In investing, there's always a balance of risk versus reward. But this balance can take on a wide spectrum, ranging from YOLOing your money on Dogecoin to investing in various index funds.
But for many investors, reducing risk and focusing on income generation and preserving capital is what's most important. And the great news is that you don't always have to give up meaningful returns to lower risk.
In fact, there are several low risk investments you can use to put your money to work while reducing or practically eliminating risk altogether. And while you might not always outperform 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 investing strategies, there are a few important factors you should consider before making any investment.
- Timeframe: Generally, investors gravitate to lower risk investments if they're investing for the short term. In contrast, for long-term investing, you can take slightly more risk and rely on time and compound interest to work in your favor.
- Income Goals: Many low risk investments generate fixed-income, but how they pay out income can vary. For example, some investment products compound interest annually, semi-annually, or daily, while others pay out investors at term end or quarterly. Decide if income generation is important for your portfolio but also consider how returns are paid out.
- Passive vs. Active Investing: How much time are you willing to spend on monitoring your portfolio? Passive investors generally prefer to dollar-cost average into the market or fixed-income investments to keep things simple. But more active investors might enjoy hunting down the very best interest rates, or researching different index or bond funds to invest in.
The Best Low Risk Investments Right Now
If you want to balance risk while still making meaningful returns, you're in luck. Here are some tried and true, low risk investments you can use to create a robust, safer 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 since you need even larger returns to offset the impacts of inflation.
However, the rise of mobile banks and rising interest rates means high-yield savings accounts can be a pretty solid, low risk investment. And they're the perfect vehicle for stashing your emergency fund or extra cash you need in the near future.
Some leading online banks with excellent high-yield savings accounts include:
- Aspiration: Earn up to 5% APY through Aspiration's Spend & Save account.
- CIT Bank: Earn 2.10% APY with the Savings Connect account.
- Current: This mobile bank pays 4% APY on up to $6,000.
- Varo: Earn up to 5% APY on up to $5,000.
To maximize your returns, you can spread out your cash amongst two or more high-yield accounts to avoid cash limits some of these banks have. But even keeping the bulk of any extra cash you have in a high-yield savings account beats most regular banks.
2. I 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 an inflation rate. In other words, these bonds are specifically designed to help offset the impact of inflation and provide a shelter for your cash.
At the time of writing, I Bonds purchased through October 2022 earn 9.62%. This rate changes every 6 months to adjust for the inflation rate, and interest compounds semi-annually.
The main downside of I Bonds is that you can only purchase $10,000 in electronic bonds and $5,000 in paper bonds per year. And if you cash them out before five years, you lose the previous three months of interest. However, they're still a safe investment with high returns you can lean on to protect some cash.
3. No-Penalty CDs
Certificates of deposits, or CDs, are another popular, low risk investment that are useful for generating fixed income. CDs are savings products that typically have a specific term length that you deposit your money for to earn interest. The upside is that you can reliably count on your CDs to generate a specific return. The main downsides are that CD rates are generally low, and fixed-rated 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 no-penalty CD before the end of the term without paying penalties. So, you still earn fixed interest on your cash while maintaining flexibility.
4. Treasury Bills
A treasury bill (T-Bill) is a short-term U.S. debt obligation that the U.S. Treasury Department issues. These bills are safe since they're backed by the U.S. Treasury. Plus, T-Bills have terms varying 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's a $100 minimum purchase for T-Bills, so it's also a viable investment if you don't have much money. As for how you earn interest, you buy T-Bills at a discount of their face value and then receive the full face value upon the end of the term.
Like many other low risk investments, the main downside of T-Bills is that you're typically looking at 2-3% returns. However, the short-term nature of this investment largely makes up for the lower returns, and T-Bills are as safe of an investment as you can find.
5. Preferred Stocks
One common downside of investments with low risk is that you usually sacrifice growth for security. This isn't always a downside, especially if you're investing for the short term and protecting your money is what matters most.
That said, preferred stocks provide a nice middle ground between investments like bonds and regular stock investing. With preferred stocks, you have higher rights than common stocks that result in receiving dividend payments first. And in the event of liquidation, preferred stockholders get paid first above common stockholders. The main downsides are a lack of voting rights and less room for capital appreciation in many cases.
In short, preferred stocks have the benefits of dividend income and provide some protection in the event of liquidation or cash flow disruptions. However, you get less room for appreciation as you would with regular stocks. But if lowering risk is your goal, preferred stocks let you still get into the market while reducing some risks.
6. Money Market Accounts
A money market account (MMA) is a deposit account that's 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 how many 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 writing and have very low or non-existent minimum deposit requirements.
7. Corporate & Municipal Bonds
Unsurprisingly, 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 fund business-related projects, whereas state and local governments issue municipal bonds to fund their own projects.
Bonds are considered low risk investments because the entities that back them are generally solid. Corporate bonds are slightly riskier than municipal bonds since corporations can go bankrupt, but they're still a lower-risk investment you can mix into your portfolio.
The downside of bonds is that returns are generally lower than the market in exchange for reducing risk. And bonds have various maturation periods, so you're locking up your money for a set amount of time. However, more conservative investors can still use bonds to create income and a more diverse portfolio that's not just made up of stocks and ETFs.
Pro Tip: For higher returns, you can also look into platforms like Worthy Bonds. These private bonds have a 36-month term and currently pay 5% interest. Bonds are backed by assets owned by the borrowing businesses Worthy Bonds lends to, plus U.S. Treasury securities, real estate, and CDs.
8. Cash Management Accounts
One final low risk investment you can consider are cash management accounts. These accounts are alternatives to checking and savings accounts that many online brokers and robo-advisors offer to let customers hold extra cash on their platforms. This makes it easier to move your money around, and the top cash management accounts also have FDIC insurance and pay pretty competitive interest rates.
Some cash management accounts you can consider include:
- Wealthfront Cash Account: This popular robo-advisor currently pays 2.55% APY and has a $1 funding requirement. You can read our Wealthfront review to learn more about investing through Wealthfront as well.
- Betterment Cash Reserve: Like Wealthfront, Betterment lets you earn 2% APY with its cash reserve account.
- Personal Capital: With Personal Capital Cash, you earn 2.02% APY and 2.15% APY if you're a client of its investment management service. There's no minimum balance requirement or fees either. And Personal Capital has a range of other great free features like budgeting tools, a net worth tracker, and investment fee analyzer.
Again, these cash management accounts are most useful if you're an existing customer since you can quickly move funds around. But they're still a standalone low risk investment you can try out.
Low risk investing might not yield the same results as growth stocks or private equity. But in many cases, protecting your capital and achieving fixed income is more important than pure growth.
Ultimately, you have to decide on what 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 investing options.