The investment market in 2022 was volatile as inflation raged and the Fed’s rapid interest rate hikes created uncertainty about the economy. Some experts believe there’s reason for optimism about the economy in the coming months, while others believe the U.S. is headed for a recession with rising inflation and interest rates.
While investor confidence is low, many have shifted their investment strategy toward low-risk investments to protect their money from volatility. The good news is that there are many investment options for anyone looking to build wealth in an unreliable economy. In this article, find out which low-risk investments produce strong long-term results.
- Low-risk investments are critical during times of economic uncertainty.
- Safe investments often come with lower returns, so investors should have a diversified portfolio with assets of varying risk levels.
- The U.S. government has never defaulted on debt, making treasury debt securities and I bonds safe investments.
- Dividend-paying stocks, fixed-income annuities, corporate bonds, and some U.S. debt securities can provide regular income.
Assessing Risk Tolerance Before Investing
Risk tolerance is the level of comfort an investor has when exposed to investment losses. Investors with high-risk tolerance feel comfortable exposing themselves to more significant losses or a higher probability of losses occurring. Investors with low-risk tolerance feel most comfortable with investments that have little chance of losing money.
Many factors can impact an investor’s risk tolerance. While personality and emotional state may play a role, risk tolerance is generally most affected by an investor’s age, investment knowledge, personal financial responsibilities, other sources of income, and current economic conditions. For example, if an investor is nearing retirement age and economic conditions look poor, they may be primarily interested in low-risk investments. They don’t want to see significant losses right before retirement when their investment portfolio becomes their primary source of income.
Investors with a low-risk tolerance will likely see lower returns over time. Low-risk investments are best as a part of a diversified portfolio or as short-term savings options.
Best Low-Risk Investments for 2023
1. High-Yield Savings Account
A high-yield savings account provides a higher return than traditional savings accounts. Traditional savings accounts average a 0.21% return. The U.S. Federal Reserve sets a target annual inflation rate of 2%, which means even in a perfect economy, you’ll see a negative return each year you store your money in a traditional savings account.
With average returns between 2% and 4%, high-yield savings accounts allow you to store your money while limiting inflation-related losses. These savings accounts typically have high liquidity, so you can access your savings anytime.
Additionally, like all savings accounts, the FDIC insures high-yield savings accounts. Your bank agrees to return your principal to you plus interest, but in the event of a bank failure, your money is insured up to $250,000.
Unfortunately, when inflation is high, the returns on a high-yield savings account may not be enough to counteract the effects of inflation. In 2022, inflation rates remained consistently above 7.5%, reaching as high as 9.1% at one point.
During times of high inflation, a high-yield savings account can slow your losses related to inflation, but you’ll still likely see a negative return. It’s best to store only short-term and emergency savings in these savings accounts when your return rate is lower than inflation.
- Beat the returns of a traditional savings account
- Keep your savings liquid
- Modest return rate may not counteract inflation in high-inflationary periods
How Do I Invest?
You have many options for providers of high-yield savings accounts. Here are a few of the top providers who can help you open an account and begin earning higher returns on your savings:
- Marcus by Goldman Sachs: This savings account offers a 3% yield and no monthly fee, with six free withdrawals per statement cycle.
- Bask Bank Interest Savings Account: Bask Bank offers a 3.6% yield, no monthly fee, and six free withdrawals per statement cycle.
- Varo Savings Account: The yield for a Varo Savings Account starts at 2%, but you can begin qualifying for a 5% return.
2. Dividend-Paying Stocks
There are two types of dividend-paying stocks: common and preferred. Both types of stockholders may receive dividends, but the payout method and risk level vary.
- Preferred stock: Preferred stock is a type of stock that gives the holder a set dividend payment each year with an average annualized return of 6.14%. The risk level of preferred stock is lower than common stock because preferred stockholders always get priority over other stockholders. If the company is liquidated, the preferred stockholders are paid before any other stockholders. Additionally, most companies pay preferred stockholders the same rate of dividend payment they were promised upon purchasing, regardless of the fluctuations in the stock’s value, while common stock dividend payments can vary with stock price changes.
- Dividend-paying common stocks: In 2022, the average dividend-paying common stock return was roughly 3.2%. Common stock dividends are less reliable than preferred stock dividends because they fluctuate. However, common dividend stocks are still low-risk investments when compared to non-dividend stocks because you begin earning income in the short term rather than relying on the stock’s long-term performance.
- Provides a reliable income stream
- Opportunity for high returns, especially among preferred stock
- Risk levels can vary, especially when investing in companies without strong track records
- Varying stock values can affect liquidity
How Do I Invest?
