Key Takeaways
What are low-risk investments?
12 best low-risk investments
Low-risk real estate investments
The best way to build a successful investment portfolio is to focus on one main thing: balance. By including various investment types, you can help maximize your profits while minimizing your overall risk. To properly execute this strategy, you’ll need to focus on both high and low risk investments. But where exactly should you start?
Low risk investments represent the perfect entryway to a profitable portfolio. There are opportunities available for almost everyone, each requiring different amounts of skill, capital, and time to get started. Keep reading to learn more about the best low risk investments to make in 2022.
What Are Low Risk Investments?
Low-risk investments are financial opportunities with only a small chance of losing some or all of the money you put in. A few common examples of low risk investments are bonds or Certificates of Deposit (CDs). Low risk investments are typically recommended for individuals who are new to investing, preparing for retirement, or diversifying their portfolios.
The appeal of low risk investments is in the name, and they generally perform as predicted. This benefit does come with a tradeoff: low risk investments do not appreciate in value as quickly compared to high-risk investments, such as stocks. Because of this, it is generally recommended that investors choose a mix of low and high-risk investments if they want to maximize returns.
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12 Best Low Risk Investments
There are a few factors to take into consideration before deciding where to invest. As you read through the following options, think about how much time and money you have to dedicate to each investment type. Remember, while many low-risk options require a small amount of capital to get started they will take time to become profitable. With that being said, here are some of the best low-risk investments available:
High-Yield Savings Accounts
Money Market Accounts
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Series I Savings Bonds
Treasury Notes, Bills, Bonds, & TIPS
Corporate Bonds
Preferred Stocks
Dividend Paying Stocks
Mutual Funds
Stable Value Funds
Fixed Annuities
Immediate Annuities
High-Yield Savings Accounts
People often feel stuck between the decisions of putting their money in their savings account versus putting it in investment accounts. You want to earn better returns on your savings, and yet sometimes you want to keep it liquid. This often applies to those who want to build up an emergency fund, or save up quickly toward a short-term goal. Luckily, there’s a solution: high-yield savings accounts.
High-yield savings accounts are an alternative to traditional savings accounts. They offer higher annual percentage yields (APY). Simply put, APY is the interest your savings earns in a year. Some online banking institutions can offer products with higher savings rates because of their low overhead and operational costs.
Below you’ll find three recommended banks that offer high-yield savings accounts. Note that the interest rates in 2022 are lower than average due to current economic conditions.
Lending Club Bank: Purchased by Radius Bank, Lending Club Bank offers a high-yield savings account with one of the highest interest rates on the market at 0.65% APY. However, you must deposit a minimum of $2,500 in order to earn this rate. This financial product also comes with an ATM card that does not charge any maintenance fees.
Comenity Direct: The second-highest interest rate is offered by Comenity Direct at 0.55% APY. If you don’t have $2,500 lying around, you may be happy to find out that only $100 is required to open an account at this rate.
Alliant Credit Union: Last but not least, consider Alliant Credit Union’s high-yield savings account. You can open an account with a low $5 minimum. However, be sure to deposit at least $100 to begin earning the 0.55% APY.
Money Market Accounts
Another way to make your bank account work for you is through a money market account. A money market account is a savings account, but also allows you to hold a debit card and write checks associated with this account. Allows you to earn interest on your savings while simultaneously treating it like a checking account as needed.
Most banks offer these and again provide a higher interest rate when compared to savings accounts. Account-holders can spend money directly from the account, though there are typically balance minimums and transaction limits.
Certificates Of Deposit
Certificates of Deposit (CDs) are a low risk investment type offered by banks as a way for them to secure capital. When you purchase a CD, you are giving the bank permission to use your funds however they need to. In exchange, you will receive a higher interest rate than you would from a savings account. Note that you cannot withdraw funds from a CD before its expiration, or you risk losing some of the interest earned (and, in some cases, part of your initial investment).
Series I Savings Bonds
A Series I savings bond is a type of low risk investment bond that adjusts for inflation. Investors often worry that their return-on-investment is essentially pointless if their interest growth can’t keep up with inflation. Luckily, Series I bonds automatically adjust their interest rates relative to inflation. However, keep in mind that this means that the interest rate will fall along with the inflation rate. Overall, it’s a safe investment that can give an investor peace of mind that they’ll at least be keeping pace with inflation.
Treasury Notes, Bills, Bonds, & TIPS
The U.S. Treasury issues a few different investment options that mature over time. These include treasury notes, treasury bills, bonds, and treasury inflation-protected securities (TIPS). These opportunities are thought to be low-risk because they are issued and backed by the U.S. government. They offer potential profits in the form of interest.
