Building a diversified portfolio with low-risk investments is important to reach your financial goals, especially shorter-term ones. When the market takes a turn for the worse, you know you have the security of your low-risk investments saving you.
You won’t have high returns as you’d see on riskier investments, but it can help preserve your capital and ensure you always have liquid funds for emergencies and short-term goals.
Check out the best low-risk investments to consider adding to your portfolio for peace of mind.
Best Low-Risk Investments
Finding the best low-risk investments is much easier than deciding which riskier investments to consider for your portfolio.
Here are the top low-risk investments to consider right now.
- High-yield savings accounts
- High-yield money market accounts
- Certificates of Deposit
- Money Market Funds
- U.S. Treasury Bills, Notes, Bonds, and TIPS
- Corporate Bonds
- Fixed Annuities
- Preferred Stocks
- Dividend Stocks
1. High-Yield Savings Accounts
- Average Return: 4-5%
- Risk: Your investment is guaranteed but can lose value to inflation
A basic savings account may be the simplest and most convenient place to store your money. Savings accounts at traditional banks, online banks, and credit unions are almost completely liquid. You can get your money out at any time at any branch or ATM.
They’re also about as safe as any investment can be. The FDIC insures all bank accounts up to $250,000. The NCUA insures accounts with credit unions for the same amount. So even if your bank or credit union goes out of business, you can get your money back.
A high-yield savings account can pay as much as 4-5% APY, which is much better than most savings accounts. Watch the minimum deposit or balance requirements to ensure you earn the highest APY available.
2. High-Yield Money Market Accounts
- Average Return: 0.64% APY (based on FDIC figures for December 2023)
- Risk: Your investment is guaranteed, but can lose value to inflation
A money market account is like a cross between a checking and savings account. Unlike savings accounts, these accounts generally come with a debit card and old-fashioned paper checks. But some banks limit you to six withdrawals or transfers per month.
Money market accounts are backed by the FDIC or NCUA, making them very safe. However, their typical interest payments are lower than you’d get from a high-yield savings account. That means they tend to lose even more value to inflation over time.
A money market account is a handy place to keep funds you need to write checks from occasionally. For instance, you could write one monthly check on the account to pay your rent or utility bills.
3. Certificates of Deposit (CDs)
- Average Return: Varies by CD term, ranging from 0.23% for one month to 1.40% for five years (based on FDIC figures for December 2023)*You may find higher interest rates at online banks
- Risk: Your principal is guaranteed, but you can lose your returns if you withdraw early
A certificate of deposit, or CD, is a fixed-term loan you make to your bank. You agree to lend the money for a set amount of time, and the bank guarantees you a fixed amount of interest when this term is up. Like other bank accounts, CDs are FDIC- or NCUA-insured.
CDs at most banks and credit unions vary from short-term (one month) to long-term (five years), but some financial institutions offer even shorter or longer terms. The longer the term of the CD, the more interest it pays. However, longer-term CDs also tie your money up longer. If you withdraw it early, the bank typically charges a penalty that cuts into your earnings.
You can get around this problem by creating a CD ladder. You split up your investment among several CDs with different terms, such as one, two, three, four, and five years. That makes some of your money available sooner, while some money earns higher interest.
4. Money Market Funds
- Average Return: Up to an average of 5.2% (as of January 2024)
- Risk: Very low, but your principal is not guaranteed
A money market fund is not the same as a money market account. It’s a type of bond mutual fund that you usually open through a brokerage, although some banks offer them, too. These funds are not FDIC-insured and can come with fees that eat into your return.
Money market funds invest in other low-risk investments, such as CDs and short-term municipal, corporate, or government bonds (discussed below). These investments don’t have the same fluctuations in value as the stock market, so they keep your money safe.
Unlike CDs, money market funds are fully liquid, so you can add or remove money at any time.
And they generally offer better returns than savings accounts or money market accounts. However, their returns are usually still too low to keep up with inflation.
5. U.S. Treasury Bills, Notes, Bonds, and TIPS
- Average Return: Varies by term, ranging from about 0.62% to 5.45% as of November 2023
- Risk: Very safe, but can lose value to inflation
Just as you can lend to a bank with a CD, you can lend to the U.S. government by buying Treasury securities and TIPS. These government bonds are very safe investments, offering a guaranteed, fixed interest rate. You can buy them online at TreasuryDirect.gov.
Treasury bills are good for short-term investments (one year or less), treasury notes can have maturity of 10 years or more, and treasury bonds have maturity dates of up to 30 years. TIPS are the only government-issued security whose principal changes with the pace of inflation.
Treasuries give a safe, guaranteed return that usually beats bank and money market rates. However, it generally can’t beat inflation, and if you cash them in early, you can lose some principal due to inflation. And the highest yields require tying up your money for decades, meaning you’ll lose out if interest rates rise.
6. Corporate Bonds
- Average Return: About 4-5% for the highest-grade (safest) bonds, but varies widely based on company and length of bond
- Risk: Low to high, depending on the company and the term
A corporate bond is a loan to a business. These bonds vary widely in risk and return depending on the business doing the borrowing. The safest bonds, from big companies like Apple or Google, offer fairly safe but modest returns.
The riskiest corporate bonds, called “junk bonds,” offer very high yields, but there is a real risk of losing your money if the company goes bankrupt. On average, corporate bonds are a bit riskier than munis and therefore pay a bit more. You can also reduce your risk by investing in corporate bond funds or ETFs rather than individual bonds.
