Best Low-Risk Investments for 2023: Exploring safe investments can come in handy during a volatile market. However, it’s important to understand that low risks often equate to lower returns. Here are a few crucial factors to consider before selecting a low-risk investment that aligns with your financial goals:
If you’re investing with retirement in mind, it’s a prudent strategy to diversify your portfolio by incorporating low-risk assets. These assets can play a pivotal role in safeguarding your financial resources during periods of economic turbulence, which might occur prior to your retirement. Diversification not only helps mitigate potential losses but also ensures that you have a stable foundation to rely on as you approach your retirement years.
Best Low-Risk Investments for 2023
Once you’ve thoroughly assessed your personal goals and considered the relevant factors, the subsequent step is to delve into the realm of secure investment choices and understand their distinctions.
Below, we’ve compiled a list of the most promising low-risk investments to explore in the current year.
1. Money Market Funds
A money market fund is a type of mutual fund known for its low-risk profile. These funds operate by investing in high-quality, short-term corporate or government debt instruments, and they distribute returns to shareholders based on the interest earned. Money market funds offer various options based on the specific types of securities they choose to invest in.
Investing in money market funds provides an opportunity to participate in a diversified pool of short-term securities, typically yielding higher returns compared to traditional bank account interest rates. These funds are generally accessible through brokerage firms and mutual fund companies, although some online bank accounts may also offer them as an investment option.
One of the primary advantages of money market funds is their short duration, making them less susceptible to market fluctuations. Additionally, they offer high liquidity, allowing investors to withdraw their funds at any time without incurring penalties. Moreover, these funds are cost-effective, and the returns you earn are typically available for withdrawal on the next business day. This combination of safety, accessibility, and liquidity makes money market funds a favored choice for risk-averse investors.
Benefits:
- Flexible to take out any time without penalization: Unlike some long-term investments, these accounts offer the flexibility to withdraw your funds at any time without incurring penalties, ensuring quick access to your money when needed.
- Inexpensive to purchase: Opening and maintaining these accounts typically come with minimal costs, making them an affordable choice for investors looking to get started without substantial fees.
- Diversification by holding a variety of securities: Investment accounts allow you to diversify your portfolio by holding a range of securities, spreading risk and potentially enhancing returns.
Trade-Offs:
- Not FDIC-insured as investment accounts: Unlike traditional bank accounts, investment accounts are not protected by FDIC insurance, meaning there’s a level of risk involved, particularly if the market experiences downturns.
- Doesn’t keep pace with inflation: Over time, the purchasing power of the funds in these accounts may erode due to inflation, potentially diminishing the real value of your investments.
- No guarantee on earnings: Investment accounts are subject to market fluctuations, and there is no assurance of positive returns. The value of your investments can rise or fall based on the performance of the underlying securities, which can lead to financial gains or losses.
2. Fixed Annuities
A fixed annuity is a long-term contractual arrangement between you and an insurance provider that offers financial security and predictability. This arrangement guarantees that as the buyer, you will receive a fixed rate of return on your contributions for a specified period.
With fixed annuities, you make payments to the insurance company in exchange for a reliable stream of income, and in return, they safeguard your principal investment. Your contract outlines a set interest rate, which remains consistent throughout the designated period, ensuring a steady and predictable growth of your investment.
Fixed annuities come in two primary forms: immediate or deferred. In the immediate variant, you can begin receiving payments within a year of purchasing the annuity, providing an immediate income stream. On the other hand, deferred annuities allow you to delay payment commencement to a later time, making them an attractive choice for individuals planning for retirement.
For those seeking a secure haven to preserve their principal while still achieving better returns than a standard savings account, fixed annuities offer an appealing solution. They provide the stability and growth potential that many investors desire, making them a wise choice for long-term financial planning.
