Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
Life is full of risks. Walk out your front door, and there’s a small risk that—KABLAM!–you’ll be vaporized by a falling meteor. Unfortunately, you will never be able to fully eliminate risk from your life, but when it comes to investing, there are ways that you can reduce your risk to the point that it will be as likely you’ll be killed by space junk as lose your money.Wealthsimple Invest is an automated way to grow your money like the worlds most sophisticated investors. Get started and we'll build you a personalized investment portfolio in a matter of minutes.
Background to low-risk investments
Truly low-risk investments are fantastic to preserve capital but by and large, they’re not going to provide particularly robust returns on your investment. Like they say, nothing ventured, nothing gained. Those with long investment horizons should look at devoting a substantial part of their portfolio towards stocks, which historically have provided great returns for those willing to ride out the volatility. Lots of investors, however, don’t have the luxury of time and need to preserve capital rather than grow it. Low risk investments are ideal for the kind of investors that understand that stuffing cash in a mattress is not a sound strategy–if mice don’t eat the cash, inflation will essentially do the same thing by reducing its value over the long term.
Low-risk investments are ideal for a variety of investors, like…
Someone savings for a big ticket item in the near future, like a down payment on a car or house, or university tuition.
Someone who is either retired or nearing retirement and will need to access their funds soon.
Someone who is creating an emergency fund with enough money to pay their expenses for a period of three to six months in case of unexpected job loss, health issues, or other unforeseen events.
Best low-risk investments
Understanding that the word “best” is a subjective term, and that there’s really no such thing as one size fits all answers to complicated financial questions, we’re going to provide you with as attractive an array of investments as you’ll find in the not-very-sexy world of low-risk investments.
High interest savings accounts
This is about as safe an option as you’ll ever find. The high interest savings account has much in common with the savings account into which you might have deposited lemonade stand earnings or birthday money as a kid that might earn you a few pennies a month. The government guarantees savings deposits up to $100,000 should your bank go bust. Typically, banks have offered pretty paltry interest rates on savings, but some newer players on the financial scene have disrupted the savings account market and may offer interest rates as high as 2% annually. Funds in savings accounts, unlike some of the options discussed below, are totally liquid and can be withdrawn at any time with no penalty.
Money market account
Money markets are kind of like a hybrid of a checking and savings account. They often come with checks and ATM cards, but because of the government’s Regulation D, you’ll only be allowed six transactions per month in the account. Go over that number of transactions, and you’ll face stiff penalties that are often between 5 and 10 dollars. (Usually, ATM withdrawals and withdrawals made at a branch thankfully won’t count towards your six.) Whereas checking accounts generally offer no interest and in fact will likely assess a monthly fee, money markets will yield interest. In the past, they’ve been touted as generally offering a higher interest rate than savings accounts, but online banks offering high interest savings accounts have made that much less of a given. Like savings accounts, money markets are guaranteed by the Federal Deposit Insurance Corporation. Unlike savings accounts, they generally require maintaining a minimum deposit to avoid fees.
Money market fund
Money market funds are low risk mutual funds that invest in high quality, short-term government and corporate bonds. They are considered safe places to park money, however, unlike savings accounts or GICs, they are not guaranteed by the the government in case of bank failure. Because, like other mutual funds, money market funds carry with them management expense ratios, they’ve of late fallen out of favor with personal finance experts since their returns will not often rise much above the cost of holding them. Stable value funds . Money market funds should not be confused with money market accounts, which are hybrid checking/savings accounts common in the US.
Stable value funds
Stable value funds are a type of investment commonly available in 401(k)s, other defined pension plans as well as 529 education plans. Stable value funds are intended to counteract the volatility of other investments and indeed, during 2008’s global financial crisis were the only part of 401(k)s that produced positive returns. Stable value funds are not as liquid as many other low risk investments because they’ll often come with a required holding period of between six months and a year. Stable value funds invest primarily in the most high quality short and intermediate term government and corporate bonds. So what makes stable value funds different from run of the mill bond funds? They are very similar, but unlike bond funds they’re insured by the issuer so that fund investors are guaranteed to never lose capital or interest. In the last decade, stable value funds have offered about 2 to 3 percent annual returns.
