings rate of 0.07 percent.
The primary difference between a savings account and a money market account is in how you access your money. Money market accounts typically offer check writing, but savings accounts don’t. Federal law limits withdrawals from both types of accounts to six per month.
7. Savings Accounts
Backed by the same FDIC insurance that covers CDs, savings accounts are good choices for investors who want to safely build up reserves but who might need access to their money. Savings accounts allow six monthly withdrawals without penalty, so they’re more liquid than CDs.
The downside of savings accounts is usually their low interest rate. As of Feb. 5, 2018, the national average savings account rate was a meager 0.07 percent. But you can usually find much higher rates by shopping around. Online bank CIT, for example, pays a 1.55% annual percent yield in its Savings account.
8. US Savings Bonds
The U.S. government still issues savings bonds with face values between $25 and $10,000. You can buy Series EE bonds, which are traditional savings bonds, and Series I bonds, which carry an inflation-adjustment component. Interest on savings bonds is compounded semiannually. You’ll forfeit the most recent three months of interest earned if you cash in a savings bond within five years of buying it.
Savings bonds let younger or first-time investors watch their money grow with no worries about losing any of their principal.
9. Municipal Bonds
State and local entities typically issue municipal bonds to raise funds for building roads or other projects that serve the public. Municipal bond interest is federally tax exempt and typically state-tax-free for residents of the state of issue. Thus, muni bonds are particularly well-suited to higher-income investors.
Many municipal bonds are rated AAA and carry insurance, protecting them against default. This makes them excellent low-risk investments in terms of capital risk. But like all fixed-income investments, muni bonds carry both interest rate risk and inflation risk.
10. S&P Index Fund
An S&P index fund tracks the performance of the Standard & Poor’s 500 index, a widely used barometer of overall stock prices. Although not traditionally considered a “low-risk” investment, if you have a long investment time horizon, an S&P index fund might be less risky than you think.
Despite being subject to short-term volatility, the S&P 500 Index has never had a 20-year period where it has lost money for investors, and stock indices in general have higher long-term returns than any other investment on this list. Thus, long-term investors with acceptable risk profiles might add an S&P Index fund to their overall portfolio.
Keep Reading: Learn to Safely Invest Your Money in 10 Steps