If the investment markets are volatile, many investors look for low-risk investments to retain more of their hard-earned money. Read on if you want to lower your risk.
What are Low-Risk Investments?
People often talk about low-risk investments. They usually refer to investment vehicles where you won’t lose any or very little of your investment. While these investments might not yield much in terms of returns, most or all of your principal will remain intact.
6 Best Low-Risk Investments
These are low-risk investments that you can make right now.
High-Yield Savings accounts
High-yield savings account at a brick-and-mortar or online bank is a safe way to save some money. Although interest rates are still very low, they are rising. You should shop around to find the best rate. Bank of America paid between 0.01% to 0.04% APY on July 21, 2022, based upon aggregate account balances. Ally Bank is a line bank that was paying 1.750% in APY that day.
Also read: Top 8 Short-Term Investments In 2022
Money Market Accounts
A money-market account works in the same way as a savings account. You can also write checks on it. Like savings accounts, money market accounts are usually insured by the FDIC or, if you get one from a credit union by the NCUA. Your money is guaranteed protection by the U.S. government even if the credit union or bank fails.
The interest rate on money-market accounts is generally the same as that for savings accounts. CIT Bank paid 1.30% on their money-market account as of June 22, 2022, with a minimum deposit of $100.
Certificates of Deposit
A certificate or deposit (or CD) is bought from a bank, or credit union, and is FDIC or NCUA insured. CDs have a fixed interest rate for a set period. The interest rate will be higher if the term length is longer. However, sometimes the difference is very small. If you are considering this route, it is best to obtain a short-term CD. If rates rise to 3% in the next year, you don’t want to lock yourself into a 5-year CD that pays 1%.
Series I Savings Bonds
Series I savings bond is issued by the U.S. government and backed by it. They pay interest each month. The interest rate is a combination of a fixed interest rate and a variable inflation-based rate. It is calculated twice per year. The interest rate was 9.62% until October 2022. You can cash in savings bonds as soon as one year after they were purchased. However, the interest rate on savings bonds will continue to earn interest for a period of 30 years. You will be charged a penalty of three months of interest if you cash them in after five years.
Treasury Bonds, Bills, and Notes
Treasury bonds notes and bills are debt issued by the U.S. government debt. when you by purchasing these items, you are effectively loaning the government money It agrees to repay you interest.
The term is what differentiates bonds from notes and bills. Treasury bills are short-term securities that have a term of less than one year.
You can buy a Treasury bill at a lower price than its face value when you purchase it. The face value is the amount that matures at the expiration of the term. You earn interest on the difference between the face value and what you paid. You might purchase a $100 Treasury bill for $95, which has a face value of $100. It matures one year later and you receive $100. You get $5 more.
Treasury bonds and notes work a little differently. Treasury notes can mature between one and ten years, while Treasury bonds can last for more than ten. They pay a fixed interest rate twice a year, and at maturity, they pay the face or par value.
Similar to the U.S. Treasury issues bonds to raise funds, and corporations also issue bonds. Because of the possibility that the company will go bankrupt, they are riskier than U.S. bonds. However, if it does, bondholders get paid first to stockholders. Corporate bonds are less dangerous than stocks.
Corporate bonds have a face or par value and maturity. They also come with a coupon rate. Although the par value is usually $1,000, bonds can sell for less or more. Maturity refers to the time period before the bond matures. In order to repay the par value, the company must pay it back. The coupon rate refers to the interest rate the corporation will pay bondholders during the term of the bond. The interest is paid every six months.
An investor can look at the yield to maturity to see how bonds compare. Bonds can be sold at different prices. This is the interest you will earn plus the par value, as compared to what you paid for the bond.
Let’s say you buy a $1,000 bond and it matures in 10 years with a coupon rate of 4.00%. You’ll receive $40 per annum. The yield to maturity of the bond, which is sold at par value and is equal to the coupon rate, is 4%.
However, if you buy the same bond for $900, your yield to maturity is 5.31%. Although you paid less for the bond when it was purchased, you still get $40 per year in interest and the $1,000 maturity par value. The maturity yield was higher.
If you buy that bond at $1,100, the yield to maturity is 2.84%. The interest rate will be the same at $40 per year and $1,000 at maturity. However, the amount you paid for the bond is higher so the yield is lower.
What is the Safest Investment with the Highest Return?
Investing is about taking risks. The lower the return, the more risky the investment. It is important that you know how much risk your investment will entail. It is also important to consider whether you may need access to your money.
You absolutely don’t want to lose any principal under any circumstances. If you want to be in a position to withdraw funds when you need them, Search for the best savings account or money market rate.
Are There Any Investments That Are Risk-Free?
Asking a group of people the question might result in some saying, “Cash in a bank” or, “Put it under the mattress.” However, even this isn’t completely free from risk. Inflation risk is when the amount of money you earn on your investment doesn’t keep pace with inflation. Your balance may not be declining, but your real purchasing power is.
Let’s say you have $1,000 saved in a savings account earning 2.2% interest. You’ll eventually have $1,020 after a year. However, if groceries cost more than $100 per week, then you will lose purchasing power.
You should only invest in investments that allow you to sleep well at night. You should stop worrying about losing money if you are waking up every night.