Do the volatile ups and downs of the stock market make your stomach churn? Does the thought of buying a fixer-up to flip give you pause? Do you break out in a nervous sweat whenever someone suggests getting into crypto?
If you answered yes to any of these questions, you probably have a low risk tolerance. You worry more about losing money than missing out on the opportunity to make more of it.
Being cautious about how you invest your money is a good thing. But if you’re so risk-averse that you avoid investing altogether, you’re putting your money at greater risk than you think.
Do Safe Investments Actually Exist?
When you think about the risks of investing, you probably think about losing principal, i.e., the original amount you invested. If you keep your money in a savings account, there’s virtually no chance of that happening because deposits of up to $250,000 are insured by the Federal Deposit Insurance Corporation (FDIC).
But consider that savings accounts, on average, pay just 0.13% APY. Then you have a year like 2022, when inflation hit 8.5%.
So while you’re not at risk of losing principal by stashing your funds in savings accounts, you could still lose purchasing power. In personal finance, purchasing power risk means that your money will lose value if it doesn’t earn enough to keep up with inflation. Say inflation had continued at 8.5%, buying $100 worth of groceries would have costed you $108.50 a year later. If you’re saving over decades toward retirement, you’ll be able to buy a whole lot less groceries in your golden years.
There’s also the risk of missed opportunity. By playing it too safe, you’re unlikely to earn the returns you need to generate income and grow your savings into a sufficient nest egg.
Though there’s no such thing as a risk-free investment (all investing involves risk!), there are plenty of safe ways to invest your money.
The 8 Best Low-Risk Investments
Here are eight options that are good for conservative investors. (Spoiler: Gold, bitcoin and SS Reader stocks did not make our list.)
1. CDs
If you have cash you won’t need for a while, investing in a CD, or certificate of deposit, is a good way to earn more interest than you’d get with a regular savings account.
You get a fixed interest rate as long as you don’t withdraw your money before the maturity date. Typically, the longer the duration, the higher the interest rate.
Since they’re FDIC insured, CDs are among the safest investments in existence. But low risk translates to low rewards. Those low interest rates for borrowers translate to lower APYs for money we save at a bank. Even for five-year CDs, the best APYs are just over 1%.
You also risk losing your interest and even some principal if you need to withdraw money early. In comparison, you can withdraw money from a savings account without fear of penalty.
If CDs sound a little too illiquid for your cash needs, a high-yield savings account may be the better move. Some of the best high-interest savings accounts offer an interest rate at 1.00% or more — and you can access that cash when you need it. You can also see if your preferred bank or credit union offers money market accounts, which might have an even better APY than a high-yield savings account.
2. Money Market Funds
Not to be confused with a money market account, money market funds are actually mutual funds that invest in low-risk, short-term debts, such as CDs and U.S. Treasurys. (More on those shortly.)
The returns are often on par with CD interest rates. One advantage: It’s a liquid investment, which means you can cash out at any time. But because they aren’t FDIC insured, they can technically lose principal, though they’re considered extraordinarily safe.
3. Treasury Inflation Protected Securities (TIPS)
The U.S. government finances its debt by issuing Treasurys. When you buy Treasury bonds, you’re investing in treasury bonds backed by the “full faith and credit of the U.S. government.” Unless the federal government defaults on its debt for the first time in history, investors get paid.
The price of that safety: pathetically low yields that often don’t keep up with inflation.
TIPS offer built-in inflation protection — as the name “Treasury Inflation Protected Securities” implies. Available in five-, 10- and 30-year increments, their principal is adjusted based on changes to the Consumer Price Index. The twice-a-year interest payments are adjusted accordingly, as well.
If your principal is $1,000 and the CPI showed inflation of 3%, your new principal is $1,030, and your interest payment is based on the adjusted amount.
On the flip side, if there’s deflation, your principal is adjusted downward.
