While the U.S. economy continues to recover from the COVID-19 pandemic, there may still be quite a few bumps in the road during the rest of 2021 and beyond. The stock market enjoyed a substantial rebound in the second half of last year and has largely stayed hot since. But investors should stay disciplined in the event that the market cools off or inflation continues to surge. Building a portfolio that has at least some less-risky assets can be useful in helping you ride out future volatility in the market.
The trade-off, of course, is that in lowering risk exposure, investors are likely to earn lower returns over the long run. That may be fine if your goal is to preserve capital and maintain a steady flow of interest income.
But if you’re looking for growth, consider investing strategies that match your long-term goals. Even higher-risk investments such as stocks have segments (such as dividend stocks) that reduce risk while still providing attractive long-term returns.
What to consider
Depending on how much you’re willing to risk, there are a couple of scenarios that could play out:
- No risk — You’ll never lose a cent of your principal.
- Some risk — It’s reasonable to say you’ll either break even or incur a small loss over time.
There are, however, two catches: Low-risk investments earn lower returns than you could find elsewhere with risk; and inflation can erode the purchasing power of money stashed in low-risk investments.
If you opt for only low-risk investments, you’re likely to lose purchasing power over time. It’s also why low-risk plays make for better short-term investments or a stash for your emergency fund. In contrast, higher-risk investments are better suited for higher long-term returns.
Here are the best low-risk investments in November 2021:
- High-yield savings accounts
- Savings bonds
- Certificates of deposit
- Money market funds
- Treasury bills, notes, bonds and TIPS
- Corporate bonds
- Dividend-paying stocks
- Preferred stocks
- Money market accounts
- Fixed annuities
Overview: Best low-risk investments in 2021
While not technically an investment, savings accounts offer a modest return on your money. You’ll find the highest-yielding options by searching online, and you can get a bit more yield if you’re willing to check out the rate tables and shop around.
Why invest: A savings account is completely safe in the sense that you’ll never lose money. Most accounts are government-insured up to $250,000 per account type per bank, so you’ll be compensated even if the financial institution fails.
Risk: Cash doesn’t lose dollar value, though inflation can erode its purchasing power.
Like savings accounts, U.S. savings bonds aren’t investments, strictly speaking.
Rather, they’re “savings instruments,” says Mckayla Braden, former senior advisor for the U.S. Department of the Treasury, which operates TreasuryDirect.gov.
Via TreasuryDirect, the Treasury sells two types of savings bonds: the EE bond and I bond.
“The I bond is a good choice for protection against inflation because you get a fixed rate and an inflation rate added to that every six months,” Braden says, referring to an inflation premium that’s revised twice a year.
Why invest: The Series EE savings bonds pay interest up to 30 years, and they earn a fixed rate of return if they were issued in May 2005 or after. If a U.S. savings bond is redeemed before five years, a penalty of the last three months’ interest is charged.
Risk: U.S. savings bonds come with little to no risk, and they may also come with little or no return. So you’re likely to lose purchasing power over time.
Bank CDs are always loss-proof in an FDIC-backed account, unless you take the money out early. To find the best rates, you’ll want to shop around online and compare what banks offer.
Why invest: If you leave the CD intact until the term ends the bank promises to pay you a set rate of interest over the specified term.
Some savings accounts pay higher rates of interest than some CDs, but those so-called high-yield accounts may require a large deposit.
Risk: If you remove funds from a CD early, you’ll usually lose some of the interest you earned. Some banks also hit you with a loss of a portion of principal as well, so it’s important to read the rules and check rates before you purchase a CD.
Money market funds are pools of CDs, short-term bonds and other low-risk investments grouped together to diversify risk, and are typically sold by brokerage firms and mutual fund companies.
Why invest: Unlike a CD, a money market fund is liquid, which means you typically can take out your funds at any time without being penalized.
Risk: Money market funds usually are pretty safe, says Ben Wacek, founder and financial planner of Guide Financial Planning in Minneapolis.
“The bank tells you what rate you’ll get, and its goal is that the value per share won’t be less than $1,” he says.
The U.S. Treasury also issues Treasury bills, Treasury notes, Treasury bonds and Treasury inflation-protected securities, or TIPS:
- Treasury bills mature in one year or sooner.
- Treasury notes stretch out up to 10 years.
- Treasury bonds mature up to 30 years.
- TIPS are securities whose principal value goes up or down depending on the direction of inflation.
Why invest: All of these are highly liquid securities that can be bought and sold either directly or through mutual funds.
Risk: If you keep Treasurys until they mature, you generally won’t lose any money, unless you buy a negative-yielding bond. If you sell them sooner than maturity, you could lose some of your principal, since the value will fluctuate as interest rates rise and fall. However, recent volatility in the market and the Fed’s move to lower interest rates to zero mean that some Treasurys may actually have a negative yield. So buying some of these bonds could actually cost you money.