Corporate Bonds
Corporate bonds are an alternative to U.S. Treasury bonds and allow investors to earn interest by working with private companies. There can be some risk involved, as private companies can default or go out of business. The best way to minimize risk while investing in corporate bonds is to research stable, profitable companies.
Preferred Stocks
Preferred stocks represent shares in a private company, and they typically pay investors quarterly in the form of dividends. While preferred stocks trade on an exchange, they are more similar to bonds than traditional stocks. This is because preferred stocks offer fixed returns regardless of market performance (though there is still some risk associated with investing in private companies).
Dividend Paying Stocks
On a scale of low to high-risk investments in the stock market, dividend-paying stocks can be considered one step above preferred stocks. This is because dividend stocks are subject to traditional stock market fluctuations, though they do pay regular cash dividends (making them less risky than traditional stocks). If you mind your due diligence when selecting a company, dividend-paying stocks can be a low to moderate risk addition to your portfolio.
Mutual Funds
Mutual funds represent the opportunity to diversify your portfolio with a single investment. They can be thought of as a pool of investor funds, which are then used to buy various other investment types such as stocks, bonds, and securities. The purpose of mutual funds is to maximize returns for each investor while minimizing overall risk. Sounds perfect, right? Choosing the right mutual fund involves a lot of research, and with any investment type, there is still some risk involved. Read our guide to mutual funds to learn more about how to get started.
Stable Value Funds
Does your employer offer a 401(k) plan for retirement? If yes, stable value funds are one way you can invest within your retirement account. These funds are essentially contracts issued by banks or insurance companies that generate interest over a predetermined amount of time. They are an excellent low risk option because they typically offer shorter terms than bonds or CDs.
Fixed Annuities
Fixed annuities can be thought of as similar to CDs, though they are issued by insurance companies rather than banks. These low risk investments allow you to accumulate interest in a tax-deferred account. They can be paid out as a lump sum or over time, depending on the contract. Fixed annuities are typically best used as a way to prepare for retirement, as funds are not accessible without a penalty until you turn 59½.
Immediate Annuities
If you are looking for a low risk investment with regular income, immediate annuities might be the right option. They are more frequently used as a way to guarantee retirement income. There is some risk involved when purchasing annuities, for example, if the insurance company were to go out of business. However, this risk can be minimized by researching and comparing different companies.
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4 Best Low Risk Real Estate Investments
When investors think real estate, “low-risk” is not always the first thing that comes to mind. However, there are several real estate strategies that are thought to be lower risk when compared to other investment types. These investments can be a great way to increase your reward, while still shouldering a minimal amount of risk. Here are the best low risk real estate investment types:
Long-Term Rental Properties
Short-Term Rental Properties
Buy-and-Hold Real Estate
Multi-Family Homes
Long-Term Rental Properties
Real estate is an interesting asset class because it is always in demand. This is what makes long-term rental properties such a great investment opportunity. There is a need for rental houses in almost every market in the country, though you should always research your market before getting started. When managed correctly, they can provide consistent cash flow for as long as you own the property.
Short-Term Rental Properties
Thanks to the creation of platforms like Airbnb and VRBO, short-term rental properties have become easier to manage than ever before. In certain markets, they can be extremely profitable, even after cleaning and maintenance costs are factored in. Short-term rentals are often considered low risk because their demand is predictable. They can be priced differently based on the season to maximize profitability (for example, higher prices in the summer for a beachfront property).
Buy-and-Hold Real Estate
Buy-and-hold real estate refers to the strategy of purchasing a property, typically for below market value, and selling it for a profit after it goes up in value. Buy-and-hold properties can take years to appreciate, depending on how fast the market moves in your area. However, in the meantime, the property can be rented out for a profit. Buy-and-hold is thought of as a low risk investment because it can be executed without difficulty with the right market research.
Multi-Family Homes
Multi-family homes represent a great first step into real estate investing while also being relatively low risk when compared to other investment types. Multi-family properties can even be purchased using FHA loans, which are backed by the government to provide low interest rates to qualifying buyers. For example, you could purchase a duplex to live on one side and rent out the other (thus generating long term cash flow).
Summary
The best investment portfolios will strike a balance between high and low risk opportunities. This is often the only way to maximize returns without placing your finances entirely on the line. When it comes to low risk investments, there are so many options for investors to choose from. Consider your availability and ideal investment timeline before getting started. If you have already dipped your toes in the water, think about adding a low risk real estate investment to your portfolio. The sooner you get started, the sooner you can begin securing your financial future.
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