You can purchase dividend stocks through a broker or financial advisor. Here are some of the best online and traditional brokerage options:
- Fidelity Investments: Fidelity is consistently one of the top low-cost brokerage companies. Many beginner investors enjoy the affordability and guidance they get by working with Fidelity.
- TD Ameritrade: TD Ameritrade has some account fees but offers a wide array of educational resources and excellent customer service.
- Webull: Webull is a free stock-trading platform with an easy-to-use app but limited educational support.
3. Treasury Debt Securities
A debt security issued by the U.S. government is one of the safest investments because the U.S. has never defaulted on its debt. There are four main types of debt securities offering a variety of interest rates and term lengths. Here are your options for investing in U.S. debt securities:
- Treasury notes: T-notes mature between two and ten years, with bi-annual interest payments. These notes can be purchased in any amount between $100 to $10 million. As of November 2022, the latest interest rate for a 10-year note was 4.125%.
- T Bills: A treasury bill is a U.S. government debt security with a maturity length of one year or less. You receive the interest when the bond matures. As of November 2022, the average rate of return on a four-week treasury bill was 3.53%.
- Treasury bonds (T-bonds): T bonds are fixed-rate U.S. government debt securities with a maturity range between 20 and 30 years. Bondholders receive interest payments every six months. As of November 2022, the latest interest rate was 4%.
- TIPS: TIPS, or treasury inflation-protected securities, are issued in lengths of 5, 10, or 30 years. The current average interest rate is 0.487%. While the interest rate typically remains low, the principal is adjusted for inflation. For example, if you invest $1,000 while inflation is at 7%, your principal will be increased by 7%, giving you $1,070. You’ll earn interest on the new adjusted principle. Because inflation in 2022 has been high and is expected to remain above average, TIPS are one of the best investments right now.
- Some treasury debt securities offer short-term lengths for greater liquidity
- U.S. government backing means these securities are very low risk
- There are many term length and interest rate options, allowing you to choose the security that best meets your needs
- Some treasury debt securities have long-term lengths, keeping you from retrieving your money for long periods of time
- Some debt securities have low-interest rates that cannot match high inflation
How to Invest
U.S. Treasury securities are sold at regularly scheduled auctions. You can bid at an auction through a Treasury Direct account or through a bank, broker, or dealer. As mentioned above, Fidelity Investments, TD Ameritrade, and Webull are excellent brokerage options.
If you choose to bid directly through your Treasury Direct account:
- Go to your TreasuryDirect account or set up an account here.
- Choose the Buy Direct tab.
- Follow the prompts to choose the security you want and the amount you want to buy.
4. I Bonds
An I bond is a government savings bond that earns interest based on a fixed interest rate and a variable inflation rate. The fixed rate remains the same for the 30-year life of the bond, while the inflation rate is set every six months.
As of November 2022, I bonds offer a 6.89% rate of return. The current rate is a combination of a 0.4% fixed rate and a 3.24% inflation rate, which will be adjusted in May 2023 and again every six months for the life of the bond.
I bonds are especially appealing during inflationary periods because their rates are set specifically to protect your savings from the loss of purchasing power that occurs when inflation is rampant. I bonds are popular in 2022 because investors are looking for safe investments with high returns while inflation is high. However, when inflation returns to target levels or below, investors can often earn higher returns from other types of investments.
While the interest rate rises during periods of high inflation, the US government guarantees bondholders that the rate will never drop below zero, even in deflationary periods.
I bonds are not a good option for people looking for high liquidity in an investment. You cannot retrieve your money from an I bond within the first year of purchasing. If you want to cash out on your bond within the first 1–5 years of holding it, you will forfeit three months of interest.
Additionally, I bondholders may only purchase $10,000 in electronic I bonds each year and $5,000 in paper bonds, meaning you will need to find alternative investments for any savings that exceed $15,000.
- Inflation protection
- You cannot lose your principal by investing in an I bond
- Limited liquidity
- Low returns in periods of low inflation
- Annual limits
How to Invest
You can purchase electronic I bonds by opening a U.S. Treasury Direct account. Follow these steps:
- Set up a Treasury Direct account here.
- Select “BuyDirect.”
- Select “Series I” from the category “Savings Bonds” and click “Submit.”
- Fill out your desired purchase amount and other requested information.
To purchase paper bonds, you’ll need to fill out Form 8888 while filing your tax returns. This form specifies how much of your tax return you want in the form of an I bond and how much you want in cash.
5. Certificates of Deposit
A certificate of deposit, also known as a CD, is a type of savings account that guarantees a fixed interest rate in exchange for a longer-term commitment from the CD’s holder to leave the money untouched. The term length is typically between three months and five years, with the longer term lengths earning higher rates of return.
