As the economy faces high inflation and the Federal Reserve increases interest rates in an attempt to curb rising prices, America could be heading towards a recession in 2023. Creating a portfolio that includes at least some low-risk assets could be useful in helping you navigate market volatility.
Indeed, the trade-off is that by reducing risk, investors are likely to receive lower returns over the long term. This might be fine if your goal is to preserve capital and maintain a steady flow of interest income.
However, if you’re seeking growth, consider investment strategies that align with your long-term goals. Even high-risk investments like stocks have segments (such as dividend stocks) that offer attractive long-term returns while reducing relative risk.
What to Consider
Depending on how much risk you’re willing to take, there are several scenarios that could unfold:
- No Risk – You won’t lose even a percentage of your principal.
- Some Risk – It’s fair to say that over time you’ll either break even or incur a small loss.
However, there are two downsides: low-risk investments earn lower returns than you could elsewhere with risk; and inflation can erode the purchasing power of money held in low-risk investments.
If you choose only low-risk investment options, you’re likely to lose purchasing power over time. This is why low-risk plays make better storage for short-term investments or your emergency fund. Conversely, high-risk investments are better suited for high long-term returns.
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Here are the best low-risk investments in October 2023:
- High-yield savings accounts
- Series I savings bonds
- Short-term certificate of deposits
- Money market funds
- Treasury bills, notes, bonds and TIPS
- Corporate bonds
- Dividend-paying stocks
- Preferred stocks
- Money market accounts
- Fixed annuities
Overview: Best Low-Risk Investment in 2023
- High-Yield Savings Accounts Technically not an investment, savings accounts still offer a modest return on your money. You’ll find the highest-yielding options by searching online, and if you’re willing to check rate tables and shop around locally, you might earn a bit more interest.
Why invest: A high-yield savings account is completely safe in the sense that you will never lose money. Most accounts are government-insured up to $250,000 per bank per account type, so you’ll be compensated even if the financial institution fails.
Risk: Cash doesn’t decrease in dollar value, but inflation can erode its purchasing power.
- Series I Savings Bonds Series I savings bonds are a low-risk bond that adjusts for inflation, helping secure your investment. When inflation rises, the bond’s interest rate adjusts upward. But when inflation falls, so does the bond’s payout. You can purchase Series I bonds from TreasuryDirect.gov, which is operated by the U.S. Treasury Department.
Treasury Bonds and Inflation
Former senior advisor to the Treasury Department, Braden MacKella, mentions the inflation premium, saying, “Series I bonds are a good option for protection against inflation because you get a fixed rate and an inflation rate every six months.” It is revised twice a year.
Why Invest:
Series I bonds adjust their payments semi-annually based on the inflation rate. With high levels of inflation, the bond is paying a large yield. If inflation continues to rise, it will adjust even more. Therefore, the bond helps protect your investment from the damage of rising prices.
Risk:
Savings bonds are backed by the U.S. government, so they are considered as safe as an investment. However, don’t forget that when inflation stabilizes, the bond’s interest payment will fall.
If U.S. savings bonds are cashed in before five years, a penalty of the last three months’ interest is imposed.
3. Short-term Certificate of Deposit
Bank CDs in FDIC-insured accounts are always proof against loss, as long as you don’t withdraw money early. To find the best rates, you’ll want to shop online and compare offers given by banks. Since interest rates have already been rising in 2022, it might be wise to hold short-term CDs and then reinvest when rates rise. You’ll want to avoid being locked into a below-market CD for a long time.
An alternative to short-term CDs is no-penalty CDs, which offer you the convenience of avoiding the usual penalty on early withdrawal. So you can withdraw your money and then transfer it to a higher-paying CD without any normal cost.
Why Invest:
If you hold the CD until maturity, the bank promises to pay you a fixed interest rate for a specified term.
Some savings accounts pay higher interest rates than some CDs, but those so-called high-yield accounts may require a large deposit.
Risk:
If you withdraw money from a CD early, you typically lose some portion of the earned interest. Some banks may also penalize part of your principal amount, so it’s important to read the rules and check CD rates before investing. In addition, if you lock yourself into a long-term CD and overall rates rise, you will earn less yield. To get market rate, you would have to cancel the CD and usually pay a penalty.
4. Money Market Funds
Money market funds are pools of CDs, short-term bonds and other low-risk investments grouped together to diversify risk, and are typically sold by brokerage firms and mutual fund companies.
Why Invest:
Unlike CDs, money market funds are liquid, meaning you can typically withdraw your fund at any time without any penalty.
Risk:
Ben Wacek, founder and financial planner at Guide Financial Planning in Minneapolis says money market funds are generally quite safe.
He says, “The bank tells you what rate you’ll get, and its goal is that the share price will not drop below $1.”
5. Treasury Bills, Notes, Bonds and TIPS
The U.S. Treasury also issues Treasury bills, Treasury notes, Treasury bonds and Treasury Inflation-Protected Securities or TIPS:
- Treasury bills mature in one year or less.
- Treasury notes have terms up to 10 years.
- Treasury bonds mature in 30 years.
- TIPS are securities whose principal value goes up or down based on inflation.
Why Invest:
All these are highly liquid securities that can be bought and sold directly or through mutual funds.