US savings bonds
Savings bonds, like savings accounts, are about as safe as investments come since they’re backed by the full faith and credit of the U.S. government. Savings bonds, which can only be purchased online through treasurydirect.com come in various denominations of $25 and more, and are available in two flavors: Series EE bonds and Series I bonds. Series EE bonds offer a fixed rate of interest that is set twice a year, and series I bonds are adjusted periodically with an interest rate designed to keep up with inflation. Both types of bonds must be held for a minimum of one year and a maximum of 30 years and earn interest that entire period. Savings bonds are appealing to many because they can be given as gifts and they’re not subject to state or local income tax.
CDs, otherwise known as Certificates of Deposit, are a cousin of the savings account, but not as liquid. While CDs generally offer a higher interest rate than savings accounts, they also require depositors to commit to a specific period of time, known as a “term,” that may be as short as a few months and as long as several years. Typically with CDs, the longer the term, the higher the interest rate. At the end of this term, the CD will mature and you’ll be able to access your principal and interest. Should you need to access funds in a CD before the end of that term, you’ll lose interest and may be assessed an early withdrawal penalty so CDs are only good for patient types who won’t need to access their funds for a period of time. Like savings accounts, they’re guaranteed by the Federal Deposit Insurance Corporation for up to $100,000 should the bank go belly up.
Treasury bills, notes and TIPS
In order to fund all the stuff that the government needs to do but doesn’t have the cash on hand for, the US Treasury will regularly issue securities to finance the government’s debt. Treasury bills, also known as T-bills, are investments that mature in a year or less, and are considered virtually risk-free as long as the American economy continues to exist. They do not earn interest per se but are sold at a discount from their face value, which they can be redeemed for upon maturity. Treasury notes, or T-notes, mature in 2 to 10 years and every six months pay out an amount equal to have of what’s called their “coupon rate.” Coupon rates, which vary as interest rates rise and fall, will dictate whether T-notes will sell at above or below their face value. Investors concerned about inflation may choose to invest in inflation-protected securities, or TIPS, that have a coupon rate that is adjusted by the Consumer Price Index, so they’re specifically designed to be inflation proof.
Just as the government issues bonds to cover their obligations, corporations to the same in order to cover the cost of variety of things such as business expansion, capital improvements, buying back their own stock, or paying dividends to stockholders. Corporate bonds are classified by their maturity dates. Short term bonds mature in fewer than three years, medium term mature in four to ten years, and long term bonds mature in more than ten years. Generally, the further out the maturity date, the higher the risk and the more they’ll pay bondholders. Bonds are also rated by independent agencies according to how likely it is that they’ll have the cash to pay back their bondholders. Bonds with at minimum BBB ratings are called “investment grade” bonds. So those investors primarily interested in the lowest possible risk might look towards short term investment grade bonds, though they in many cases won’t pay much, if anything, more than similarly safe government bonds.
Dividend paying stocks
Dividends are one of the more dependable parts of equity investing; they’re a regularly-issued taste of a company’s corporate profits paid on a per-share basis regardless of whether a stock happens to be up or down. For this reason, many investors seek out long term positions in stocks with dividend yields and depend on the income dividends offer to finance their lifestyles, especially in retirement. But there are many pitfalls that can befall dividend investors, and any stock investment comes with significant risks, so at the very least, anyone considering a dividend-centric financial plan should read this article, How to Invest in Dividend Stocks.
Low-risk investment portfolio
Generally, investment portfolios range from very aggressive all the way down to conservative, a scale that generally corresponds to the mix of equities (stocks, which tend to be volatile) to fixed income (bonds, which are a lot less so.) An investor seeking to play it safe may decide to seek out an automated investing service that offers conservative portfolios that are overwhelmingly tilted to fixed income (like 70% or more.) The portfolios offered by the best robo-advisors will provide ample diversification through stock and bond ETFs that will maximize upside while minimizing risk.