As of November 2022, the average return for a one-year CD was 1.2%. While average return rates are relatively low, high-yield CDs can offer returns over 4%. Do your research before investing to ensure you’re getting the best rate possible.
CDs are a safe investment option because similar to savings accounts, CDs are FDIC-insured up to $250,000, so in the event of a bank failure, your money is protected.
- Many banks offer high-yield certificates of deposit
- There are many low-yield CD options—if you don’t do your research, you may end up with a low rate of return
- Inflexible term lengths leave CD holders with low liquidity
How to Invest
Choose your favorite bank or financial institution to open a certificate of deposit. Look for high return rates, liquidity that matches your needs, and a minimum deposit that fits your budget.
- Citi Bank: Citi Bank offers a 4.35% interest rate for a 13-month term and a minimum deposit of $1,000.
- Synchrony: Open a CD account with Synchrony to receive a 4.4% return rate for a 15-month term and no minimum deposit.
- Blue Federal Credit Union: This credit union offers a CD with a 4.7% return rate for a 15-month term.
6. Corporate Bonds
A corporate bond is a type of debt security issued by private companies. Bonds pay bondholders a fixed interest rate over time. Many corporate bonds do not have annual maximums and offer higher yields than traditional savings accounts. In 2022, the average 10-year high-quality bond interest rate was 4.57%.
Corporate bonds guarantee you’ll receive your principal investment plus a fixed-interest rate at the end of the term. However, if the company declares bankruptcy, you may not be able to claim your investment.
To protect bondholders, companies receive an “A,” “B,” “C,” or “D” rating that evaluates their risk level. Companies with an “A” rating are low risk and unlikely to default, while companies with a “D” rating are much riskier.
While A-grade corporate bonds are low-risk, all bonds are sensitive to rising interest rates. When interest rates rise, bonds often become more difficult to sell, which means you can lose money if you need to sell your bond quickly.
Although bonds are safe investments with high returns, they are not the most flexible investment option. Many bonds require a minimum investment of $1,000, and liquidity relies on your ability to resell your bond to another purchaser.
- Provides a consistent source of income
- A-grade companies are low-risk investments
- Minimum investment requirements
- Limited liquidity
- Sensitive to interest rate changes
How to Invest
- Purchase corporate bonds through a brokerage or with the help of a financial advisor
7. Fixed-Income Annuities
An annuity is a contract with an insurance company. In exchange for an upfront payment, owners of fixed annuities are guaranteed a certain amount of income for a specified period of time, usually during retirement or until death. Average fixed-income annuity rates in 2022 are between 3.6% and 5.25% ranging from two to ten years.
Retirees often use the income from annuities to cover necessary expenses like groceries, auto insurance, credit bills, or debt payments. Unfortunately, many retirees still have debt from student loans, credit cards, or personal loans, so a fixed income is critical.
Because a fixed annuity is more like an insurance policy than a stock or bond, you don’t have to rely on a strong economy to ensure you’ll earn a profit. However, although the returns are guaranteed, they tend to be low when you factor in the fees involved in purchasing an annuity.
Because of low returns, many investors choose to put money in investment vehicles that offer higher returns but more risk. During uncertain times, though, a fixed-income annuity can be a perfect solution for someone who wants to rest easy in retirement without worrying about a stock market crash.
- Guaranteed income
- Can have high fees
- Low returns
- Low flexibility
How to Invest
To purchase an annuity, research the top options to find a low-fee, high-return option with the term lengths that meet your needs. Here are some of the most popular annuity options:
- American National: American National offers a long-term annuity with a 2.3% yield and a contribution minimum of $5,000. There is no annual fee. However, there is a 2.5% sales commission upfront.
- Fidelity: Fidelity offers six different types of annuities with minimums ranging from $5,000 to $25,000. With an annual fee of 0.25%, the average return for a Fidelity annuity is 1.65%.
- Allianz: Allianz offers seven types of annuities with minimum premiums between $10,000 and $20,000. The return rates for Allianz annuities are between 4.37% and 6.7%
Building Wealth During Uncertain Times
Building wealth during uncertain times requires a disciplined approach. Follow these three tips to ensure your portfolio contains safe investments with high returns:
- Create a diversified portfolio: Your portfolio should contain low-risk investments as well as moderate to high-risk investments. The safest investments are diversified investments.
- Be patient: Market volatility often causes investors to panic and sell their investments, but remember to be patient when the value of your investments drops. Always think long-term while investing, and you’ll come out on top.
- Capitalize on low prices: When investment prices drop, you can often purchase securities at discounted prices. This is an excellent opportunity for building wealth, but it requires discipline while you wait for values to rise again.
For more investment advice, check out this article:
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