Benefits
- Simple and straightforward type of annuity
- Least risky, most predictable stream of income
- Typically low fees
- Guaranteed minimum interest rate
- Lifetime income
- Premium protection
Trade-Offs
- Not guaranteed by the FDIC (but regulated and guaranteed by state insurance commissions)
- Contract-dependant
- No inflation protection, where actual value may decline over time
- Early withdrawal penalties
3. Preferred Stocks
Another low-risk asset frequently favored by investors is preferred stock. Preferred stocks are considered hybrid securities, as they possess attributes of both common stocks and bonds. Typically yielding between 5% to 7%, preferred stocks offer a more substantial income stream compared to regular stocks while maintaining a lower level of volatility.
One distinguishing feature of preferred stocks is that preferred shareholders have the privilege of claiming dividend payments before common shareholders, often at a higher dividend yield. Additionally, in the event of bankruptcy or liquidation, preferred shareholders have a higher priority in claiming assets over common shareholders.
However, it’s crucial to note that the preferred shareholder’s priority and enhanced income potential come with certain exceptions and risks. While preferred stocks may offer greater return potential and security than common stocks, there remains a possibility of loss, underscoring the importance of careful consideration and diversification within one’s investment portfolio.
Benefits:
- High yields: Preferred stocks often provide investors with attractive yields, making them a valuable option for income-oriented portfolios.
- Liquidity: Preferred stocks are typically more liquid than certain other fixed-income investments, allowing investors to buy and sell them with relative ease.
- Price transparency: The prices of preferred stocks are generally transparent and easy to track, enhancing clarity for investors.
- Less risky than common dividend stocks: Preferred stocks are generally less volatile than common stocks, offering a degree of stability and income potential.
Trade-Offs:
- Dividends aren’t guaranteed: While preferred stocks offer higher yields, the payment of dividends is not guaranteed and can be suspended or reduced by the issuing company if financial conditions warrant.
- Preferred stockholders have no voting rights: Unlike common stockholders, those holding preferred stocks typically have no voting rights in the company’s decision-making processes.
- Cannot claim residual profits: In the event of the company’s liquidation, preferred stockholders have a priority claim to assets but do not have the same claim as common stockholders to residual profits after debts and obligations are settled.
4. Treasury Notes, Bills, Bonds and TIPS
Treasury Notes, often referred to as T-Notes, are debt securities issued by the U.S. Department of the Treasury to raise funds for various government expenditures, including infrastructure projects, debt refinancing, and budgetary needs.
Benefits:
- High Yields: Preferred stocks typically offer attractive yields, making them a favorable option for income-seeking investors.
- Liquidity: Preferred stocks are generally more liquid than certain other fixed-income investments, allowing investors to buy and sell them with relative ease.
- Price Transparency: The prices of preferred stocks are typically transparent and easy to track, enhancing transparency for investors.
- Less Risky than Common Dividend Stocks: Preferred stocks are generally less volatile than common stocks, providing a degree of stability and income potential.
Trade-Offs:
- Dividends Aren’t Guaranteed: While preferred stocks offer higher yields, the payment of dividends is not guaranteed and can be suspended or reduced by the issuing company if financial conditions warrant.
- Preferred Stockholders Have No Voting Rights: Unlike common stockholders, those holding preferred stocks typically have no voting rights in the company’s decision-making processes.
- Cannot Claim Residual Profits: In the event of the company’s liquidation, preferred stockholders have a priority claim to assets but do not have the same claim as common stockholders to residual profits after debts and obligations are settled.
5. Corporate Bonds
In straightforward terms, corporate bonds are financial instruments that companies issue as a means of raising capital. In exchange for your investment, these companies commit to paying you both periodic interest payments and the bond’s face value upon its maturity date. Corporate bonds represent a compelling low-risk investment option for those seeking to generate income while safeguarding their initial investment.
The additional interest, often referred to as a yield premium, varies depending on the creditworthiness of the bond issuer. Riskier issuers with non-investment grade ratings typically offer substantially higher yields compared to more secure investment grade issuers.
While corporate bonds come with an inherent level of credit risk, they generally offer more attractive interest rates when compared to U.S. Treasury securities, government agency bonds, and municipal bonds. This makes corporate bonds an appealing choice for investors seeking a balance between income generation and risk management in their investment portfolios.
Benefits:
- Stable Income Investment: Annuities provide a dependable source of income, making them a valuable option for individuals looking to ensure financial security during retirement or other specific periods.
