Investors steered through calm waters in January and February, with stocks generally up on speculation that the Federal Reserve would curb its recent spate of interest rate hikes, and amid optimism that the Fed might throw in a rate cut or two by the end of 2023.
The S&P 500 was cooperating, up 3.4% through the first two months of the year, and the economy showed slivers of sunlight that encouraged weary market investors after a rough 2022.
Then on March 10, news broke of the collapse of Silicon Valley Bank, followed by Signature Bank’s shutdown two days later. The failure of two U.S. brand-name regional banks fueled fears of a major bank run as depositors grew more uneasy.
Meanwhile, Swiss central bankers were engineering the takeover of Credit Suisse Group AG (CS), a European financial institution with an illustrious 166-year history, with UBS Group AG (UBS) winding up with the bank‘s dwindling assets.
In a matter of days, hopeful optimism turned to fear and anxiety among market mavens.
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From March 10 to March 14, the Chicago Board Options Exchange’s CBOE Volatility Index, also known as VIX, a standard barometer of stock market volatility based on S&P 500 index options, rose from 18 to 26.5, sending red lights flashing across U.S. financial markets.
While the volatility had abated somewhat by early April, the heightened volatility on Wall Street in the immediate aftermath of the bank scare shined a separate light on the need for stability in Main Street portfolios.
“In the unlikely event the market creates significant challenges in the future, there should be a contingency plan for immediate access to liquidity.” – Judith Raneri, portfolio manager at Gabelli Funds
“The recent collapse of two large regional banks has raised concerns not only about the fragility of the financial sector, which has been a driving force in the economy, but has raised concerns many may have with the safety of and access to their cash assets,” says Judith Raneri, portfolio manager at Gabelli Funds. “This collapse has brought to light the importance of risk management, making it crucial that depositors take proactive steps to manage financial risks and safeguard their cash funds.”
“In the unlikely event the market creates significant challenges in the future, there should be a contingency plan for immediate access to liquidity,” Raneri adds.
That’s where low-risk investments can help.
It shouldn’t take fears of a massive bank run for investors to prioritize less risky portfolio assets, but as the old saying goes, “Never let a good crisis go to waste.”
With that thought front and center, let’s take a look at the best low-risk investments for an all-weather investment portfolio and see what they can do to stabilize anyone’s long-term investment experience. Here are eight low-risk investments to buy now:
— High-yield bank savings accounts
— Certificates of deposit
— Money market funds
— Series I savings bonds
— U.S. Treasurys
— Fixed annuities
— Money market accounts
— Dividend-paying stocks
High-Yield Bank Savings Accounts
Bank savings accounts have been the standard for low-risk money management ever since the late 1600s, when the Bank of England first opened its doors.
High-yield savings accounts are usually at the low end of investment return rates, but they are routinely clearing 4% in April. Plus, with Federal Deposit Insurance Corp. protection for up to $250,000 per individual bank account, high-yield savings accounts offer a robust level of guaranteed protection.
Certificates of Deposit
Most banks offer short-term certificates of deposit, commonly called CDs, with guaranteed asset protection along with a modest rate of return. Right now, six-month bank CDs are returning anywhere from 4% to 4.75%, along with the same FDIC-insured protection.
One word of caution: If you opt for a longer-term bank CD and try to take the money out early, you could be hit with an onerous early-withdrawal penalty. One solution to that problem is restricting your CD timetable to six months or less and keeping your cash working for you instead of taking it out prematurely.
Money Market Funds
Money market funds are at the low end of the mutual fund investment risk scale.
They’re offered by fund companies with no implicit guarantee of principal, but money market fund investors usually get the same protection as with assets where the principal is guaranteed, as such funds typically invest in low-risk assets like cash, U.S. Treasurys and debt-based securities that hold a high credit rating.
Money market funds may be taxable or tax-exempt, depending on the type of fund you choose. While rates of return are low on money market funds, the best funds generate between 4.25% and 4.75%, with expense ratios of between 0.1% and 0.45% of fund assets, or about $10 to $45 annually per $10,000 investment.
Series I Savings Bonds
This asset class has generated a buzz in the past year, as Series I savings bonds generated hefty rates of return, about 8% or 9%, for a period of time.
