All investments have risk, even the low risk savings account at your bank. The challenge is to find an investment that is paying you an acceptable return for the risk you are taking.
List of Low Risk Investments
A savings account at your bank or credit union is low risk. You account value is not going to fluctuate. Yet you can lose money in a slow and steady way, like erosion. If your savings account is paying you 1%, and inflation is 3%, you are losing 2% a year in purchasing power. Banks saving accounts are the best choice when you need access to your money at any time.
Learn more in Bank Savings Accounts.
Certificates of Deposit (CDs)
Banks issue certificates of deposit that guarantee you a specific interest rate over a specific term, such as six months, one year, or five years. If you withdraw the money before the end of the term, a penalty may apply. Like savings accounts, CDs are low risk. CDs can be a good place to park money for a purchase you know you will need to make at a specific time in the future.
Learn more in CD Basics - How CDs Work.
The U.S. Government issues numerous types of securities, all considered low risk investments. There are EE Bonds, I Bonds, TIPS, Treasury Bonds, Treasury Bills and Treasury Notes. You buy these types of investments electronically directly from the U.S. Treasury through an online account. I have such an account, which is linked to my checking account.
Learn more in Buy Treasury Securities Direct.
Money Market Accounts
Your bank may offer a money market account which may pay a slightly higher interest rate than a standard savings account. You may be required to keep a minimum balance to qualify for the higher interest rate. Money market accounts are slightly different than money market funds.
Learn more at Money Market Accounts vs Money Market funds.
Fixed annuities are issued by an insurance company. They are low risk because the insurance company contractually agrees to pay you a fixed interest rate. A fixed annuity is like a CD except the interest accumulates tax-deferred. Unlike a CD you'll pay a penalty tax if you withdraw the interest before you reach age 59 ½. The interest rate guarantee is only as good as the insurance company issuing it. Your money in an annuity is exposed to some risk if the insurance company goes out of business. If you are under the state guaranty limits, your money should still be protected. Fixed annuities are a good choice is you are in a high tax bracket, want your money to be safe, and won't need to use it until 59 1/2 or later.
Learn more in What is a Fixed Annuity.
An immediate annuity guarantees you a specific monthly amount of income. Just as with the fixed annuity the guarantee is only as good as the insurance company issuing it. Your money in an annuity is exposed to some risk if the insurance company goes out of business. If you are under the state guaranty limits, your money should still be protected. Immediate annuities are the best choice when you are older and want income guaranteed to last the rest of your life.
Learn more in Everything You Need to Know About an Immediate Annuity.
Returns for Low Risk Investments
This graph shows you returns for low risk investments. It is one of a series of graphs that allows you to compare the performance of low, medium and high risk investments.
Before You Decide on a Low Risk Investment
I measure investment risk on a scale of "can I lose all my money" to "can I lose any money". To learn more about how to measure investment risk read:
When Low Risk Investments Are Good Choices
Low risk investments are the optimal choice for all of the following situations.
- You don't know what else to do with your money right now.
- It's for your emergency fund.
- You may need to use the money in less than two years.
If you are looking for choices for your retirement money, you may want to consider something that may have a higher return, which may also entail taking on additional risk. The process of building a portfolio means you thoughtfully select investments with different levels of risk so they work together toward a common goal. Learn more in 4 Ways the Average Investor Can Manage Risk.