Not to fearmonger. But, the U.S. could be headed for a recession in 2023 due to high inflation and an increase in interest rates by the Federal Reserve. Thankfully, by having some less-risky assets in your portfolio, you can help weather market volatility.
While lower risk exposure reduces investment returns over time, the tradeoff is lower returns. If you’re aiming to preserve capital and generate regular interest income, that might be fine.
However, what if your goal is long-term growth? Should you consider investment strategies that match those goals? Then you’re in luck. Stocks, for instance, can have segments (such as dividend stocks) that provide high long-term returns while reducing relative risk.
So let’s dive into the 10 best low-risk and high-return investments for 2023 and beyond.
1. High Yield Savings Account
To begin with, we need to cover the safest option first; high-yield savings accounts.
As you may already know, a high-yield savings account is an insured savings account under the federal government. There is a higher interest rate on these accounts than the national average — which makes them appealing to many people.
Most of these accounts earn between 0.40% and 0.50% annual percentage yield. The annual percentage yield paid by some banks is between and based on aggregate account balances. In comparison, Bankrate’s June 7 survey of institutions shows an average yield of 0.25 percent APY for savings accounts.
A high-yield savings account doesn’t offer all that much excitement, but it does offer a significant rate. On top of that, you won’t need to put in any extra effort to increase your balance Besides, you can easily open an account online with Chime, Marcus, Alliant, Discover, or Varo.
As an example, let’s say you are able to open an account at 0.50% APY. With $10,000 in your account, you can earn around $50 per year. Even if you don’t make billions with this account, it’s much better than the five dollars you’d make with a 0.25% APY
2. Certificate of Deposit
If you search hard enough, you will not find a more boring investment than a Certificate of Deposit. The purpose of a Certificate of Deposit (CD) is to deposit your money for a specific period of time — usually between 3 months and five years. If you exchange your money for a guaranteed return, you will get it regardless of any interest rate changes.
Make sure you buy your CD from an FDIC-insured financial institution (up to $250k is protected). In general, the longer the CD’s duration, the higher the interest rate.
The 11-month No Penalty CD from CIT Bank is a good choice for a quick low-risk turnaround with 4.15%.
3. Short-term Bonds
A short-term bond fund invests in securities that mature in a year to three years. Besides commercial papers and CDs, they invest in long-term securities and government bonds.
In addition to the government issuing short-term debt (bonds), investment corporations and companies rated below investment grade can also issue short-term debt (bonds). It is also possible to purchase bonds for dividends or growth.
Why are short-term bonds so popular? Bonds with a short maturity date have a lower interest rate risk than those with a long maturity date. This makes short-term bonds less sensitive to market fluctuations.
Additionally, they have higher yields than money market funds, ranging from 0.5% to 1.5%+.
Just be aware that investing in short-term bond funds can lead to the loss of principal for investors. Similarly, corporate bond funds aren’t government-insured.
4. Series I Savings Bonds
Unlike other savings bonds, Series I savings bonds are issued by the government and backed by it. Normally, they pay interest every month. Inflation-based interest rates are calculated twice a year and combine a fixed interest rate with a variable interest rate.
The interest rate is 4.30% until October 2023. Even though you can cash in savings bonds as early as one year after purchasing them, they continue to earn interest for 30 years. Cashing them in before their expiration date will incur an interest penalty of three months.
5. Dividend Stocks
A dividend stock is an investment in a company that pays its shareholders a regular dividend. Typically, a dividend is paid quarterly, but can also be paid semiannually or annually. A dividend yield is a ratio of the dividend amount to the price of the stock, expressed as a percentage.
Investing in dividend stocks may also enhance the stability of your portfolio since dividend-paying companies are likely to be well-established. As a result, they’re considered low-risk investments.
A good example is Texas Instruments, which made the calculator you used in high school. Most of the company’s revenue now comes from semiconductor manufacturing. In terms of analog chips, it is the world’s biggest manufacturer, notes Cory Mitchell in Forbes.
The Morningstar rating for TXN’s financial health is “A”. Over the next five years, it is expected to grow EPS by 10% a year. Over the last five years, the company has steadily increased its dividend amount by 14.9%.
6. Annuities
Some investors are concerned about annuities because they were over-marketed to them by shady financial advisors who didn’t understand what they were buying.
However, they do not have to be frightening. In fact, annuities are a good option for investors whose portfolios need long-term stabilization.
Be aware of the risks of annuities, however, and speak with a good financial advisor before making a decision.
Why? In addition to being complex financial instruments, annuities have a lot of catch-up clauses. So, the most important thing you need to know about your annuity is how it works.
Although there are several types of annuities, purchasing one is the same as negotiating with an insurance company. You are being charged a lump sum of money.
In exchange, they promise a stated return rate. Depending on your annuity, your return might be fixed (with a fixed annuity), variable (with a variable annuity), or equity-indexed (with an equity-indexed annuity).
