Top 10 Low-Risk Investments You Can Trust in 2024!
As inflation starts to ease its grip and the Federal Reserve gears up to reduce interest rates, concerns linger over the potential for a recession. In these uncertain times, crafting a portfolio that incorporates a mix of safer assets can be your ticket to weathering market turbulence.
Of course, embracing lower risks often means accepting the trade-off of potentially lower long-term returns. This could work in your favor if your priority is to preserve your capital while enjoying a steady trickle of interest income.
However, if you’re hungry for growth, you need to explore investment strategies that align with your long-term aspirations. Even within higher-risk assets like stocks, there are segments—such as dividend stocks—that balance risk while still promising appealing returns over time.
Key Considerations
Your investment journey is shaped by how much risk you’re willing to embrace. Here are a couple of scenarios that might unfold:
- No risk — Your principal remains untouched.
- Some risk — You may break even or experience a slight loss over time.
However, there are two crucial caveats: low-risk investments generally yield lower returns compared to their riskier counterparts, and inflation can quietly chip away at the purchasing power of your cash nestled in low-risk assets.
If you choose to solely invest in low-risk options, you might find your purchasing power diminishes as time goes on. This is why low-risk investments are often better suited for short-term needs or as a cushion for emergencies, whereas higher-risk investments are more apt for long-term objectives.
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Explore the Top Low-Risk Investments for 2024:
- High-yield savings accounts
- Money market funds
- Short-term certificates of deposit
- Series I savings bonds
- Treasury bills, notes, bonds, and TIPS
- Corporate bonds
- Dividend-paying stocks
- Preferred stocks
- Money market accounts
- Fixed annuities
Deep Dive: Best Low-Risk Investments for 2024
1. High-yield Savings Accounts
While not a traditional investment, high-yield savings accounts provide a modest return on your money. The best rates are typically found through online searches, so don’t hesitate to shop around for that perfect yield.
Why Invest: A high-yield savings account comes with the reassurance that your funds are secure. Most accounts are government-backed up to $250,000 per account type per financial institution, ensuring your money is protected even in the unlikely event the bank falters.
Risk: While cash maintains its nominal value, inflation can erode its purchasing power.
2. Money Market Funds
Money market funds are collections of CDs, short-term bonds, and other stable investments designed to spread risk. They’re typically offered through brokerage firms and mutual fund companies.
Why Invest: Unlike a CD, a money market fund is liquid, allowing you to access your funds anytime without penalties.
Risk: Money market funds are generally considered safe. As Ben Wacek, a financial planner, notes, “The bank tells you the rate you’ll receive, and their goal is to keep the value per share at $1.”
3. Short-term Certificates of Deposit
Bank CDs are incredibly secure within an FDIC-insured account, unless you withdraw your funds early. To find the best rates, be sure to shop around online for competitive offers. With rising interest rates, it can be strategic to opt for short-term CDs and reinvest as rates increase.
An alternative is a no-penalty CD, allowing you to avoid typical penalties for early withdrawal, giving you the flexibility to move your money into a higher-yielding CD if needed.
Why Invest: If you keep the CD until its term concludes, the bank guarantees a specific interest rate for the duration.
While some high-yield savings accounts may offer better rates than CDs, they often require a significant initial deposit.
Risk: Withdrawing funds early typically results in forfeiting some earned interest, and in some cases, a portion of your principal. Thus, understanding the specific terms and checking CD rates before investment is essential. Additionally, locking into a long-term CD as rates rise could lead to lower earnings, necessitating cancellation and possibly incurring penalties.
4. Series I Savings Bonds
A Series I savings bond is a low-risk investment that adjusts for inflation, safeguarding your investment. When inflation rises, the bond’s interest rate increases, and conversely, when inflation falls, so does the bond’s payout. You can purchase these bonds directly from TreasuryDirect.gov, maintained by the U.S. Department of the Treasury.
“I bonds are an excellent choice for shielding against inflation, as they come with a fixed rate and an inflation adjustment every six months,” explains McKayla Braden, a former senior advisor for the Department of the Treasury.
Why Invest: The Series I bond adjusts its payout semi-annually based on inflation rates. With inflation high, the bond currently offers a robust yield, which will escalate further if inflation remains a concern. This investment acts as a fortress against the ravages of rising prices.
Risk: Backed by the U.S. government, savings bonds are among the safest investments available. However, it’s important to remember that the bond’s interest payment could decrease if inflation stabilizes and declines.
Should you redeem a U.S. savings bond before five years, a penalty of the last three months’ interest will apply.
5. Treasury Bills, Notes, Bonds, and TIPS
The U.S. Treasury also offers Treasury bills, notes, bonds, and Treasury inflation-protected securities (TIPS):
- Treasury bills mature within one year or less.
