The 7 Best Low-Risk Investments

Quick Answer

Some of the best low-risk investment options include bonds, certificates of deposit, money market funds and certain types of stock.

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Whether you're nearing retirement or simply looking for ways to minimize your investment risk as much as possible, there are several types of securities that can help you accomplish your goal.

Of course, low-risk investments typically come with lower returns, especially in the long run. So, as you decide which securities to include in your portfolio, 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

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 what your return is 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.

With that in mind, there are several different types of CDs, each of which has 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.

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2. Treasury Securities

The U.S. Treasury offers investors a variety of bills, notes and bonds. In general, 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. In other words, you'll get your investment back plus interest relatively quickly, though you can sell before then. T-bills are considered a risk-free investment. As of January 2024, yields are hovering around 5%.
  • Treasury notes: Treasury notes are mid-term Treasury securities, with maturities ranging from two to 10 years. They pay interest semiannually, then return your initial investment when they mature. You can sell before then, however. The latest rates for Treasury notes are around 4%.
  • Treasury bonds: Treasury bonds come with terms of 20 or 30 years. Because they have much longer terms, they usually offer higher yields than bills and notes, but that's not always the case. For example, the current yields for Treasury bonds are in the low 4% range. Interest is paid semiannually, and you can sell your bond before it matures.
  • Treasury Inflation-Protected Securities (TIPS): If you want to ensure that your investment keeps up with inflation, you may consider TIPS. While the interest rate is fixed for a term of five, 10 or 30 years, 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: An EE bond has a fixed interest rate—currently 2.7% through April 2024—for at least 20 years of its 30-year term. The federal government guarantees that the value of your EE bonds will double at the 20-year mark.
  • I bonds: An I bond can 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%. Even if the economy suffers from deflation, however, the rate will never go below zero.

In both cases, interest is compounded semiannually, but it's added to the principal value of the bond instead of getting paid to you. You don't have to hold either bond for the full 30 years, but you can't redeem them during the first year. If you redeem them before you hit the five-year mark, you'll lose the previous three months' worth of interest.

As with Treasury securities, savings bond returns are only taxed at the federal level.

4. Municipal Bonds

Called munis for short, municipal bonds are issued by state, city, county and other local government agencies. There are two types of munis, including:

  • General obligation bonds: These munis are backed by the full faith and credit of the issuing government agency. As a result, they tend to carry less risk overall compared to revenue bonds but also lower returns.
  • Revenue bonds: As their name suggests, revenue munis are backed by the revenue of the specific project they're financing. For example, transportation revenue bonds may be repaid through highway tolls, bus fares and other transportation-related revenue. They tend to be riskier because they're not backed by the issuing government agency, but that means they can also offer higher returns.

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

5. Corporate Bonds

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

So, if you want to minimize your risks, focus on what are called investment grade bonds, which are issued by corporations with strong credit ratings.

But even with strong financials, highly rated bonds still carry more of a default risk than Treasury and municipal bonds. That also means 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. As a result, they're mostly impacted by interest rates and the credit of the government entities issuing the securities.

That said, 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

Stock prices are generally volatile, but preferred stock functions a bit differently than the common stock most people are more familiar with. Preferred stocks are a hybrid investment that combine elements of both debt and equity from the issuing company. As a result, they tend to be riskier than bonds but less risky than common stocks.

When a company pays dividends or distributes assets to its shareholders, preferred stockholders get first priority over common stockholders—though they also 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—for example, you're in your 20s or 30s and investing for retirement—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.