In today's unpredictable markets, many investors seek to allocate a portion of their portfolio to safer, more stable assets. While high-risk investments may offer greater potential returns, they also carry a higher chance of losing principal. For those looking to generate reasonable returns with less uncertainty, here are some top low-risk investment options.
All investments involve a natural trade-off between risk and potential returns. Generally, assets with higher return potential also carry greater risk, while low-risk investments like CDs and Treasuries provide stable but modest returns.
In general, younger investors with longer time horizons can take on more risk, knowing they have time to recover from periodic downturns in volatile assets. Older investors nearing retirement may shift toward more low-risk securities to preserve capital.
Experts typically recommend a diversified portfolio containing a mix of low, moderate, and high-risk assets, tailored to your goals, timeline, and risk tolerance. Having some higher risk assets allows for growth potential, while maintaining a core of stable investments hedges against volatility. Meanwhile, a safety net of some low-risk investments can ensure you'll be able to ride out rough patches or generate needed income in older age.
| Top Safe Assets at a Glance | |||
|---|---|---|---|
| Asset Class | Safety | Liquidity | Upside Potential |
| Cash | Very High | Very High | Very Low |
| High-Yield Savings | High | High | Low |
| Money Market Funds | High | High | Low |
| CDs | High | Low | Low |
| Treasuries | Very High | High | Low |
| TIPS | High | High | Low |
| Investment Grade Corporate Bonds | Moderate | Moderate | Moderate |
| Bond Funds | Moderate | High | Low-Moderate |
| Municipal Bonds | Moderate | Moderate | Low-Moderate |
| Annuities | High | Low | Low |
| Cash-Value Life Insurance | High | Low | Moderate |
Cash
Cash, including demand cash deposits, represents the epitome of safety in the asset world. There's virtually no risk of loss (unless it is lost or stolen), making it a very reliable asset. However, its safety comes at a cost – it generally yields minimal returns, especially when considering the erosion of purchasing power due to inflation.
Cash is ideal for immediate or short-term financial needs due to its unparalleled liquidity. It's perfect for maintaining an emergency fund or paying for immediate and upcoming expenses. Indeed, the most significant benefit of holding cash is that it is instantly accessible and pretty much universally accepted.
- Why Invest: No risk of loss, unparalleled liquidity and accessibility
- Why Not Invest: Minimal returns, loses purchasing power to inflation, opportunity costs
Finding the right balance ultimately comes down to your specific situation and risk tolerance. Be sure to thoroughly assess your goals, timeline, and psychological & emotional ability to handle swings in portfolio value. And don't forget to diversify across asset classes to avoid overexposure to any one type of risk.
High-Yield Savings
High-yield savings accounts offer a low-risk bank account option, but with higher interest rates than regular savings accounts. Online banks that have lower overhead expenses compared to traditional brick-and-mortar banks are often able to offer such products with attractive rates.
These accounts are ideal for short-term savings goals where you want to earn a bit more interest than a regular savings account without compromising on safety. One major perk is FDIC insurance, which covers potential losses of up to $250,000 per institution and the ability to withdraw funds at any time, providing both security and liquidity. To get one, simply open an account with a bank that offers high-yield savings accounts.
- Why Invest: Higher interest than regular savings, FDIC insured
- Why Not Invest: Returns still quite low, some banks may charge account fees
Money Market Funds
Money market funds are low-risk as they invest in stable, short-term debt instruments and certificates of deposit. Though rates are still relatively modest, they usually offer higher yields than savings or money market accounts. Fund shares are targeted to $1 per share. Returns are variable based on holdings, and money market funds are not FDIC-insured. These funds are suitable for investors seeking a bit more yield than a savings account but who also value liquidity and safety.
To invest, one must buy shares in a money market fund through a brokerage or a mutual fund company.
- Why Invest: Higher yields than savings accounts, very safe, very liquid
- Why Not Invest: Not FDIC insured, returns are modest
Money market funds and money market accounts are two common low-risk savings vehicles that are often confused with each other. Money market accounts are FDIC insured up to $250,000, while money market funds do not offer FDIC protection.
Certificates of Deposit (CDs)
CDs are low-risk, FDIC-insured investments that offer fixed interest rates over a set period (often six months to five years). Their returns are usually higher than savings accounts, but still fixed and predictable. CDs can be well-suited for investors who don't need immediate access to their funds and are looking for relatively higher, guaranteed returns over a specific period.
To invest, purchase a CD through a bank, choosing the term and rate that best fits your financial timeline.
