Stocks and bonds are considered low-risk/low-return investments. As inflation accelerates and the Federal Reserve continues to hike interest rates to contain price increases, the US could be on the brink of a recession.
Building a portfolio with at least some lower-risk assets can help you weather market volatility.
The downside of reducing risk exposure is that investors will likely earn lower returns in the long run.
This may be okay if you want to preserve capital and keep a steady stream of interest income flowing.
But consider investing strategies that align with your long-term objectives.
For example, higher-risk investments like stocks have segments (like dividend stocks) that lower relative risk while still offering attractive long-run returns.
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What to Consider
Depending on your risk tolerance, several scenarios can occur:
- There is no risk — you will never lose a dime of principal.
- There is some risk — it’s fair to say that you will either make a profit or lose some money over time.
However, there are two caveats: low-risk investments tend to yield lower returns than riskier investments, and inflation can reduce the value of money invested in low-risk funds.
Low-risk investments, on the other hand, tend to lose value over time. That’s why low-risk investments make great short-term investments or a haven for an emergency fund. Higher-risk investments, however, tend to yield higher returns in the long run.
Best low-risk investments in 2024
1. High-yield savings accounts
A savings account is not an investment, but it does offer a modest return. You can find the best savings accounts by searching online, but you can also get a bit more if you look at the rate tables and compare different options.
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A high-yield savings account is completely safe, meaning you will never lose money. The majority of high-yield accounts are insured by the government, up to a maximum of $250,000 for each account type per bank. This means you will be compensated even if your financial institution fails.
The dollar does not depreciate, although inflation can reduce its value.
2. Short-term certificates of deposit
Bank CDs are always risk-free in an FDIC-backed account unless you withdraw money early. To get the best bank CD rates, you’ll need to search online and compare the rates offered by different banks.
With interest rates expected to go up in 2022, owning short-term CDs and reinvesting them as rates increase may make sense. You don’t want to be locked into under-market CDs for long periods.
A no-penalty short-term CD allows you to avoid the usual penalty for early withdrawal, allowing you to withdraw your funds and then move them into a higher-paying CD without the usual fees.
If you keep your CD until the term expires, the bank guarantees to pay you a fixed interest rate over the term.
Some savings accounts offer higher interest rates than some CDs. However, these high-yield savings accounts may require large deposits.
If you withdraw money early from a CD, you will usually lose interest. Some banks may also charge a loss of principal, so it is important to check the rules and CD rates carefully before investing.
If you lock into a long-term CD, and overall rates increase, you will earn a lower return. To get market rates, you will have to cancel your CD, and you will usually pay a penalty.
3. Money market funds
Money market funds (MMFs) are bundles of certificates of deposit (CDs), short-term bonds, and other risk-free investments that are pooled together to provide diversification. MMFs are usually sold by broker-dealers and mutual fund firms.
Unlike collateralized debt obligations (CDs), money market funds are liquid, meaning you can usually withdraw funds whenever you want without penalty.
As a rule of thumb, MMFs are generally safe, according to Ben Wacek, president and founder of Guide Financial Planning in Minneapolis.
4. Corporate bonds
Companies also issue bonds ranging from relatively low-risk (issued by large, profitable companies) to very risky (issued by high-risk companies). High-yield bonds, also known as junk bonds, are the lowest of the low-risk options.
“There are low-risk, low-quality corporate bonds that are issued by high-yield companies,” says Growing Fortunes Financial Partners founder Cheryl Krueger. “I think those are the riskier options because you have not only the interest rate risk but also the default risk.”
Interest-rate risk: The bond’s market value can increase or decrease depending on the changes in interest rates. Bond values increase when interest rates decrease and bond values decrease when interest rates increase.
Default risk: The company may default on interest and principal repayments, leaving you with no return on your investment.
Choose bonds that mature over the next several years to reduce interest rate risk. Long-term bonds tend to be more sensitive to interest rate fluctuations. Reduce default risk by choosing high-rated bonds issued by large, well-known companies, or by investing in funds that hold a diversified basket of these bonds.
Most people think bonds are riskier than stocks, but they’re not. Neither asset class is completely risk-free.
5. Fixed annuities
An annuity is an agreement with an insurance company to pay a certain amount of money over a certain period in exchange for an initial payment.
It can be structured in many different ways, such as being paid over a fixed period, such as 20 years, or until the client passes away.
A fixed annuity promises to pay a specified amount, typically monthly, over a specified period. It can be paid in one of two ways: you can pay a lump sum and get your payout right away, or you can pay into the annuity over time and the annuity begins to pay out at a future date (e.g. your retirement date).
With a fixed annuity, you’re guaranteed income and a guaranteed return, which means you’ll have more financial stability, especially during times when you’re not working.
Annuities can also give you a tax-advantaged way to increase your income, and you’ll be able to contribute as much or as little as you want to your account.
Depending on the type of annuity you choose, you may also be entitled to death benefits or a minimum guaranteed payout.
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Annuity contracts are often complicated, so you may not get exactly what you think you’re getting if you don’t read the contract carefully.
Annuities tend to be illiquid, which means it can be difficult or impossible to withdraw from an annuity contract without incurring a hefty penalty. If inflation significantly increases over the next few years, your guaranteed payment may look less appealing.