If the risk of deflation has you worried about investing in TIPS, there’s nothing wrong with investing in treasury bonds, treasury notes, and savings bonds. Treasury bonds mature in 30 years and are relatively low yield, but they are pretty much a sure thing. If you can’t afford to have your funds tied up for too long, you can also consider treasury bills. Some treasury bills can mature in just a few days.
4. Municipal Bonds
Municipal bonds, or “munis,” are bonds issued by a state or local government. They’re popular with retirees because the income they generate is tax-free at the federal level. Sometimes when you buy muni bonds in your state, the state doesn’t tax them either.
There are two basic types of munis: General obligation bonds, which are issued for general public works projects, and revenue bonds, which are backed by specific projects, like a hospital or toll road.
General obligation bonds have the lowest risk because the issuing government pledges to raise taxes if necessary to make sure bondholders get paid. With revenue bonds, bondholders get paid from the income generated by the project, so there’s a higher risk of default.
5. Investment-Grade Bonds
Bonds issued by corporations (called corporate bonds) are inherently riskier than bonds issued by governments, because even a stable corporation is at higher risk of defaulting on its debt. But you can mitigate the risks by choosing investment-grade bonds, which are issued by corporations with good to excellent credit ratings.
Because investment-grade corporate bonds are low risk, the yields are low compared to higher-risk “junk bonds.” That’s because corporations with low credit ratings have to pay investors more to compensate them for the extra risk.
6. Target-Date Funds
When you compare bonds vs. stocks, bonds are generally safer, while stocks offer more growth. That’s why as a general rule, your retirement portfolio starts out mostly invested in stocks and then gradually allocates more to bonds.
Target-date funds make that reallocation automatic. They’re commonly found in 401(k)s, IRAs and 529 plans. You choose the date that’s closest to the year you plan to retire or send your child to college. Then the fund gradually shifts more toward safer investments, like bonds and money market funds, as that date gets nearer.
7. Total Market ETFs
While having a small percentage of your money in super low-risk investments like CDs, money market funds and Treasurys is OK, there really is no avoiding the stock market if you want your money to grow.
A total stock market exchange-traded fund (ETF) will invest you in hundreds or thousands of companies. Usually, they reflect the makeup of a major stock index, like the Wilshire 5000. If the stock market is up 5%, you’d expect your investment to be up by roughly the same amount. Same goes for if the market drops 5%.
By investing in a huge range of companies, you get an instantly diversified portfolio, which is far less risky than picking your own stocks.
You can even invest in bond mutual funds — even lower risk than other mutual funds because it invests solely in bonds.
If you’re playing day trader, the stock market is a risky place. But when you’re committed to investing in stocks for the long haul, you’re way less exposed to risk. While downturns can cause you to lose money in the short term, the stock market historically ticks upward over time.
8. Dividend Stocks
If you opt to invest in individual companies, sticking with dividend-paying stock is a smart move. When a company’s board of directors votes to approve a dividend, they’re redistributing part of the profit back to investors.
Dividends are commonly offered by companies that are stable and have a track record of earning a profit. Younger companies are less likely to pay dividends because they need to reinvest their profits. They have more growth potential, but they’re also a higher risk because they’re less established.
The best part: Many companies allow shareholders to automatically reinvest their dividends, which means even more compound returns.
Pros and Cons of Safe Investments
Safe investments might be good for your blood pressure, and they inherently keep your money (mostly) protected, but they also come with some downsides. When prioritizing safe investments, you’ve got to be willing to take the good with the bad. Here’s what that looks like:
Pros
- Many safe investments, like money market accounts, high-yield savings accounts, certificates of deposit and savings bonds, are easier to understand for novice investors.
- Some low-risk investments keep money liquid.
- Money is likely to grow over time without risk of major losses.
Cons
- The interest rate on a low-risk investment may not keep up with inflation.
- Some safe investments keep money somewhat illiquid, despite meager interest rates.
- Investors face missed opportunity; their low-risk portfolio might have grown tenfold had they taken higher risks.
Robin Hartill is a certified financial planner and a senior editor at The SS. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]. Timothy Moore, who covers banking, investing and insurance, among other topics, contributed to this report.