- Why Invest: Guaranteed fixed interest rates, FDIC insured
- Why Not Invest: Funds locked up until maturity, early withdrawal penalties, possible account minimums
Treasuries
Treasury securities like T-bills and T-notes are very low-risk as they're issued and backed by the U.S. government. They provide a safe way to earn a return, albeit generally lower than aggressive investments. Treasuries are generally considered"risk-free" since the federal government guarantees them and has never (yet) defaulted.
These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market. You can purchase these securities through your broker or via the government's TreasuryDirect website.
- Why Invest: Extremely safe, backed by US government, highly liquid
- Why Not Invest: Lower returns compared to somewhat riskier bonds
TIPS
TIPS (Treasury Inflation-Protected Securities) offer low-risk investment opportunities, with the added perk of its principal adjusting with inflation, thus providing a hedge against inflation. Like treasuries, these are also backed by the US government.
TIPS offer high liquidity and inflation protection, but can underperform during periods of low inflation or when real interest rates are rising, as their value is directly tied to inflation trends. Additionally, their returns may not be as high as other fixed-income securities in a stable or deflationary economic environment. You can buy TIPS through TreasuryDirect or your brokerage account.
- Why Invest: Inflation protection, backed by US government
- Why Not Invest: Can underperform in low inflation environments
AAA Bonds
Investment grade bonds, particularly short-duration ones and those with the highest AAA-rating, are considered low to moderate risk. They are highly rated, indicating a lower default risk, and offer moderate returns. Still, bond prices are sensitive to interest rate changes and can become riskier if the issuer faces financial troubles or insolvency later on.
Corporate bonds are suitable for investors seeking steadier, but potentially higher returns than government securities, with a reasonable level of risk (depending on the bond). To invest, buy these bonds through a brokerage account.
- Why Invest: Potential for higher returns than government bonds
- Why Not Invest: Comparatively higher credit & default risk, sensitive to interest rate changes
Bond Funds
Bond funds, which are managed portfolios of various bonds packaged into mutual funds or ETFs, have low to moderate risk, depending on their particular investment strategy. Diversification within the fund reduces risk, and returns are generally steady. These are particularly attractive for investors looking for diversified bond exposure without having to buy individual bonds.
You can buy bond funds through mutual fund companies or brokerage accounts.
- Why Invest: Diversification reduces risk, steady returns
- Why Not Invest: Returns generally lower than stock funds, fund management fees
Municipal Bonds
Municipal bonds are low to moderate risk and are funded by tax collection or other government revenues (such as toll roads or bridges). They can offer tax-free income at the federal (and sometimes state & local) level. As such, "munis" are particularly attractive to investors in higher tax brackets.
A drawback is that munis are somewhat illiquid, with a less active secondary market compared to other securities. To invest, buy municipal bonds through a specialized municipal bond dealer, or in some cases, directly from the issuing municipality. Municipal bond funds are also available, they may be more liquid, but may not cater to your particular tax situation.
- Why Invest: Tax-free income, funded by government revenues
- Why Not Invest: Less liquid secondary market, some municipalities may be higher risk
Annuities
Annuities are low-risk investments that provide fixed, steady income in return for an upfront investment -- guaranteed either for a set period of time, or for life. The returns are backed by the insurance company issuing the annuity. However, the funds put into an annuity are often locked up or exchanged for the flow of future cash flows. Therefore, they are not liquid. Indeed, annuities are often best suited for older individuals looking for a steady, guaranteed income stream, particularly during retirement.
The process of buying involves selecting an annuity type and making an investment through an insurance company or agent.
- Why Invest: Guaranteed fixed income, often for life
- Why Not Invest: Funds locked up, minimal liquidity, may only be available to older individuals
Cash-Value Life Insurance
Cash Value Life Insurance is a unique financial product that combines the protection of life insurance with the benefit of a savings component. The risk level is generally low, as it not only guarantees a payout to beneficiaries upon the policyholder's death but also allows the cash value to grow at a set interest rate and without the risk of loss, often tax-deferred. This growth rate is often more favorable compared to traditional savings vehicles, though it typically offers lower returns than more aggressive investment options.
The cash value grows tax-deferred, and beneficiaries receive the death benefit tax-free. Additionally, policyholders can borrow against the cash value tax-free, though loans can reduce the death benefit and cash value.
This type of insurance is best suited for individuals who are looking for a long-term investment that provides both a death benefit and a potential cash accumulation. It's particularly appealing to those who have maximized other retirement savings options and are seeking additional tax-advantaged ways to save. It can also be a strategic tool for estate planning.
