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Which Investment Type Has the Lowest Risk?

Which Investment Type Has the Lowest Risk

High risk means high returns. It also means large losses. You can’t predict what will happen. Many investors want investments with the lowest risk. First-time investors and those nearing retirement are the most common. They can’t risk a big loss, but they want more than a savings account offers.

Which investment types offer the lowest risk while providing some return? Check out the list below.

Savings Accounts

We mentioned savings accounts as ‘not an option,’ but don’t overlook high-yield savings accounts. If you put your money in an FDIC insured bank, there’s no risk (up to $250,000). These high-yield savings accounts offer more interest than you’d get in your brick-and-mortar bank’s savings account, and it’s guaranteed. It’s better than leaving the cash under your mattress.

CDs

Want a step up from savings accounts? CDs offer higher interest rates and more potential. The longer you can invest your money (leave it in the CD), the more interest you’ll earn. Again, choosing an FDIC insured bank protects your investment up to $250,000.

If you reinvest your earnings into another CD, you’ll compound your earnings. Here’s an example. You have a 3-year CD that pays interest quarterly. Rather than taking the interest out, invest it in another CD. Now your earnings earn money.

Bonds

Do you want an option outside of the traditional or online bank? Bonds are a great option. Government bonds have virtually no risk and give a slightly higher return than banks.

You buy the bond at a discount (lower than face value). If you keep it through maturity, you get the full face value back. It’s a predictable investment that offers a decent return with no risk outside of country bankruptcy.

If government bonds don’t interest you, check out corporate bonds. Make sure you do your research and find highly rated (AAA to A grade) bonds. This minimizes your risk. You may see greater returns than government bonds offer.

Money Market Funds

If you don’t want to do the research yourself, consider money market funds. These fixed income mutual funds invest in debt instruments. They focus on loans for institutions with great credit and low risk of default.

Most money market funds have short maturity dates. They are also a liquid investment – you can sell them quickly, turning your asset into cash. There’s no penalty for liquidating the investment, as there is with CDs or bonds.

Utility Stock

Utility stocks often pay dividends. This differs from the capital gains earned from buying and selling stocks. On average, utility stocks pay as much as 3% more than treasury securities.

Although utility stocks are common stocks, the dividends offset the risk of fluctuating prices. Utilities are a necessity, so the price fluctuations are minimal. Choose highly rated utility stocks and reinvest your dividends for the greatest return on your low-risk investment.

Fixed Annuities

Investors close to retirement prefer fixed annuities. You invest money now to put away for retirement. The money grows tax-deferred – you pay taxes when you withdraw the funds. Choose annuities from financially stable insurance companies for the lowest risk.

Fixed annuities offer higher returns than high-yield savings accounts and CDs, but lower than dividend-paying stocks. They are great for those close to retirement that can’t risk a major loss. Some fixed annuities offer a ‘teaser rate’ or higher rate of return for the first few years.

Real Estate Investment Trusts

If you’ve always wanted to invest in real estate but don’t have the capital, REITs offer the chance. These crowdfunded investments invest in real estate equity and debt, diversifying your funds for lower risk.

You don’t have to manage the property or put up all the capital. You earn a prorated amount of the profits based on your investment. While there’s some risk, it’s much lower than if you invested in real estate yourself, risking your whole investment.

Low-risk investments have lower rates of return, but a higher guaranteed. You may not retire strictly on low-risk investments, but they help offset the damage high-risk investments create. If you have a loss in a high-risk investment, the profits from low-risk investments help.

Diversifying your funds between super low-risk investments, like high-yield savings accounts and CDS and higher, but still, low-risk investments like money market funds and REITs create the perfect balance.

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