Why low-risk investments?
After a volatile end to 2018, wary investors may be searching for stability in 2019. Even for aggressive stock market fiends, an investment portfolio that’s diversified with less-risky assets is vital to ensure your earnings see growth over time.
What to consider
The trade-off, of course, is that in lowering risk exposure, investors are likely to see 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.
Risk tolerance and time horizon play big roles in deciding how to allocate your investments. Conservative investors or those near retirement may be more comfortable allocating a larger percentage of their portfolios to less-risky investments to minimize risk. These are also great for people saving for short term (about five years or fewer) or intermediate (around a decade) goals.
Those with stronger stomachs and workers still accumulating a retirement nest egg probably can fare better with riskier accounts, as long as they diversify. Be prepared to do your homework and shop around for the accounts that fit both your short- and long-term goals.
Overview: best investments in 2019
If you’re looking to minimize your portfolio’s risk, here are a few of the safest investments to consider:
#1: Certificates of deposit
Certificates of deposit, or CDs, are issued by banks and generally offer a higher interest rate than savings accounts.
These federally insured time deposits have specific maturity dates that can range from several weeks to several years. Because these are “time deposits,” you cannot withdraw the money for a specified period of time without penalty.
The financial institution pays you interest at regular intervals. Once the CD matures, you get your original principal back plus any accrued interest. Today you can earn as high as nearly 3 percent interest.
Risk: CDs are considered safe investments. However, they do carry reinvestment risk — the risk that when interest rates fall, investors will earn less when they reinvest principal and interest in new CDs with lower rates. The opposite risk is that rates will rise and investors won’t be able to take advantage because they’ve already locked their money into a CD.
Consider laddering CDs — investing money in CDs of varying terms — so that all your money isn’t tied up in one instrument for a long time. CD returns are inching up as interest rates are on the rise, but it’s important to note that inflation and taxes could significantly erode the purchasing power of your return.
Liquidity: CDs aren’t as liquid as savings accounts or money market accounts because you tie up your money until the CD reaches maturity — often for months or years. It’s possible to get at your money sooner, but generally you’ll pay a penalty.
#2: Money market accounts
A money market account is an FDIC-insured, interest-bearing deposit account.
Money market accounts typically earn higher interest than savings accounts and require higher minimum balances. Because they’re relatively liquid and earn high yields, money market accounts are a great option for your emergency savings.
In exchange for better interest earnings, consumers usually have to accept more restrictions on withdrawals, such as limits on how often you can access your money.
Risk: Inflation is the main threat. If inflation rates exceed the interest rate earned on the account, your purchasing power could be diminished. In addition, you could lose some or all of your principal if your account is not FDIC-insured (though the vast majority are) or if you have more than the $250,000 FDIC-insured maximum in any one account.
Liquidity: Money market accounts are considered liquid, especially because they come with the option to write checks from the account. However, federal regulations limit withdrawals to six per month (or statement cycle), of which no more than three can be check transactions.
#3: Money market funds
Not to be confused with money market accounts, money market mutual funds — also known as money market funds — are a saving and investing option offered by banks, brokerages and mutual fund companies.
These funds are great options for storing cash that you don’t want to tie up in a long-term investment.
Money market funds earn a higher yield than money market accounts and may be taxable or tax-free. These funds are stable and have historically tried to maintain a share price of $1, but that price is not guaranteed.
Risk: Money market funds are not FDIC-insured, but they’re regulated by the Securities and Exchange Commission. The SEC requires companies to invest them in short-term debt securities like CDs and U.S. Treasury bills. This helps reduce risk to the investor by protecting them from major rate fluctuations that may occur over longer periods.
Interest rates can vary, so there’s no guarantee of how much you’ll earn from month to month. Further, there’s no guarantee that the share price will remain stable at $1 per share. If the share price dips below $1, you could lose some of your principal.
Liquidity: Money market funds, like money market accounts, often provide check-writing and money transfer privileges for shareholders. There are usually limits on the number of transactions and required minimum withdrawals.
#4: Treasury securities
The U.S. government issues various types of securities to raise money to pay for projects and pay its debts.
These are some of the safest investments to guarantee no loss on your principal.
T-bills technically are not interest-bearing. They are sold at a discount from their face value, but when they mature, the government pays you full face value. For example, if you buy a $1,000 T-bill for $980, you would earn $20 on your investment.
Treasury notes, or T-notes, are issued in terms of two, three, five, seven and 10 years. Holders earn fixed interest every six months and then face value upon maturity. The price of a T-note may be greater than, less than or equal to the face value of the note, depending on demand. If demand by investors is high, the notes will trade at a premium, which reduces investor return.
Treasury bonds, or T-bonds are issued with 30-year maturities, pay interest every six months and face value upon maturity. They are sold at auction throughout the year. The price and yield are determined at auction.
All three types of Treasury securities are offered in increments of $100.
Risk: Treasury securities are considered virtually risk-free because they are backed by the full faith and credit of the U.S. government. You can count on getting interest and your principal back at maturity. However, the value of securities fluctuates, depending on whether interest rates are up or down. In a rising rate environment, existing bonds lose their allure because investors can get a higher return from newly issued bonds. If you try to sell your bond before maturity, you may experience a capital loss.
Treasuries also are subject to inflation pressures. If the interest rate of the security is not as high as inflation, investors lose purchasing power.
Because they mature quickly, T-bills may be the safest treasury security investment, as the risk of holding them is not as great as with longer-term T-notes or T-bonds. Just remember, the shorter your investment, the less your securities will generally return.
Liquidity: All Treasury securities are very liquid, but if you sell prior to maturity you may experience gains or losses, depending on the interest rate environment.
#5: Government bond funds
Government bond funds are mutual funds that invest in debt securities issued by the U.S. government and its agencies.