- Why Invest: Tax-deferred growth, tax-free loans, estate planning benefits
- Why Not Invest: More complex, less liquidity, not suitable for short- or medium-term growth
| Safe Investments at a Glance | ||||
|---|---|---|---|---|
| Investment | Description | Risk Level | Why It's Low Risk | Liquidity |
| Cash | Cash or demand cash deposits | Very Low | No risk of loss - however, it can lose purchasing power to inflation | Very high - cash is the most liquid asset by definition |
| High-Yield Savings Accounts | Savings accounts with higher interest rates than normal. FDIC insured up to $250k. | Low | FDIC insurance protects against losses | Very High - can withdraw funds any time |
| Money Market Funds | Mutual funds investing in short-term debt instruments. Higher yield than savings accounts. | Low | Invests in stable short-term assets | High - Shares can be sold daily |
| CDs | Certificates of deposit pay fixed interest over set periods, usually 3 months to 5 years. | Low | FDIC insured, fixed rates | Low - Funds locked up until maturity; early withdrawal penalties |
| Treasury Securities | Bonds issued by the US Treasury like T-bills, T-notes, savings bonds. | Very Low | Backed by US government | High - Active secondary market |
| TIPS | Treasury Inflation-Protected Securities. Bonds whose principal adjusts with inflation. | Low | Backed by US government; inflation protection | High - Active secondary market |
| Investment Grade Bonds | Highly rated corporate bonds. Short duration bonds are safest. | Moderate | High credit ratings mean lower default risk | Moderate to High - Can sell but may take time depending on the bond |
| Bond Funds | Bundles of bonds in mutual funds or ETFs provide diversification. | Low to Moderate | Diversification reduces risk | High - Shares can be sold daily |
| Municipal Bonds | Bonds issued by local governments to fund projects. | Low to Moderate | Funded by tax collection or other gov't revenue | Moderate - Secondary market not highly liquid |
| Annuities | Insurance contracts providing fixed income in return for an upfront investment. | Low | Guaranteed fixed payments from insurance companies | Low - Funds locked up, early withdrawal penalties |
| Cash Value Life Insurance | Permanent life insurance with savings component. | Low | Guarantees payout to beneficiaries; savings grow tax-free at favorable dividend rates | Moderate - Usually must request withdrawal or loan, or else surrender policy to access cash value |
What Is the Safest Asset of All?
The concept of the "safest investment" can vary depending on individual perspectives and economic contexts, but generally, cash and government bonds, particularly U.S. Treasury securities, are often considered among the safest investment options available. This is because there is minimal risk of loss.
That said, it's important to note that no investment is entirely risk-free. Even with cash and government bonds, there is a risk of inflation outpacing the yield, leading to a decrease in purchasing power over time.
Why Is there A Risk-Return Tradeoff?
There are several reasons proposed for the risk-return tradeoff, which is a cornerstone concept of financial economics. It implies that lower-risk investments will also offer lower expected returns.
Higher returns are often required by investors as compensation for the increased uncertainty and potential for loss associated with riskier investments. When investors put money into an asset with a high level of risk, such as a new tech start-up, they face a higher chance of losing their investment. Therefore, they expect higher returns to justify this risk.
The time-value of money further states that money available now is worth more than the same amount in the future due to its potential earning capacity and opportunity costs. Riskier investments must offer higher returns to compensate for the possibility that the future value of the investment might be lower than expected or even negative.
Can Money Market Funds Ever Result in a Loss?
While money market funds are considered very low-risk, they are not entirely risk-free. Unlike bank savings accounts, they are not insured by the FDIC. There have been rare instances, such as during severe financial crises, where money market funds "broke the buck," meaning their value dropped below the target $1 per share, leading to losses for investors. However, regulatory changes have been made to increase their stability since the 2008 financial crisis.
Are There Any Safe Assets that Are Also Socially-Resonsible or ESG Conscious?
Yes, there are safe investment options that also consider social or environmental impacts. Green bonds, for example, are often issued by governments and corporations to fund environmentally-friendly projects. They typically carry lower risk, similar to other government or corporate bonds, while contributing to positive environmental outcomes. Additionally, some municipal bonds will finance projects with social or environmental benefits, combining safety with social responsibility.
The Bottom Line
Safe assets such as U.S. Treasury securities, high-yield savings accounts, money market funds, and certain types of bonds and annuities offer a lower risk investment option for those prioritizing capital preservation and steady, albeit generally lower, returns. While they may not provide the high returns of riskier assets like stocks, they play a crucial role in a diversified portfolio, offering stability, predictable income, and protection against market volatility. These assets are particularly appealing for risk-averse investors, those nearing retirement, or anyone looking to balance out higher-risk investments. However, it's important to be mindful of their limitations, such as lower returns that may not keep pace with inflation and the varying degrees of liquidity and tax implications. Ultimately, the choice of safe assets should align with individual financial goals, risk tolerance, and overall investment strategy.
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