10 Lower-Risk Investments to Consider
Investing is a smart way to make your money work for you and build wealth over time.
However, not everyone is willing to take significant risks in the financial market.
If you are an investor looking for safety and stability, there are a variety of low-risk investment options at your disposal.
In this list, we will explore 10 of these alternatives that can help protect your capital while seeking consistent returns.
We will examine each of them in detail and understand how they can fit into your financial strategy.
1. High-Yield Savings Accounts
High-yield savings accounts can earn you much higher interest earnings than traditional savings accounts.
They’re ideal for people who want to save money toward short-term goals or larger expenses down the road, like a home down payment.
While cash doesn’t lose value, inflation can erode the purchasing power of your funds over time.
Depending on your financial situation and risk tolerance, you may be better off with another investment option.
2. Preferred Stocks
Preferred stocks are a less volatile investment than common stocks, and they often offer higher yields than dividend-paying shares.
They can also serve as an alternative to bonds in a well-diversified portfolio.
Financial companies, like Texas Instruments (TXN), maker of the iconic calculator you used in school, issue preferred stock to raise capital without diluting their own shareholdings.
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Their prices move more narrowly than common stock, and usually depend on interest-rate risk or the issuing company’s creditworthiness.
They come with long maturities, which can further help diversify your portfolio.
3. Short-Term Bonds
Investors often seek lower risk investments, like short-term bonds, that still offer potential to earn a yield.
They have less interest rate exposure than longer-term bonds and are typically more stable than stocks.
Bonds are debt securities issued by governments, municipalities or corporations to raise money in return for regular interest payments and a principal payout when the bond reaches maturity.
Investing in low-risk bonds, such as government or corporate bonds, can help you diversify your portfolio. But it’s important to remember that lower-risk investments also have a lower return potential.
4. Certificates of Deposit
If you’re looking to save money or earn an extra income, low-risk investments like certificates of deposit (CDs) and high-yield savings accounts can help.
But make sure you know your own goals and time horizon.
The best CDs offer higher interest rates than savings or money market accounts in exchange for tying up your funds for a set term.
That means you may miss out on more growth potential long-term. Compare options based on your risk tolerance, financial needs and time horizon.
Read our guide on investing in CDs for more information.
5. Annuities
Annuities offer the potential to realize tax-deferred compounding growth over a long period of time.
They also typically carry less risk than individual stocks or bonds, but they can still be vulnerable to market fluctuations.
While low risk doesn’t mean no risk, you should choose investments that align with your financial goals and tolerance for market volatility.
A qualified financial planner can help you identify options that are right for you. Find one near you with Bankrate’s AdvisorMatch.
6. Real Estate Investment Trusts (REITs)
REITs typically pay hefty dividends that are less volatile than stocks and often offer higher yields.
They provide diversified access to real estate at a lower minimum investment and risk level than direct ownership of property, says financial advisor Robert DeHollander of Greenville, SC.
REITs tend to “zig” when other investments zag, improving the overall returns of your portfolio for a given level of risk.
However, REITs are also susceptible to interest rate movements. Investors should choose REITs carefully, and avoid non-traded REITs and private REITs that may be difficult to sell or liquidate.
7. High-Yield Bonds
Most bond investors shun high-yield bonds, also known as junk bonds, for fear of defaults, ratings downgrades and economic turmoil.
But those that focus on risk management and a long-term investment horizon can reap significant yields.
Investors can buy these securities in the public markets and often find them less sensitive to day-to-day changes in interest rates than other types of bonds.
Moreover, they can offer more yield than private credit options. A financial advisor can help you determine if these investments make sense for your portfolio.
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8. Dividend Stocks
Investing in dividend stocks offers peace of mind because these securities gain back their value during market crashes and declines.
This makes them a safer option compared to growth stocks.
Investors usually focus on price gains when selecting dividend stocks, but a company’s financial health is just as important.
A good way to determine a company’s ability to sustain its dividend is by looking at its Distance to Default score.
Keep in mind that every type of investment has risk. Your investment goals and comfort level with risk will determine the types of investments that are best for you.
9. Real Estate Investment Trusts (REITs)
Unlike homeownership, REITs offer high dividend yields that are supported by consistent cash flows from rental property.
They are also less correlated with the stock market, making them a useful diversifier in your portfolio.
REITs are accessible to investors with modest investment thresholds and risk tolerances through mutual funds and exchange-traded funds.
The biggest risks include rising interest rates, which can ding REIT stocks (because they borrow money to finance their properties), and idiosyncratic real estate prices that rise and fall.
Investors should research both mortgage REITs and equity REITs carefully to find one that matches their goals and risk tolerance.
10. Short-Term Bonds
Short-term bonds offer stability, lower risk and a potentially higher yield than money market funds.
However, they also typically have lower interest rate potential and can be exposed to reinvestment risk.
Treasury bills (T-bills) and commercial paper are examples of short-term bonds.
Governments and corporations issue these securities, which are generally safer than stocks and provide a stronger return than money markets.
But beware that if interest rates rise, bond prices will fall and you could lose some of your principal.
That’s why many investors choose to buy bond funds rather than individual bonds.
In conclusion, when considering low-risk investments, it’s important to remember that while they offer security and stability, these options may not provide the substantial returns associated with high-risk investments.
However, capital preservation is crucial for many investors, especially those seeking protection against market volatility.
Each of the 10 low-risk investments mentioned in this list has its advantages and disadvantages, and the right choice depends on your financial goals, investment horizon, and risk tolerance.
Before making any investment decisions, it’s advisable to consult a financial advisor or conduct thorough research to assess which option best suits your individual situation.
With the right strategy, you can build a diversified investment portfolio that balances growth potential with capital preservation, helping you achieve your long-term financial objectives.
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Linda Carter is a writer and expert in finance and investments. With extensive experience helping individuals achieve financial stability and make informed decisions, Linda shares her knowledge on the Your Finanças platform. Her goal is to provide readers with practical advice and effective strategies to manage their finances and make smart investment choices.