Another risk with long-term bonds is that interest rates will rise, and you will be stuck with a low-paying investment. You can sell your bond before it matures, but its value will fall if interest rates have risen. You can reduce this risk by sticking to shorter-term bonds.
7. Fixed Annuities
- Average Return: Varies by term; between 4% and 6% over two to 10 years
- Risk: Very safe, but may lose value to inflation
A fixed annuity is like a CD sold by an insurance company. It ties up your money and provides a guaranteed return over a period of time. This can be as little as two years or until your death.
With some annuities, you pay a lump sum upfront and get income immediately. With others, you pay into the annuity over time, and it starts paying out on a certain date, such as when you retire. Annuity contracts can be very complex, so reading them carefully is important.
Fixed annuities provide a safe, guaranteed income. However, their returns are fairly low and may not keep pace with inflation. Also, they tie up your money for a long time. You will likely pay a penalty if you need to cash in your annuity early.
8. Preferred Stocks
- Average Return: Between 6% and 9%
- Risk: Fairly low — safer than common stock but riskier than bonds
Investing in the stock market is generally risky. However, preferred stocks are safer than other stocks. They’re more similar to bonds, paying out a regular cash income over a period of time. But they also offer some of the potential for growth you get from regular stocks. You can buy them directly or invest in preferred stock index funds and ETFs.
A preferred stock pays out a regular quarterly dividend. In rare cases, a company can suspend the dividend temporarily, but companies try to avoid this. Those that do it often have to make up the missed payments later.
Preferred stocks are a middle ground between the high returns of stocks and the lower risk of bonds. They grow slower than other stocks but provide a fixed return that’s usually higher than a bond’s return. And some preferred stocks qualify for lower tax rates than other investments.
9. Dividend Stocks
- Average Return: Between 2% and 5%, but high-value dividend stocks offer 6% or more
- Risk: Low to medium
Preferred stocks aren’t the only ones that pay dividends. Many common stocks do as well. However, they’re a bit riskier because their dividends rise and fall with the value of the stock. So, unlike preferred stocks, they don’t offer a stable return.
Nonetheless, dividend stocks are generally safer than other common stocks. The companies that offer them tend to be older and more stable, so their stock value doesn’t fluctuate as much over time. They may not grow as much over the long term, but they provide income from the dividends to make up for it.
Stock dividends aren’t guaranteed, and the stocks themselves can lose value. That makes them riskier than bonds or bank investments. But they’re a good bet if you’re willing to accept a little more risk for a better rate of return.
Key Considerations for Low-Risk Investing
When considering the best low-risk investments, consider the following factors. Each investor has different risk tolerances and goals.
What is your Risk Tolerance?
Low-risk investments don’t mean NO risk, so it’s important to determine what you can afford to lose without causing financial hardship or ruining your peace of mind. For example, money invested in a high-yield savings account is much less risky than an investment in dividend stocks. Determining how much risk you can take will determine the best low-risk investment.
How Long Can You Invest?
The longer you can invest, the better your chances of high returns become. However, paying close attention to your time horizon is also important to avoid unnecessary penalties. For example, if you invest in CDs with a term longer than you can leave the funds invested, you could pay a hefty early withdrawal penalty.
If you’re considering investing in stocks, your best bet is to have a long-term investment plan. A 10-year plan is usually best as that’s when you’ll see the highest returns because you allowed enough to ride out the market’s highs and lows.
Finding the best low-risk investments is a personal decision. Here are some more questions to consider when creating your investment plan.
Are there any zero-risk investments?
The best zero-risk investments are those made in FDIC or NCUA-insured deposits. This includes high-yield savings accounts, money market accounts, and CDs. However, keep in mind that CDs charge early withdrawal penalties if you withdraw the funds before maturity.
What is the safest investment with the highest return?
A high-yield savings account or CD is the safest investment with the highest returns. Online banks offer the highest rates without the risk of losing your principal as long as they are FDIC-insured. Pay close attention to the bank’s minimum balance requirements or any tiers required to earn the highest rates to ensure you get the highest return.
What is the safest investment to not lose money?
At the risk of sounding like a broken record, high-yield savings accounts, CDs, and money markets are the safest investments that don’t risk losing money. As long as the bank is FDIC or NCUA insured, you don’t lose money even if the financial institution closes.
What types of investments should low-risk investors avoid?
Avoid common stocks, penny stocks, high-yield bonds, or alternative investments if you have a low-risk tolerance. While these investments have a much higher yield, they pose a much higher loss risk.
When deciding where to stash your cash, you aren’t limited to just one choice. For instance, you can choose a high-yield savings account for personal expenses, put your emergency fund into Treasuries, and choose a slightly riskier bond fund for your vacation fund.
One more option you shouldn’t overlook is to pay down your debts. If you currently owe $6,000 on a credit card that charges 15% interest, paying off that debt gives you a guaranteed 15% return. That’s much better than any other low-risk investment.
Remember, all the investment choices covered here are for your short-term needs, such as personal savings, emergency funds, or a new-car account. Safe investments aren’t the best way to grow your money long-term.
It’s worth putting most of your money into riskier investments like stocks for longer-term needs like retirement savings. It doesn’t matter if they fall in the short term; their higher returns give you the best chance of meeting your long-term goals.