Risk:
If you hold onto your treasury until maturity, you generally won’t lose any money unless you buy a negative-yield bond. If you sell them before maturity, you could lose some of your principal as value will fluctuate with rises and falls in interest rates.
4: Corporate Bonds
Companies also issue bonds, which can range from relatively low-risk types (issued by large profitable companies) to very risky types. The lowest level is known as high-yield bonds or “junk bonds”.
Cheryl Krueger, founder of Growing Fortunes Financial Partners in Schaumburg, Illinois, says, “High-yield corporate bonds are those that are lower-rated, lower-quality.” “I consider them riskier because you have not only interest rate risk but also default risk.”
Interest Rate Risk:
The market value of a bond can fluctuate with changes in interest rates. When rates fall, the value of the bond increases and when rates rise, the value of the bond goes down.
Default Risk:
The company may fail to fulfill its promise to pay interest and principal, potentially leaving you with nothing on your investment.
Why Invest:
To reduce interest rate risk, investors may choose bonds that will mature in the next few years. Long-term bonds are more sensitive to changes in interest rates. To reduce default risk, investors can choose high-quality bonds from large, reputable companies, or buy funds that invest in diversified portfolios of these bonds.
Risk:
Bonds are generally considered less risky than stocks, although no asset class is risk-free.
Wacek says, “I wouldn’t say that a dividend-paying stock is a low-risk investment because there were dividend-paying stocks that had a 20 percent or 30 percent drop in 2008.” “But generally, it has less risk than a growth stock.”
This is because dividend-paying companies are more stable and mature, and they offer the potential for stock-price appreciation as well as dividends.
Wacek says, “You’re not just dependent on that stock’s price, which can fluctuate, but you’re also getting regular income from that stock.”
Risk:
A risk for dividend stocks is that if the company goes through tough times and declares a loss, it may be forced to reduce or completely eliminate its dividend, which would hurt the stock’s price.
7. Dividend-Paying Stocks
Stocks are not as safe as cash, savings accounts or government loans, but they are generally less risky than options or high-flying companies. Dividend stocks are considered safer than high-growth stocks because they pay cash dividends, which helps limit their volatility but does not eliminate it. Therefore, there will be ups and downs in dividend stocks with the market, but not as much when the market is down.
Why Invest:
Stocks that pay dividends are generally considered less risky than those that do not pay dividends.
Wacek says, “I wouldn’t say that a dividend-paying stock is a low-risk investment because there were dividend-paying stocks that had a 20 percent or 30 percent drop in 2008.” “But generally, it has less risk than a growth stock.”
This is because dividend-paying companies are more stable and mature and they offer the potential for stock-price appreciation as well as dividends.
Wacek says, “You’re not just dependent on that stock’s price which can fluctuate but you’re also getting regular income from that stock.”
Risk:
A risk for dividend stocks is that if the company goes through tough times and declares a loss then it may be forced to reduce or completely eliminate its dividend which would hurt the stock’s price.
8: Preferred Stocks
Preferred stocks are more like lower-tier bonds compared to common stocks. However, their values can fluctuate significantly if the market falls or interest rates rise.
Why Invest:
Like a bond, a preferred stock makes regular cash payments. Unusually, companies that issue preferred stocks can suspend dividends under certain circumstances, although the company often has to make up for any missed payments. And the company has to pay dividends on preferred stock before paying dividends to common shareholders.
Risk:
Preferred stock is like a riskier version of a bond, but it is generally safer than a stock. They are often referred to as hybrid securities because preferred stockholders are paid after bondholders but before stockholders. Preferred stocks typically trade on the stock exchange like other shares and need to be carefully analyzed before purchasing.
9. Money Market Accounts
A money market account can seem like a savings account, and it offers many similar benefits, including a debit card and interest payments. However, money market accounts may require a higher minimum deposit compared to savings accounts.
Why Invest:
Interest rates on money market accounts can be higher compared to comparable savings accounts. Also, you will have the convenience of spending cash when needed, although like a savings account, there may be a limit on your monthly withdrawals from a money market account. To ensure that you are maximizing your return, you will want to look for the best rates here.
Risk:
Money market accounts are insured by FDIC, with a guarantee per bank per depositor up to $250,000. So money market accounts do not pose any risk to your principal. Perhaps the biggest risk is having too much money in your account and not earning enough interest to outpace inflation, meaning you could lose purchasing power over time.
10. Fixed Annuities
An annuity is a contract, often with an insurance company, which will pay a fixed level of income over some time period in exchange for an upfront payment. Annuities can be structured in several ways, such as for a fixed term like 20 years or until the customer’s death.
With a fixed annuity, the contract promises to pay out a specific amount over a fixed term, usually monthly. You can contribute a lump sum and start your payout immediately, or you can contribute over time and start your annuity payout at some future date (like your retirement date).
Why Invest:
A fixed annuity can provide you with guaranteed income and returns, giving you more financial security, especially during periods when you are not working. An annuity can also provide you with a way to increase your income on a tax-deferred basis, and you can contribute an unlimited amount to your account. Depending on the contract, annuities can also come with several other benefits such as death benefits or minimum guaranteed payouts.
Risk:
Annuity contracts are extremely complex, and therefore if you do not read the fine print very carefully you may not get what you expect. Annuities are quite illiquid, meaning it could be difficult or impossible to get out of them without significant penalties. If inflation rises significantly in the future, your guaranteed payout may not seem as attractive.