- Treasury notes have maturity periods of up to 10 years.
- Treasury bonds can mature over 30 years.
- TIPS adjust their principal value based on inflation changes.
Why Invest: Each of these securities is highly liquid, meaning they can be bought and sold directly or through mutual funds.
Risk: Holding Treasurys until maturity generally guarantees you won’t incur losses unless you opt for a negative-yielding bond. However, if sold before maturity, the value may fluctuate, possibly leading to losses as interest rates shift. Rising rates typically decrease the value of existing bonds and vice versa.
6. Corporate Bonds
Corporate bonds vary in risk, from those issued by solid, profitable companies to riskier high-yield or “junk” bonds.
“There are high-yield corporate bonds that come with low rates and low quality,” warns Cheryl Krueger, founder of Growing Fortunes Financial Partners in Schaumburg, Illinois. “These are riskier due to the potential for not just interest rate fluctuations, but also default risk.”
- Interest-rate risk: The market value of bonds can shift as interest rates fluctuate. Prices rise when rates fall and drop when rates rise.
- Default risk: The issuing company might default on their obligation to pay interest and principal, which could leave you with nothing.
Why Invest: To reduce interest-rate risk, consider bonds that mature soon. Longer-term bonds are more susceptible to interest rate changes. To minimize default risk, opt for top-tier bonds from reputable companies or invest in funds that hold a diversified mix of these bonds.
Risk: While bonds are generally perceived as safer than stocks, neither asset class is devoid of risk. “Bondholders are prioritized over stockholders, so in the event of bankruptcy, they are reimbursed before stockholders,” Wacek explains.
7. Dividend-Paying Stocks
While stocks don’t boast the same safety as cash or government securities, they are typically less volatile than high-risk options like futures or options. Dividend stocks are often seen as a safer bet than growth stocks due to their cash dividends, which help cushion against volatility.
Why Invest: Stocks that pay dividends are often viewed as more stable investments.
“While I wouldn’t categorize a dividend-paying stock as a low-risk investment—since some have seen significant losses—generally, they are considered less risky than growth stocks,” Wacek notes. “These stable, mature companies provide both dividends and the potential for stock price appreciation.”
Risk: One of the risks associated with dividend stocks is the potential for companies to cut or suspend dividends during economic downturns, which in turn can negatively impact stock prices.
8. Preferred Stocks
Preferred stocks function more similarly to lower-grade bonds than to common stocks, although their values can be quite volatile if market conditions change.
Why Invest: Like bonds, preferred stocks offer regular cash payments. However, companies issuing preferred stocks may suspend dividends under certain circumstances, although they typically must make up missed payments later. Moreover, dividends on preferred stock take priority over those for common stockholders.
Risk: Preferred stocks are akin to a riskier variant of bonds but are generally safer than common stocks. They are often referred to as hybrid securities due to their position in the payment hierarchy, coming after bondholders but before stockholders. Careful analysis is essential before committing to preferred stock purchases.
9. Money Market Accounts
A money market account resembles a savings account, offering similar benefits like a debit card and interest payments. However, it may require a higher minimum deposit than a traditional savings account.
Why Invest: Money market accounts tend to offer rates that can outpace those of standard savings accounts. Plus, they provide you the flexibility to access your funds if needed, although they may limit monthly withdrawals similar to savings accounts. Be sure to find the best rates to maximize your returns.
Risk: Money market accounts are federally insured by the FDIC, covering up to $250,000 per depositor per bank, which means there’s virtually no risk to your principal. The main risk involves having excessive funds in the account that fail to earn enough interest to outpace inflation, leading to a gradual loss in purchasing power.
10. Fixed Annuities
An annuity, typically arranged with an insurance company, guarantees regular income over a specified period in exchange for an upfront payment. These annuities can be crafted in various ways, such as paying out over 20 years or until your passing.
A fixed annuity promises a set income stream, typically on a monthly basis, for a designated period. You can either invest a lump sum upfront or contribute gradually until the annuity begins disbursing funds (like at retirement).
Why Invest: Fixed annuities can secure a guaranteed income stream, providing greater financial stability, particularly during retirement. They also allow for tax-deferred growth and can include various benefits such as death benefits or minimum payouts, depending on the contract.
Risk: Annuities can be complex financial products, and it’s crucial to scrutinize the fine print to fully understand what you’re getting. Additionally, they tend to be illiquid, making it challenging to withdraw funds without incurring steep penalties. If inflation surges dramatically in the future, your guaranteed payouts may not be as appealing.
Editorial Disclaimer: All investors are encouraged to conduct their own independent research into investment strategies before making any decisions. Remember that past performance is no guarantee of future results.
