Investors often need to keep some money aside for a specific purpose, such as a new vehicle or home repairs. Other times, an investor simply doesn’t want to put all his or her money at risk in the stock market and opts for a less risky investment instead.
Stocks as an asset class carry higher risk than others. That’s true for even well-established blue-chip stocks.
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However, every type of investment has some kind of risk. There’s even an opportunity cost when parking cash instead of getting a higher return in the stock market. Bonds are less volatile than stocks but can have interest rate, credit or inflation risk. These vary by bond type and issuer.
Fortunately, investors looking for relatively safe investments with a healthy return have several choices, depending on their goals and situation. Here are some ways investors can take less risk but still generate a decent return:
— High-yield savings accounts.
— Money market funds.
— Certificates of deposit (CDs).
— Corporate bonds.
— Treasurys.
— Dividend stocks.
— Preferred shares.
High-Yield Savings Accounts
is exactly what the name suggests: It’s a bank account offering above-average interest rates. You can open a high-yield account at an online bank, a credit union and many traditional banks.
“High-yield savings accounts are a great option for those looking to grow their cash reserves while still maintaining liquidity,” says Jason Gilbert, managing partner and president at RGA Investment Advisors in Great Neck, New York.
“These accounts often offer interest rates much higher than traditional savings accounts, making them a smart choice for emergency funds or short-term savings goals,” he adds.
However, Gilbert notes, interest earned in these accounts is typically subject to taxation.
Money Market Funds
A money market fund is a mutual fund that invests in low-risk, short-term debt instruments like Treasury bills and short-term unsecured corporate debt.
These funds are highly liquid, as many even include checking privileges. If you already have an investment account, your brokerage almost certainly offers money market funds. You can also find them at some banks.
“With the Fed raising rates over the last few years, money market funds have been very attractive for a safe investment option,” says David Berns, a financial advisor at HD Money in Sarasota, Florida.
“Advisors will usually use these for short-term cash alternative options,” he adds.
Certificates of Deposit (CD)
A CD is a fixed-term savings product offered by banks. These provide higher interest rates in exchange for locking up your money for a certain period of time, such as three months, six months or even several years.
Arielle Tucker, a certified financial planner and founder of Connected Financial Planning — a U.S.-registered investment advisory based in Switzerland that serves U.S. expats — cites the protections offered by CDs.
“CDs are FDIC-insured, providing a safe investment with a guaranteed return if held to maturity,” she says. “They are excellent for funds that you won’t need immediate access to and can commit (to) for a specified period.”
Corporate Bonds
Corporate bonds, which represent debt issued by companies to finance growth, are suitable for investors seeking relatively low-risk investments with steady income.
However, corporate bonds still carry credit and interest rate risks.
“Corporate bonds can generate higher yields compared to government bonds, but this comes with additional risk,” says Gilbert. “Bonds from well-established companies tend to be safer, while those from less creditworthy firms may carry higher yields but also higher default risk.”
For income seekers, a well-diversified corporate bond portfolio is worth considering, especially in a steady interest rate environment, he adds.
[How to Invest During Rate Cuts]
Treasurys
Treasurys are debt securities issued by the U.S. government. As they are government-backed, they carry minimal risk.
Tucker says these instruments include short-term securities that mature in one year or less, medium-term securities with maturities ranging from two to 10 years and longer-term securities that mature in 20 to 30 years.
“Investing in Treasurys provides regular interest payments and the return of principal at maturity,” she says.
Investors who want additional convenience and diversification might consider Treasury exchange-traded funds, or ETFs, she adds. These allow investors to buy a collection of Treasurys through the stock market.
“Treasury ETFs offer the safety of government-backed securities with the flexibility of stock trading, making them accessible to a broader range of investors,” Tucker says.
Dividend Stocks
Dividend stocks give investors regular income through cash payouts. While many investors focus on price appreciation of stocks, overlooking dividends is a mistake, as historically they account for more than 30% of the returns of the S&P 500 index, according to S&P Global.
“Dividend-paying stocks provide a reliable income stream, which can be especially appealing in uncertain markets,” Gilbert says. “Companies that regularly pay dividends often have stable cash flows and a history of financial strength.”
However, while dividend stocks can be a good hedge against market volatility, investors should ensure their portfolios remain diversified, as dividends are never guaranteed, Gilbert says.
Preferred Shares
Preferred shares are a class of stock offering fixed dividends. If a company liquidates, preferred shareholders have priority over common shareholders in asset claims, but they’re still behind debt holders.
Owners of preferred shares have no voting rights through proxies or direct votes.
“Preferred stocks combine features of both stocks and bonds, offering fixed dividends that take precedence over common stock dividends,” Gilbert says. “They are less volatile than common stocks but provide higher yields than most bonds.”
Preferred stocks can be a useful addition for income-focused investors, he adds, but investors should be aware that these often have limited upside potential and may be sensitive to interest rate changes.
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What Is the Safest Investment With the Highest Return? originally appeared on usnews.com
Update 11/14/24: This story was published at an earlier date and updated with new information.