The funds invest in debt instruments such as T-bills, T-notes, T-bonds and mortgage-backed securities issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac.
These government bond funds are well-suited for the low-risk investor.
Risk: Funds that invest in government debt instruments are considered to be among the safest investments because the securities are backed by the full faith and credit of the U.S. government.
However, like other mutual funds, the fund itself is not government-backed and is subject to risks like interest rate fluctuations and inflation. If inflation rises, purchasing power can be diminished. If interest rates rise, prices of existing bonds decline, and if interest rates decline, prices of existing bonds rise. Interest rate risk is greater for long-term bonds.
Liquidity: Bond fund shares are highly liquid, but their values fluctuate depending on the interest rate environment.
#6: Municipal bond funds
Municipal bond funds invest in a number of different municipal bonds, or munis, issued by state and local governments.
Earned interest generally is free of federal income taxes and also may be exempt from state and local taxes.
According to the Financial Industry Regulatory Authority, muni bonds can be bought individually, through a mutual fund or and exchange-traded fund. You can consult with a financial adviser to find the right investment type for you, but you may want to stick with those in your state or locality for the best income tax rates.
Risk: Individual bonds carry the risk of default, meaning the issuer becomes unable to make further income or principal payments. Cities and states don’t go bankrupt often, but it can happen. Bonds also may be callable, meaning the issuer returns principal and retires the bond before the bond’s maturity date. This results in a loss of future interest payments to the investor.
Choosing a bond fund allows you to spread out potential default and prepayment risks by owning a large number of bonds, thus cushioning the blow of negative surprises from a small part of the portfolio.
Liquidity: You can buy or sell your fund shares every business day. In addition, you usually can reinvest income dividends and make additional investments at any time.
#7: Short-term corporate bond funds
Corporations sometimes raise money by issuing bonds to investors.
Small investors can get exposure by buying shares of short-term corporate bond funds. Short-term bonds have an average maturity of one to five years, which makes them less susceptible to interest rate fluctuations than intermediate or long-term.
Risk: As is the case with other bond funds, short-term corporate bond funds are not FDIC-insured. Investment-grade short-term bond funds can reward investors with higher returns than government and municipal bond funds.
But the greater rewards come with added risk. There is always the chance that companies will have their credit rating downgraded or run into financial trouble and default on the bonds. Make sure your fund is made up on high-quality corporate bonds.
Liquidity: You can buy or sell your fund shares every business day. In addition, you usually can reinvest income dividends and make additional investments at any time. Just keep in mind that capital losses are possible.
#8: Dividend-paying stocks
Even your stock market investments can become a little safer with stocks that pay dividends.
Dividends are portions of a company’s profit that they pay out to shareholders, usually quarterly. With a dividend stock, not only can you earn on your investment through long-term market appreciation, you’ll also earn cash in the short term.
Risk: As with any stock investments, dividend stocks come with risk. They’re generally considered safer than growth stocks or other non-dividend stocks, but you should choose your portfolio carefully. Make sure you invest in companies with a solid history of dividend increases rather than selecting those with the highest current yield. That could be a sign of trouble ahead.
Liquidity: Quarterly payouts, especially if the dividends are paid in cash, are relatively liquid. Still, to see the highest performance on your dividend stock investment, a long-term investment is key. You should reinvest your dividends for the best returns.
Annuities are contracts you make with an insurance company in which you invest an amount of money and receive regular payments over time in exchange.
You can choose a fixed annuity, where you’ll earn a predetermined rate on your distributions, or a variable annuity, where your payout may change depending on the investments’ performances. Annuities may be used as a retirement savings account over time or as a way to receive one lump sum in regular payments.
Risk: It’s important to note that you buy annuities through insurance companies, which are not FDIC-insured. Most states do have guaranty systems to protect annuity holders should their insurer go out of business. Still, only take out an annuity with a solid, highly rated insurer to protect yourself.
Take time choosing a policy that fits your needs and learn the differences between different types of annuities, such as fixed or variable and immediate or deferred. Annuity risks vary based on the type you take on. You should also consider the possibility of your annuity distributions losing spending power over time and the risk of fluctuating interest rates affecting your payout.
Liquidity: Annuities are highly illiquid. If you withdraw money from your annuity outside of the terms of your contract, you may be subject to fees and penalties from both your insurer and the IRS.
#10: High-yield savings account
Just like the savings account earning pennies at your brick-and-mortar bank, high-yield online savings accounts are accessible vehicles for your cash.
But at online banks with fewer overhead costs, you can earn much higher interest rates. Today, you can find accounts paying well above 2 percent.
Risk: The banks that offer these accounts are FDIC-insured, so you don’t have to worry about losing your deposit. While high-yield savings accounts are considered safe investments, like CDs, you do run the risk of earning less upon reinvestment due to inflation.
Liquidity: Savings accounts are about as liquid as your money gets. You can add or remove the funds at any time, but like money market accounts, federal regulations limit most transactions to six per month.
#11: Online checking account
Online checking accounts are just like your traditional checking account, but they come from online banks, meaning they’re able to offer minimal fees and higher yields than your traditional institutions, although some brick-and-mortar banks offer online branches with these accounts too.
There are a number of banks currently offering more than 1 percent APY on checking accounts.
Risk: Always make sure your online bank is FDIC-insured. These accounts are safe places to store your money, but at 1 to 2 percent, you’re not getting the highest returns. They can be a great way to store your liquid cash when paired with higher-earning investments.
Do your research beforehand to ensure there aren’t account minimums or deposit requirements to earn the advertised yield.
Liquidity: A checking account, even one online, is about as liquid an investment as you can find. If you anticipate withdrawing cash frequently, make sure the online bank you choose has fee-free accessibility to local ATMs.
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