Investors’ first step before making any investment is to evaluate their risk tolerance. Risk-averse investors select low-risk investment options. With low risk investments options, the investor is less likely to lose their principal amount and can earn a return on their investments. Here are some low-risk investments to consider:
1. Bank Savings
A savings account at your bank or credit union can be a good low-risk investment. The account value remains stable for as long as you keep the money in it and has minimal fluctuations. It however attracts a relatively low return which is based on the financial institutions interest rate. If the inflation rate is higher than the rate your bank is giving you, then you risk losing in terms of your purchasing power rate. Bank savings are the best investments when you want to access your money at any given time.
2. Certificates of Deposit
A financial institution like a bank can offer you a specific interest rate over a specific period of six months, a year or five years. The period is fixed and a withdrawal before the end of the specified term attracts a penalty. CDs are low-risk investments and are a good way to invest money to buy a specific product in a given time in future.
3. Treasury Bills and Bonds
There are numerous low risk federal government treasury securities you can invest in such as the EE bonds, I bonds, Treasury Inflation-Protected Securities (TIPS) Bonds, Treasury bills, and Treasury notes. You can access these investments electronically from the U.S Treasury direct through an online account.
4. Money Market Accounts
Different financial institutions offer money market accounts which may earn relatively higher interest rates than a normal savings account. The investor may be required to keep a minimum balance to qualify for the highest interest rates. A key point to note is that money markets accounts are a bit different from the money market funds.
5. Fixed and Immediate Annuities
A fixed annuity is issued by an insurance company and is a low-risk investment. The insurance company that offers it agrees contractually to pay you a fixed interest rate. The only risk you are exposed to a loss if the insurance company issuing it goes out of business. It is almost similar to CDs only that the interest it accumulates is tax-differed. It is mostly preferred by the people in the high- tax bracket and wants their money to be safe. An immediate annuity is also a low-risk investment that guarantees you a specific monthly amount of income. The same aspect applies that your money is safe as long as the insurance companies offering it remains in operation. In both fixed and immediate annuity, your money should be protected if you are under the state guaranty limits. Immediate annuity is a good choice for the retirement age as it can offer you guaranteed payments in old age.
6. Stable Value Funds
A stable value fund is another low-risk investment and is an investment choice offered within most but not all 401(k) plans. Its objective is to preserve principal amount and provide liquidity so the investor is able to transfer out of it at any time they want to. The investor can achieve returns comparable to short and intermediate term bonds but with less volatility.
Safe investments are the best low-risk investments but with relatively low returns. Investments that offer higher returns come with subsequent high degrees of risk. Making an investment is the best way to save and manage money which can help you to achieve your financial goals. Evaluate your risk tolerance and make the best investment choice.