The risk is greatly reduced if you’re getting a guaranteed return. You are not protected by the Federal government when you acquire an annuity. Instead, you are protected by the insurance company that holds the annuity (perhaps by another company that further insurers the annuity company). These complicated products are generally very safe for your money, however.
My recommendation is to purchase a fixed annuity, such as Due, where you’ll get 3% a month.
7. Real Estate
People tend to view investing in real estate as a high-risk venture. That’s fair enough. You must deal with tenants, handle repairs, manage payments, or learn by trial and error how to invest in real estate.
However, there are low-risk options as well. As an example, you can purchase Real Estate Investment Trusts through ETFs.
The one option I’ve loved over the years because it’s easy, simple, and has returned good money to me is Fundrise.
Fundrise is an online platform for crowdfunding Real Estate Investment Trusts. The Fundrise team takes care of your money while you sit back and watch it grow.
In addition, Fundrise lets you start a well-diversified portfolio of commercial, condos, single-family homes, and multi-family properties for as little as $10.
8. Money Market Funds
Money market accounts are mutual funds designed to protect your principal from losing value. In addition to paying interest, the fund tries to make parking your cash worthwhile by offering a little bit of return on investment as well. Generally, funds are aimed at maintaining a $1 per share Net Asset Value (NAV).
There’s no guarantee these funds will work. Nevertheless, they have a solid pedigree when it comes to protecting your money.
In rare cases, the NAV can fall below $1. In a money market fund, where can you park your cash? You can usually do this with a great broker like TD Ameritrade, Ally Invest, and E*T RADE or with the same banks that offer high-interest savings accounts.
You may not earn much interest on your investment, but you won’t lose much of it or worry about market fluctuations.
9. Treasury Inflation-Protected Securities (TIPS)
A TIPS bond, not a tip you would leave a waiter or waitress, is a type of U.S. Treasury bond specifically designed to protect investors from inflation. At Treasurydirect.gov, you can purchase them in $100 increments with a $100 minimum investment. TIPS can also be purchased through a great broker like Ally Invest or TD Ameritrade.
The growth of these bonds can be achieved in two ways. First, there’s a fixed interest rate that doesn’t change over the bond’s lifespan. The second is government-guaranteed inflation protection.
As an example, you may want to invest in TIPS today, which offers 0.35% interest rates. Compared to certificates of deposit and even basic online savings accounts, that’s a lot less.
Until you realize your investment value will grow with inflation over the term of the bond and give you a higher return, that doesn’t seem very appealing.
TIPS can be purchased individually or you can invest in a mutual fund that, in turn, invests in a basket of TIPS. The latter option makes managing your investments easier while the former gives you the ability to pick and choose with specific TIPS you want.
10. Yourself
Investing in yourself is another way for you to invest with low risk and high return.
The reason? There is no better way to get a high return with very little risk than to invest yourself. As a matter of fact, this is the best investment with the largest potential return.
It all starts with investing in your education and enhancing your experiences. By reading financial books, taking online courses, or talking to a financial planner, you can improve your financial literacy.
Additionally, it’s all about improving yourself mentally, emotionally, and spiritually, or whatever that looks like to you.
FAQs
What are low-risk investments?
Low-risk investments are those with little chance of losing money. In general, lower-risk investments offer lower returns. However, investors who are looking to protect their capital tend to consider these investments safer.
Are there any low-risk investments that offer high returns?
Investing in low-risk items can produce high returns. Among them are:
- High-yield savings accounts. Compared to traditional savings accounts, these accounts offer higher interest rates.
- Series I savings bonds. Besides offering a fixed interest rate, the bonds are indexed to inflation and are issued by the U.S. government.
- Short-term certificates of deposit (CDs). Short-term CDs offer higher interest rates than traditional savings accounts.
- Money market funds. A short-term debt fund, such as a Treasury bill or commercial paper, invests in bonds for a short term.
- Treasury bills, notes, bonds, and TIPS. In addition to offering a variety of maturities and interest rates, these securities are issued by the U.S. government.
What are the risks of low-risk investments?
While low-risk investments are relatively safe, there are still risks involved. A few of these risks are:
- Inflation. Your investment can lose purchasing power due to inflation.
- Interest rate risk. Investing at a time when interest rates are rising could result in a decline in your investment.
- Liquidity risk. If you need to access your money quickly, you may have difficulty selling your investment.
How do I choose the right low-risk or high-return investment?
Depending on your individual circumstances and risk tolerance, you may prefer a low-risk or high-return investment. In order to get personalized advice, it’s important to speak with a financial advisor.
To help you choose low-risk or high-return investments, here are a few tips:
- Set your financial goals. Are you saving for a specific purpose? An example could be a down payment on a house or retirement. When you know your goals, you can start looking for investments that can help you get there.
- Consider your risk tolerance. What is your comfort level with risk? Low-risk investments may be a good option for risk-averse investors. You may want to consider high-return investments if you are more comfortable with risk.
- Diversify your portfolio. Be careful not to place all your eggs in one basket. Reduce your risk by investing in a variety of investments.
- Do your research. You should always research any investment and understand the risks involved before you make a decision.
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