- High Yields: Annuities often offer competitive yields, providing the potential for attractive returns on your investment.
Trade-Offs:
- Lower, Long-Term Returns: Annuities tend to offer lower long-term returns compared to some other investment vehicles, as they prioritize income stability and safety over high growth potential.
- Inflation Risk: The purchasing power of annuity payments may erode over time due to inflation, potentially reducing their real value in the future.
- May Require a Minimum Purchase: Some annuity contracts stipulate a minimum purchase amount, which could be a barrier for investors with limited funds.
6. Dividend-Paying Stocks
For those seeking a dependable source of passive income, dividend-paying stocks present an appealing investment opportunity. These stocks are a subset of equity securities that regularly distribute a portion of their earnings to shareholders in the form of dividends. Beyond offering a consistent income stream, they also retain the potential for capital appreciation.
Dividend-paying stocks prioritize income generation over price appreciation, sharing similarities with bonds in this regard. It’s worth noting that not all dividend stocks are equally suitable investments, making it advisable to seek guidance from a financial advisor when navigating this asset class.
Benefits:
- Less Volatile than Growth Stocks: Dividend-paying stocks are generally less prone to price fluctuations compared to growth stocks, providing a degree of stability to investors.
- Passive Income Stream: These stocks offer a reliable source of passive income, which can be particularly valuable for those seeking regular cash flow.
Trade-Offs:
- Returns Aren’t Guaranteed: While dividend stocks aim to provide consistent income, there is no absolute guarantee that dividends will remain at a consistent level, as they are subject to the financial performance and dividend policies of the issuing companies.
- May Experience Dividend Policy Changes: Companies can alter their dividend policies, including reducing or eliminating dividends, which can impact the income generated from these stocks. It’s essential for investors to stay informed about the financial health of their dividend-paying investments.
7. High-Yield Savings Accounts
Much like a traditional savings account, a high-yield savings account serves as a secure repository for your money while also allowing you to accrue interest. However, the distinguishing factor lies in the interest rate, with high-yield savings accounts offering approximately 20 times higher rates compared to standard accounts.
Most high-yield savings accounts yield between 0.75% to 2% Annual Percentage Yield (APY) and are typically offered by online banking institutions. Similar to regular savings accounts, high-yield variants come with a limited number of monthly transactions.
Due to their ability to accelerate the growth of your principal, high-yield savings accounts prove invaluable for achieving long-term financial objectives. They are particularly useful for endeavors such as saving for a down payment on a home or establishing an emergency fund to weather financial hardships over the next five years.
Benefits:
- Higher Earned Interest than General Savings Accounts: High-yield savings accounts offer significantly higher interest rates, allowing your money to grow more rapidly over time.
- Easy Fund Transfer Process: These accounts typically offer a hassle-free fund transfer process, enabling you to manage your finances efficiently.
- Liquidity: High-yield savings accounts provide liquidity, allowing you to access your funds when needed without the restrictions associated with some other investments.
Trade-Offs:
- Limits Monthly Transactions: Similar to regular savings accounts, high-yield savings accounts often impose restrictions on the number of transactions you can make each month.
- May Require a Minimum Initial Deposit for Best Rates: Some high-yield savings accounts may require a minimum initial deposit to access the highest interest rates.
- APYs Can Change Month-to-Month due to Market Conditions: The APY offered by high-yield savings accounts can fluctuate from month to month in response to market conditions, so it’s important to stay informed about any changes.
8. Certificates of Deposit (CDs)
A certificate of deposit (CD) is a financial product offered by banks and credit unions to their customers. CDs provide interest earnings in exchange for depositing a predetermined amount of money in a bank account for a specified period.
Typically, CDs have maturity periods ranging from one month to five years, featuring interest rates that are comparatively higher than those offered by standard savings accounts. Fixed-rate terms are the most common, ensuring a predictable return on investment.
While the minimum deposit requirements can vary, some CDs allow you to start with just a few hundred dollars. Generally, the larger your deposit, the more interest you can earn. However, CDs come with a lockup period during which you cannot access or withdraw your funds.
