| Written by Dan Schmidt  Determining the best asset allocation mix turns every investor into Goldilocks, looking for a balance of volatility and returns that is just right for their risk tolerance.
For some investors, taking risks in a sector like tech is easy to handle. For others, the security of bonds or blue-chip stocks outweighs the potentially higher returns.
If you’re approaching retirement and want to limit your portfolio's downside, switching your asset allocation in a more risk-averse direction is often prudent. Young investors have time and physical capital to make up any money lost in drawdowns; older investors don’t have this luxury of recovery time.
In this article, we will look at 10 investments with minimal risk that can still compound your nest egg, as well as discuss the tradeoffs of investing in “safe” assets.
10 Safe Investments with High Returns
Here are 10 investments for risk-averse investors ranked based on risk level and volatility. Some instruments (like savings accounts and CDs) are entirely risk-free but offer minimal returns, while others have higher upside but the potential for loss (like blue chip stocks).
1. High-Yield Savings Accounts
A high-yield savings account is the safest and simplest way to earn interest on your money without taking on any risk. These accounts are often available at traditional brick-and-mortar and online banks, which frequently have more generous yields thanks to reduced overhead. The Federal Deposit Insurance Corp (FDIC) insures deposits up to $250,000.
Savings account yields tend to track closely with the Federal Funds rate, so finding accounts yielding between 4% and 5% is still possible. Just read the terms and conditions of your accounts before signing up to ensure you maximize your rate.
2. Certificates of Deposit
A Certificate of Deposit (CD) is a fixed-income instrument that shares many similarities with a bond. However, CDs are issued by banks and credit unions and carry FDIC insurance like savings accounts. The interest rate on a CD is fixed, but you can choose your term length (usually ranging from three months to as long as 10 years). You must keep your money in the bank for the entire term to earn the total interest amount, and there are penalties for removing your cash before the CD expires. Due to this lockup requirement, CDs tend to pay higher rates than savings accounts.
3. Treasury Securities
The U.S. Treasury sells various bonds to fund government activities. These bonds are backed by the full faith and credit of the United States and carry a fixed rate of return. Treasury prices can vary since these bonds are sold on secondary markets, but you’ll receive your full principal back plus interest if you hold to maturity. Additionally, Treasuries are usually exempt from state and local taxes.
There are three main types of Treasury securities:
- Treasury Bills: T-bills have a duration of less than one year and don’t pay periodic coupon payments. Typically, these are the lowest-yielding Treasuries.
- Treasury Notes: These securities are two to ten years in duration and pay coupons every six months until maturity.
- Treasury Bonds: Treasuries with 10- to 30-year maturities are known as T-bonds. They pay biannual interest and tend to be the highest-yielding Treasury securities.
Investors can also purchase variable-rate bonds like Treasury Inflation Protection Securities (TIPS), which are linked to the Consumer Price Index (CPI) and are more complex than traditional Treasuries.
4. Money Market Accounts
A money market account is another FDIC-insured product from a bank or credit union with qualities similar to savings accounts and CDs. Money market accounts usually pay higher interest rates than savings accounts but limit the number of monthly transactions you can make. Money market accounts trade a little bit of liquidity for a higher rate of return, which is why they’re often considered a compromise between savings accounts and CDs.
5. Dividend-Paying Blue-Chip Stocks
Buying stocks can be risky, but older and more established companies traditionally present less risk than upstarts or smaller firms. Blue-chip stocks combine the best of both investment worlds: steady income through dividends and capital gains through stock price appreciation.
Blue chips often reside in less volatile sectors like consumer staples, banking, utilities, or industrials. Companies in the S&P 500 with at least a 25-year history of increasing dividend payouts are known as Dividend Aristocrats and are often the ideal type of blue-chip companies for conservative investors.
6. Corporate Bonds
Corporations don’t just raise money by issuing stock; they also sell debt like bonds to raise capital. Corporate bonds aren’t as safe as government bonds since public companies have a much higher risk of default. However, corporate bonds pay a higher rate, and bondholders have more claims in bankruptcy scenarios than common stockholders.
If you want to invest in corporate bonds, consider issuers in the same way you consider blue-chip stock investments. Large companies with a long history of profitability and success offer safer bonds than startups or firms in volatile sectors like tech.
7. Municipal Bonds
Munis are another form of government debt, but these are issued by states or localities instead of the Treasury. Municipal bonds aren’t considered as safe as Treasuries since they’re issued across every state and county, so they pay higher rates and have significant tax advantages. Municipal bonds aren’t subject to federal taxation, and you can often avoid state and local taxes if you own bonds from your home state or county.
8. Real Estate Investment Trusts
Real Estate Investment Trusts (REITs) are investment companies that purchase real estate, such as houses, apartment buildings, offices, hospitals, etc. and earn income for shareholders through rent collection or property appreciation. REITs are traded on public exchanges like ETFs and can lose value in the market, but by law, they must return 90% of their income to investors, so generous dividends are common. REITs are an easy way to get exposure to real estate without the hassle of property management.
9. Fixed Annuities
An annuity is an insurance product that earns tax-deferred interest on contributions made during the accumulation phase. The interest is earned at a fixed rate and can be withdrawn during the payout phase. Annuities are designed for conservative investors who want to know exactly how much they’ll earn on their capital. The principal is protected in an annuity, but returns are lower than market rates, fees are high, and the investor assumes risk should the insurer default.
10. Index Funds/ETFs Focused on Low-Risk Sectors
Index funds are subject to market risk and can lose money, but funds based on less volatile sectors can provide an opportunity for more aggressive investors. Index funds have low fees and diverse portfolios, allowing investors to tailor holdings based on their goals and preferences. Additionally, index ETFs often pay dividends and simplify tax planning since they don’t have capital gains distributions like mutual funds.
How to Determine Which Investment Is Right for You?
Choosing the right investment depends on several key factors that align with your financial goals and circumstances:
- Liquidity: Money needed in a pinch shouldn’t be kept in a hard-to-access account or asset. Consider the ease of withdrawing your funds when deciding how much capital to put into each investment.
- Time Horizon: How long do you plan on investing? Emergency funds should always be kept liquid in savings accounts, while retirement assets can be invested in products with lockup requirements or higher risk, like ETFs.
- Tax Implications: Taxes can eat into returns if not planned for adequately. Always consider the tax obligations of any investment before putting your money to work.
- Inflation-Adjusted Returns: Consider inflation's impact on your capital when investing. Some bonds, like TIPS, are linked to inflation measures like CPI to prevent the loss of purchasing power.
Safe Investments Offer Security and Consistency But Lack Upside Potential
The definition of "safe" is in the eye of the beholder. Some investors don’t mind volatile assets in pursuit of higher upside. But if you prefer steady income over higher potential returns, safe investments like the 10 we’ve listed here might be preferable for your portfolio. Remember that "safe" doesn’t always mean "risk-free," and you should develop an investment plan with your advisor to get the best bang for your risk-adjusted buck.
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