Series I bonds are inflation-tethered bonds issued by the U.S. government. They’re especially useful for retirees, who need guaranteed income and asset appreciation in retirement.
Currently, Series I bonds still offer a relatively higher rate of return among the overall fixed-income market, at 6.89%. Be vigilant, though. Since I bonds are tied to inflation, when inflation does recede, so will their rate of return.
U.S. Treasurys
U.S. Treasury bonds are tied directly to the birth of the United States, when the Continental Congress sought effective ways to finance the Revolutionary War.
Almost 250 years later, Treasury bills, Treasury notes and Treasury inflation-protected securities offer investors low-risk fixed-income options that generate a fixed return rate over a specific period of time — with a near-zero chance of default.
Treasurys are particularly useful for investors as the rates of return are known in advance. That “guaranteed rate” feature makes it easier to build and manage a holistic investment portfolio and balance Treasurys out with more aggressive securities like stocks and funds.
Treasurys climb the ladder in years of maturity, with Treasury bonds built for the long term (20 to 30 years); Treasury notes for the middle term (two to 10 years); and Treasury bills for the short term (four to 52 weeks).
The higher the Treasury investment maturity period, the higher the guaranteed rate of return. The good news is that even the lowest-risk Treasury bills are returning over 4% for investors right now.
[See: What’s the Best Treasury ETF? 7 Options for Investors]
Fixed Annuities
Insurance providers also offer lower-risk investment vehicles, with fixed annuities at the top of that list.
In general, a fixed annuity represents a contract between the annuitant and the annuity provider over a fixed period of time and at a fixed rate of return. The annuity holder first makes an initial payment (and possibly more payments over time) in exchange for a guaranteed lump sum or periodic payments in return. The amount of that return is based on the policy terms.
Currently, fixed annuities are offering up to 5.6% in returns over a seven-year policy rate. Talk to a trusted insurance provider before you invest, as fixed annuities tend to come with heavier investment fees.
Money Market Accounts
In general, money market accounts are offered by banks and credit unions and are backed by the FDIC for up to a $250,000 investment in individual accounts.
Money market accounts pay a higher rate of return than traditional bank savings and checking accounts — as much as 4.55% in April 2023.
Unlike bank CDs, money market account holders can use a debit card to access cash and write checks. Such accounts do come with restrictions, as banks may mandate a minimum deposit to open a money market account and may charge fees if that balance isn’t maintained.
Dividend-Paying Stocks
When publicly traded companies directly share their profits with investors, they often do so with stock dividend payments.
Typically, dividend-paying stocks are aligned with larger publicly traded companies that have been around for a while and have a strong record of dividend payouts.
Dividend payments are simple in structure. All an investor needs to do is choose a dividend-paying stock (stock market investment rating platforms like Morningstar are a good place to start), open a brokerage account or an individual retirement account, and buy the stock or a dividend fund.
Actual dividend payments are usually paid out quarterly, although some publicly traded companies may elect to pay monthly or even twice a year.
That gives low-risk investors a virtually guaranteed cash return, while still owning that same stock and benefiting from higher share prices.
Takeaway on Low-Risk Investments
The stock market is usually laden with risk, especially right now, as chaotic conditions nip at the heels of market investors.
That’s why it’s always a good idea to balance that risk out with low-wattage but highly reliable investments, like money market funds or dividend stocks.
“Conservative low-risk investments may not offer the same level of growth potential, but they are a safer bet in times of market volatility.” – Adam Pippington, chief financial officer at Freedom Dividend
It’s equally important, however, to strike a balance between more aggressive stock investing and more conservative low-risk investments.
“Aggressive stock investing can lead to higher returns, but it also comes with more risk,” says Adam Pippington, chief financial officer at Freedom Dividend, a dividend-income financial education platform. “Conservative low-risk investments may not offer the same level of growth potential, but they are a safer bet in times of market volatility.”
As always, investors should shy away from putting all their eggs in one basket and should diversify their portfolios by including both aggressive and conservative investments.
“It’s also important to remember that low-risk investments should only be a part of a larger portfolio, and should not be used as a substitute for stock market investing,” Pippington says.
[READ: Why Diversification Is Important in Investing]
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8 of the Best Low-Risk Investments in 2023 originally appeared on usnews.com