Companies also issue bonds, which can come in relatively low-risk varieties (issued by large profitable companies) down to very risky ones. The lowest of the low are known as high-yield bonds or “junk bonds.”
“There are high-yield corporate bonds that are low rate, low quality,” says Cheryl Krueger, founder of Growing Fortunes Financial Partners in Schaumburg, Illinois. “I consider those more risky because you have not just the interest rate risk, but the default risk as well.”
- Interest-rate risk: The market value of a bond can fluctuate as interest rates change. Bond values move up when rates fall and bond values move down when rates rise.
- Default risk: The company could fail to make good on its promise to make the interest and principal payments, potentially leaving you with nothing on the investment.
Why invest: To mitigate interest-rate risk, investors can select bonds that mature in the next few years. Longer-term bonds are more sensitive to changes in interest rates. To lower default risk, investors can select high-quality bonds from reputable large companies, or buy funds that invest in a diversified portfolio of these bonds.
Risk: Bonds are generally thought to be lower risk than stocks, though neither asset class is risk-free.
“Bondholders are higher in the pecking order than stockholders, so if the company goes bankrupt, bondholders get their money back before stockholders,” Wacek says.
Stocks aren’t as safe as cash, savings accounts or government debt, but they’re generally less risky than high-fliers like options or futures. Dividend stocks are considered safer than high-growth stocks, because they pay cash dividends, helping to limit their volatility but not eliminating it. So dividend stocks will fluctuate with the market but may not fall as far when the market is depressed.
Why invest: Stocks that pay dividends are generally perceived as less risky than those that don’t.
“I wouldn’t say a dividend-paying stock is a low-risk investment because there were dividend-paying stocks that lost 20 percent or 30 percent in 2008,” Wacek says. “But in general, it’s lower risk than a growth stock.”
That’s because dividend-paying companies tend to be more stable and mature, and they offer the dividend, as well as the possibility of stock-price appreciation.
“You’re not depending on only the value of that stock, which can fluctuate, but you’re getting paid a regular income from that stock, too,” Wacek says.
Risk: One risk for dividend stocks is if the company runs into tough times and declares a loss, forcing it to trim or eliminate its dividend entirely, which will hurt the stock price.
8. Preferred stocks
Preferred stocks are more like lower-grade bonds than common stocks. Still, their values may fluctuate substantially if the market falls or if interest rates rise.
Why invest: Like a bond, preferred stock makes a regular cash payout. But, unusually, companies that issue preferred stock may be able to suspend the dividend in some circumstances, though often the company has to make up any missed payments. And the company has to pay dividends on preferred stock before dividends can be paid to common stockholders.
Risk: Preferred stock is like a riskier version of a bond, but is generally safer than a stock. They are often referred to as hybrid securities because holders of preferred stock get paid out after bondholders but before stockholders. Preferred stocks typically trade on a stock exchange like other stocks and need to be analyzed carefully before purchasing.
A money market account may feel much like a savings account, and it offers many of the same benefits, including a debit card and interest payments. A money market account may require a higher minimum deposit than a savings account, however.
Why invest: Rates on money market accounts may be higher than comparable savings accounts. Plus you’ll have the flexibility to spend the cash if you need it, though the money market account may have a limit on your monthly withdrawals, similar to a savings account. You’ll want to search for the best rates here to make sure you’re maximizing your returns.
Risk: Money market accounts are protected by the FDIC, with guarantees up to $250,000 per depositor per bank. So money market accounts present no risk to your principal. Perhaps the biggest risk is the cost of having too much money in your account and not earning enough interest to outpace inflation, meaning you could lose purchasing power over time.
10. Fixed annuities
An annuity is a contract, often made with an insurance company, that will pay a certain level of income over some time period in exchange for an upfront payment. The annuity can be structured many ways, such as to pay over a fixed period such as 20 years or until the death of the client.
With a fixed annuity, the contract promises to pay a specific sum of money, usually monthly, over a period of time. You can contribute a lump sum and take your payout starting immediately, or pay into it over time and have the annuity begin paying out at some future date (such as your retirement date.)
Why invest: A fixed annuity can provide you with a guaranteed income and return, giving you greater financial security, especially during periods when you are no longer working. An annuity can also offer you a way to grow your income on a tax-deferred basis, and you can contribute an unlimited amount to the account. Annuities may also come with a range of other benefits, such as death benefits or minimum guaranteed payouts, depending on the contract.
Risk: Annuity contracts are notoriously complex, and so you may not be getting exactly what you expect if you don’t read the contract’s fine print very closely. Annuities are fairly illiquid, meaning it can be hard or impossible to get out of one without incurring a significant penalty. If inflation rises substantially in the future, your guaranteed payout may not look as attractive either.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.