“Best Low-Risk Investment Options for Conservative Investors”

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Low-Risk Investment Options for Your Portfolio

Whether you’re nearing retirement or simply looking for ways to minimize your investment risk, there are several types of securities that can help you achieve your goal. Low-risk investments typically come with lower returns, especially in the long run. Therefore, it’s important to understand the relationship between financial risk and expected returns and diversify your portfolio accordingly. Here are seven of the best investments for people with a low risk tolerance.

1. Certificates of Deposit (CDs)

A certificate of deposit (CD) is a time deposit bank account that offers a fixed interest rate for a period ranging from one month to several years. You’ll know your return from the start, and your annual percentage yield (APY) won’t change during the CD’s term. As of January 2024, some of the best CD rates are well above 5%.

In exchange for the returns a CD provides, you typically need to lock up your funds in the account until it matures. If you withdraw money too early, you could be penalized. As a result, it’s best to avoid locking up money you may need access to before your desired CD term ends.

There are several different types of CDs, each with different features that may better suit your needs and goals. For instance, brokered CDs can offer greater returns than traditional bank CDs, albeit with additional risks: You can sell your CD without incurring an early withdrawal penalty, but you may get less than your original investment.

2. Treasury Securities

The U.S. Treasury offers investors a variety of bills, notes, and bonds. These are among the safest investment options because they’re backed by the full faith and credit of the U.S. government. Here’s how they work:

• Treasury bills: These short-term investments have a maturity of one year or less. As of January 2024, yields are hovering around 5%.
• Treasury notes: These are mid-term Treasury securities, with maturities ranging from two to 10 years. The latest rates for Treasury notes are around 4%.
• Treasury bonds: These come with terms of 20 or 30 years. Current yields for Treasury bonds are in the low 4% range.
• Treasury Inflation-Protected Securities (TIPS): These ensure that your investment keeps up with inflation. The face value of your investment can go up or down with the inflation rate.

Note that your return on a Treasury security is exempt from local and state income taxes but will be subject to federal income taxes.

3. Savings Bonds

The U.S. Treasury also offers a separate program of savings bonds, including EE bonds and I bonds:

• EE bonds: These have a fixed interest rate—currently 2.7% through April 2024—for at least 20 years of their 30-year term.
• I bonds: These provide some inflation protection by offering a combination of a fixed interest rate and an inflation rate that changes every six months over its 30-year term. For bonds issued through April 2024, the total rate is 5.27%.

Interest is compounded semiannually and added to the principal value of the bond. You can’t redeem them during the first year, and if you redeem them before the five-year mark, you’ll lose the previous three months’ worth of interest.

4. Municipal Bonds

Municipal bonds, or munis, are issued by state, city, county, and other local government agencies. There are two types:

• General obligation bonds: These are backed by the full faith and credit of the issuing government agency and tend to carry less risk overall compared to revenue bonds.
• Revenue bonds: These are backed by the revenue of the specific project they’re financing, such as transportation revenue bonds. They tend to be riskier but can offer higher returns.

Municipal bond terms and yields can vary depending on the issuing agency, but they tend to offer lower returns than Treasury securities. They also have a low default risk, and returns aren’t taxed at the federal level (and sometimes not even at the state level).

5. Corporate Bonds

Corporate bonds are debt instruments issued by corporations to raise money for specific opportunities or general financial needs. The risks and returns associated with corporate bonds can vary depending on the company issuing them.

If you want to minimize your risks, focus on investment-grade bonds, which are issued by corporations with strong credit ratings. Even highly rated bonds carry more of a default risk than Treasury and municipal bonds, but they typically offer a better return. For example, the average yield for the highest-rated corporate bonds by Moody’s is currently 4.74%.

6. Money Market Funds

A money market fund is a type of mutual fund that invests in short-term, highly liquid assets, such as cash and government securities. The risks and potential return can depend on how the fund is managed. With Vanguard, for instance, seven-day yields currently range from roughly 2.5% to over 5%.

7. Preferred Stocks

Preferred stocks are a hybrid investment that combines elements of both debt and equity from the issuing company. They tend to be riskier than bonds but less risky than common stocks. Preferred stockholders get first priority over common stockholders when a company pays dividends or distributes assets, though they typically don’t get voting rights. Prices are also typically less volatile than common stock prices, though actual returns will vary by company.

The Bottom Line

Understanding your goals and risk tolerance can help you determine the best way to construct your investment portfolio. While many of these investments carry extremely low risk, they won’t offer you the same returns over time as high-risk investments like stocks and real estate.

If you have a long time horizon, it may make sense to have fewer low-risk investments because you have time to compensate for short-term volatility. But if you anticipate needing your funds within a few years, lower-risk options are generally preferable.

If you’re struggling to determine the best way to develop an investment strategy or manage your portfolio, consider consulting with a financial advisor who can provide you with personalized, expert advice on your situation.

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