Low Risk Investments

Low risk investments can be a great option if your main goal is to safeguard your savings and earn a stable return. Here are the safest investments.

What Is a Safe Investment?

Safe investments can keep your money safe, while providing some modest, steady returns. The main purpose is to preserve your original investment.

Unlike investing in stocks - which can crash at any time - low risk investments carry little risk of losing your money.

However, the trade-off is that low risk investments don't provide a high return. If you want higher returns, you will need to take on a higher risk investment.

When to Pick a Low Risk Investment

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Low risk investments are a good option in these situations:

• If you need the money within the next 5 years
  
• If you're nearing retirement
  
• During an economic downturn
  
• While waiting until you find a better investment

Generally, it's smart to look at low-risk options if you'll need the money in the next few years (like to buy a house, plan a wedding, etc.). You can't afford to lose it if the stock market crashes.

If you don't need the money in the next several years, then you can afford to take on more risk. You'll have time to ride out the ups and downs of the market.

What to Consider

When you look for a low risk investment, you have two possibilities:

No risk investments: You will not lose any of your money. However, no-risk investments typically only yield very modest returns.

Some risk investments: Some investments will carry a certain amount of risk, meaning that you may break even over a longer period of time or deal with a small loss.

The Best Low Risk Investments

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Take a look at some of the best options for low risk investments.

High Yield Savings Account

A high yield savings account is best if you will need access to your money. It's an ideal place to store your emergency fund or savings for short term goals.

Many banks offer competitive interest rates with low fees. Your savings grow risk-free. You can withdraw funds at any time, up to 6 per month.

However, the interest rate can change at any time without warning. In an economic downturn, the APY can drastically go down.

The main advantage of a high yield savings account is that your money is liquid. Many other low risk investments don't allow you to withdraw your money at any time.

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Certificates of Deposit (CDs)

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A certificate of deposit is a type of bank savings accounts. You deposit a fixed amount of money for a fixed amount of time. The CD guarantees a set interest rate over the entire term.

This is good because unlike a savings account, your rate won't change over your term (even if the economy takes a downturn). The longer your term, typically the higher the interest rate.

But the bad part is that your funds are tied up for the entire term. If you withdraw funds early, you'll face a penalty.

CDs are entirely risk-free. The interest rate is usually higher than a regular savings account, but may not beat inflation.

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Preferred Stock

Preferred stocks are like a hybrid of bonds and regular stocks. Preferred stocks pay regular fixed dividends and a higher payout than normal stocks. Preferred stockholders have priority over company profits.

In terms of risk, preferred stocks are safer than common stocks, but slightly more risky than bonds. If a company must reduce dividends, bond holders are paid first, then preferred stockholders, and finally common stockholders.

You can purchase preferred stocks at any online brokerage.

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U.S. Savings Bonds

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Savings bonds are issued by the US Treasury and backed by the federal government. These are essentially loans to the government to help pay for capital projects. You're paid back a fixed interest rate over a set period.

Savings bonds are considered a very safe investment because the likelihood of default is extremely unlikely.

There are two types of savings bonds:

• Series EE: Pays a fixed interest rate. The US Treasury guarantees that the value will double if held for 20 years.

• Series I: Pays a fixed rate plus an inflation-adjusted rate (calculated every 6 months). There's no guarantee of doubling, but they do hedge against inflation.

Savings bonds are longer term investments. You can cash out after 12 months. However, any withdrawals before five years will have a penalty worth 3 months' interest.

You don't have to pay state and local taxes on your interest earned, only federal taxes. And if you use your bonds to pay for higher education, you could even be exempt from federal tax.

Treasury Inflation Protected Securities (TIPS)

Treasury Inflation Protected Securities (TIPS) is a Treasury bond designed to keep pace with inflation. In addition to paying a fixed interest rate, the principal adjusts with inflation.

The principal value of the TIPS will increase when there's inflation. If there's deflation, the principal value will decrease. However, your principal is protected. Even if the final value at maturity is less, you will always be paid your original principal.

Interest earnings and growth of the principal are exempt from state and local income taxes.

You can purchase TIPS in terms of 5 years, 10 years and 30 years. You can buy directly at TreasuryDirect.gov or through a brokerage.

Annuities

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Annuities are long-term investment contracts sold by insurance companies. It's mostly a retirement planning solution.

You make a payment to the company (in either a single lump sum or premiums). In return, the company invests your money and pays you a guaranteed regular stream of income.

There are lots of different options so you can choose according to your risk level and goals.

• Fixed vs variable: Fixed annuities pay you a fixed return rate. These are the least risky, but returns are not very high. Variable annuities allow you to choose the investments. This has more risk, but also the potential for higher returns.

• Immediate vs deferred: Choose to receive income immediately after the purchase. Or defer income payments to a later date (like when you retire).

• Set period vs lifetime: Some will pay for a set number of years. Lifetime annuities pay out until your death.

There is no contribution limit. So if you've already maxed out your 401k and IRAs, annuities is another way to save more for retirement.

Annuities grow tax-deferred. When you begin receiving disbursements, they'll be taxed as ordinary income.

Money Market Funds

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A money market fund is a type of extremely conservative mutual fund. It invests in short-term cash equivalent securities, like US Treasury, CDs, and commerical papers. These are very low-risk investments.

The goal is to maintain a stable value, while paying out dividends to investors. However, the returns aren't very high.

The main advantage is that it's a very safe investment that you can take out at any time. Your money isn't tied up and there's no penalty to withdraw. So it's an ideal place to store cash for the short term until you need it.

You can invest in money market funds through any online brokerage.

Stable Value Funds

A stable value fund is an option found within most 401(k) plans. These funds are insured by banks and insurance companies against changes in the market. The main goal is to preserve your principal while providing steady returns.

Usually, when interest rates increase, the value of stocks and bonds will decrease. But with stable value funds, changes in the economy won't affect your return. You'll receive the fixed interest payments no matter what.

Even if there's a recession, your returns are guaranteed. But because of the low risk, returns are generally low too. Though returns are typically higher than money market funds.

Stable value funds work best for people close to retirement looking for a more steady investment.

Cash Value Life Insurance

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Your life insurance can also be a source of investment. Permanent policies also have a cash value component. In whole life insurance, the cash value is guaranteed.

A portion of your premiums goes into a cash value account. This acts like an investment/savings account. The insurance company invests this amount, so it grows over the life of the policy.

You can borrow against your cash value, or withdraw a portion of the amount. A huge benefit is that your cash value is tax-deferred, so you won't pay any taxes. However, if you withdraw, your death benefit will be reduced.

Bottom Line

Low risk investments can be beneficial for investors looking to maintain their principal and earn a little extra in addition.

However, low risk investments won't provide high returns. If you have time to ride out the volatility of the stock market, you can get more growth with higher-risk investments.