Nevertheless, CDs remain popular among investors seeking low-risk, interest-bearing assets, even if it means temporarily foregoing access to their money.
Benefits:
- Zero Credit Risk Below Insured Limits: CDs are considered low-risk investments, particularly when they are within insured limits, as they are typically insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
- Stable Investment Product: CDs offer stability and predictability, with fixed interest rates and a guaranteed return on investment upon maturity.
- May Offer More Competitive Rates than Other Short-Term Options: When compared to other short-term investment options, CDs often provide more competitive interest rates.
Trade-Offs:
- May Have an Early Withdrawal Penalty: Accessing funds from a CD before its maturity date may result in early withdrawal penalties, reducing the overall return on investment.
- Inflation Risk: CDs may not keep pace with inflation, potentially eroding the real value of your money over time.
9. Cash Management Accounts
Cash management accounts, often referred to as “CMAs,” represent digital cash storage solutions that serve as an alternative to conventional bank accounts. Typically offered by nonbank financial institutions like investment firms and broker-dealers, CMAs have gained popularity for their modern approach to managing money.
Many CMAs resemble traditional bank accounts, offering features such as debit cards, ATM access, and the added advantage of minimal to no service fees coupled with higher interest rates. These accounts also provide the convenience of consolidating your banking and investment activities within a single platform.
Depending on your chosen CMA provider, they may collaborate with banks to offer FDIC protection, ensuring the safety of your deposited funds.
Benefits:
- High-Yield Interest Accounts: CMAs often offer high-yield interest rates, enabling your money to grow at a competitive rate.
- Combined Banking and Investment Services: CMAs seamlessly integrate both banking and investment services, streamlining your financial management.
- Low to No Service Fees: CMAs generally impose minimal to zero service fees, reducing the cost of maintaining your account.
- Easy Setup and Management: Setting up and managing a CMA is typically straightforward, making it accessible for a wide range of users.
- FDIC or SIPC Coverage: Depending on the CMA provider, your account may be eligible for FDIC (or SIPC) coverage, enhancing the security of your deposits.
Trade-Offs:
- Possible Monthly Maintenance Fees: Some CMAs may charge monthly maintenance fees, although these fees are often lower than those of traditional bank accounts.
- No In-Person Customer Service: CMAs are primarily online platforms, so they may lack in-person customer service options. However, they typically provide customer support through digital channels and phone assistance.
10. Index Funds
Lastly, we have index funds, a category of mutual funds designed to replicate the performance of a specific stock index, such as the renowned S&P 500. When you invest in an index fund, you are essentially acquiring a stake in the future earnings of all the major companies within that index.
Index funds offer the advantage of passive investing, allowing you to maximize returns over an extended period without the need for frequent buying and selling. Unlike exchange-traded funds (ETFs), you can trade index funds at the close of each trading day.
Due to their diversity and cost-effectiveness, index funds hold particular appeal for risk-averse investors seeking growth opportunities. They are also professionally managed, making them an excellent choice for those new to investing.
Benefits:
- Low Cost: Index funds typically come with low expense ratios, making them a cost-effective investment choice.
- Hands-Off Management: Passive management means you don’t need to make frequent decisions about buying or selling, making index funds suitable for a more hands-off approach to investing.
- Diversification: Index funds provide instant diversification across multiple companies within the index, reducing the risk associated with individual stock selection.
- Reputable Track Record: Index funds often have a proven history of delivering returns that closely mirror the performance of the underlying index.
Trade-Offs:
- Heavily Relies on the Market: Index fund performance is closely tied to the overall market’s performance, making them susceptible to market fluctuations.
- Performance Generally Remains Average: While index funds provide consistent returns over the long term, they typically perform in line with the overall market, which may not outperform actively managed funds in certain market conditions.
Also Read: 12 Best Cryptocurrencies To Invest In 2023
Conclusion
Though no investment is devoid of risk, the ideal low-risk option provides you with the utmost peace of mind. Collaborating with a financial planner ensures you select an investment that matches your risk tolerance and aligns with your long-term objectives.
