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Despite five Federal Reserve rate hikes since March 2022, interest rates are still pretty low by historical standards. For instance, the average savings account is still only paying about 0.17% APY.
While a few high-yield bank accounts offer higher APYs, the best one hardly approach the annual rate of inflation, making it tough to maintain the purchasing power of your savings. Thankfully, it’s not impossible to earn higher returns without taking on too much risk.
Here are seven low-risk investments to safely grow your money.
Best Low-Risk Investments
These seven investments can help boost your returns more quickly than the average savings account. Keep in mind, however, that while these are low-risk investments, they aren’t no-risk investments.
Unlike bank accounts, these products are not insured by the Federal Deposit Insurance Corp. (FDIC)—you can still lose money. That said, you may be willing to take on a little extra risk in exchange for higher rates of return from products that still offer great liquidity and ease of access.
To maintain good financial health, make sure you have a fully stocked emergency fund before investing extra cash you may need in a pinch.
1. Treasury Notes, Treasury Bills and Treasury Bonds
If you want to earn a slightly better interest rate than a savings account without a lot of additional risk, your first and best option is government bonds, which offer yields ranging from 2.46% for a duration of one month, to 3.58% for a duration of 30 years (as of mid-September 2022).
Bonds issued by the U.S. Treasury are backed by the full faith and credit of the U.S. government. Historically, the U.S. has always paid its debts. This makes government debt reliable and easier to buy and sell on secondary markets, if you need access to your cash before the debt is mature.
This stability, however, means bonds may have lower yields than you might earn from bonds where the debt was less likely to be paid back, as is the case with corporate bonds.
2. Corporate Bonds
If you’re willing to accept slightly more risk for higher yields, high-grade corporate debt might be a good option. These bonds—issued by established, high-performing companies—typically offer returns that are higher than Treasuries or money market accounts.
As of August 2022, 10-year high-quality bonds offer average interest rates of 4.57%, according to the St. Louis Federal Reserve.
While high-grade corporate bonds are relatively safe, you can still lose money investing in them if:
- Interest rates go up. Because the interest rates bonds pay is generally locked in for a certain term, your money won’t earn the higher rate. If you need to sell your bonds, you may also have to sell them for less than you may have paid for them if overall interest rates have risen. If you hold your bonds until maturity, you will receive back their face value plus interest.
- The issuer goes broke. Though investment-grade bonds are generally considered relatively safe investments, they still aren’t as secure as money held in bank accounts. That’s why it’s important to focus on debt issued by highly rated companies that are most likely to pay you back. Less highly rated companies may offer higher interest rates, but they are also more likely to lose you money.
3. Money Market Mutual Funds
Money market mutual funds invest in overnight commercial paper and other short-duration securities. Even the best money market funds typically offer pretty low yields—as of mid September 2022 the best are above 2%, which still beat the average savings account APY.
Unlike Treasury products and corporate bonds, money market funds do offer investors absolute liquidity: They experience virtually no volatility, and you can pull your money out at any time.
It’s also worth noting that many banks also offer money market mutual funds. If you don’t have or don’t want to set up a brokerage account, you still may be able to invest money market funds through your bank.
4. Fixed Annuities
Fixed annuities are a type of annuity contract that allow investors to pay a lump sum upfront in exchange for a series of payments over time.
Functionally, fixed annuities work a lot like certificates of deposit (CDs): You agree to lock up your access to your money for a set period of time, and you get a higher than average interest rate in exchange.
As of mid September 2022, 10-year fixed annuity rates are around 4.75%, according to Blueprint Income, a fixed annuity marketplace. Keep in mind, though, that higher interest rates often come from less well regarded insurers, meaning they are more likely to default on payment.
Also remember that, like CDs, you may incur penalties if you need access to all of your money before the maturity date of your fixed annuity. You will, however, generally receive penalty-free access to a percentage of your money each month.
5. Preferred Stocks
Preferred stock works like a hybrid of stocks and bonds: It offers some of the potential for appreciation you get from common stocks while also providing the dependable income payments of bonds. In fact, preferred stock frequently offers higher dividend payments than companies’ bonds because, unlike bonds, payment is not completely guaranteed.
Since 1900, preferred stocks have offered average annual returns of more than 7%, most of which are from dividend payments.
In addition to dividends, you may see your investment grow through a buyback. Recently many companies have been buying back preferred shares, usually at a slightly higher price than they were sold for, because preferred stocks pay higher dividends—and therefore cost companies more—than corporate debt.
6. Common Stocks that Pay Dividends
Outside of preferred stock, some common stocks are also relatively safe options for those after a higher yield in this low-interest-rate environment. Chief among these are real estate investment trusts (REITs) and utility stocks, which are historically viewed as safer, less volatile, and more reliable in their dividend payments.
As of September 2022, REIT dividend yields are around 2.59% on average, and utility dividend yields average 2.93%, according to data analyzed by NYU’s Stern School of Business.
Regardless of the industry you invest in, when choosing common stocks it’s best to stick with strong, solid names that have been around decades and pay consistent, reliable dividends—not growth stocks that live and die by investor enthusiasm.
Keep in mind, though, that common stock dividend payments aren’t guaranteed, and like all stocks, you may lose money when you invest in them.
7. Index Funds
Individual equities, like common and preferred stocks or bonds, are not diversified. You may only buy stock or bonds from one or two companies, making them inherently very risky. What happens if those companies go under?
Index funds allow you to invest in hundreds or thousands of individual stocks and bonds. This greatly decreases the risk you take on when you invest while still offering elevated interest or dividend rates. Diversified, higher-rate funds include PIMCO’s BOND fund or Vanguard’s BND or VDADX (Dividend Appreciation) funds.
The Bottom Line
You should always have cash reserves in a liquid savings account that you can tap quickly if necessary. But for money that you need to be somewhat liquid but hope to earn a higher return on, you do have options. Money market funds, annuities, government and high-grade corporate debt are some of the best low-risk, higher-yield ways to grow your money even when interest rates are low.
Low-Risk Investment FAQs
What is low-risk investing?
Low-risk investing involves buying assets that have a low probability of incurring losses. While you’re less likely to see losses with a low-risk investment, you’re also less likely to earn a significant return.
Examples of low-risk investing include buying treasury securities, corporate bonds, money market mutual funds, fixed annuities, preferred stocks, common stocks that pay dividends and index funds
Why own low-risk investments?
Low-risk investments can be a safe way to grow your money more quickly than you would with a traditional savings account—especially in a low interest rate environment—without worrying about the potential for the potential losses that may come with riskier options.
If you’re trying to max out your potential for growth, low-risk investments likely aren’t for you.
When should you buy low-risk investments?
Low-risk investments are best for people who want to grow their money more quickly than a traditional savings account interest rate offers, but who also want to avoid the potential for large losses.
When the Federal Reserve lowers key interest rates, for example, banks may follow suit by dropping their average savings accounts rates. In this environment, low-risk investments can earn higher returns than a savings account without taking on too much risk.
Are there high-yield low-risk investments?
Low-risk investments aren’t likely to offer high-yield results. By definition, a low-risk investment usually offers higher returns than traditional bank deposits, but it involves less risk than other investment opportunities. Less risk usually means less chance for high growth.
There are opportunities for more growth within low-risk investments, depending on your tolerance for risk, but overall, any investment that is considered low-risk will net you less in returns than a higher risk investment opportunity.