Think back to what the stock market looked like to you in March 2020, aka, the apocalypse. Did it look like:
A.) The biggest bargain sale you’ve ever seen in your lifetime?
B.) A burning pit of money that was about to incinerate your life’s savings?
If you answered “B,” you probably have a low risk tolerance. You worry more about losing money than missing out on the opportunity to make more of it.
Being cautious about how you invest your money is a good thing. But if you’re so risk-averse that you avoid investing altogether, you’re putting your money at greater risk than you think.
Do Safe Investments Actually Exist?
When you think about the risks of investing, you probably think about losing principal, i.e., the original amount you invested. If you keep your money in a bank account, there’s virtually no chance of that happening because deposits of up to $250,000 are FDIC insured.
But consider that the average savings account pays just 0.05% APY, while in 2019, inflation was about 2.3%.
So while you’re not at risk of losing principal, you still face purchasing power risk, which is the risk that your money loses value. Your money needs to earn enough to keep up with inflation to avoid losing purchasing power. If inflation continues at 2.3%, buying $100 worth of groceries will cost you $102.30 a year from now. If you’re saving over decades toward retirement, you’ll be able to buy a whole lot less groceries in your golden years.
There’s also the risk of missed opportunity. By playing it too safe, you’re unlikely to earn the returns you need to grow into a sufficient nest egg.
Though there’s no such thing as a risk-free investment, there are plenty of safe ways to invest your money.
8 Low-Risk Investments for People Who Hate Losing Money
Here are eight options that are good for conservative investors. (Spoiler: Gold, bitcoin and penny stocks did not make our list.
If you have cash you won’t need for a while, investing in a CD, or certificate of deposit, is a good way to earn more interest than you’d get with a regular bank account.
You get a fixed interest rate as long as you don’t withdraw your money before the maturity date. Typically, the longer the duration, the higher the interest rate.
Since they’re FDIC insured, CDs are among the safest investments in existence. But low risk translates to low rewards. Those low interest rates for borrowers translate to lower APYs for money we save at a bank. Even for five-year CDs, the best APYs are just over 1%.
You also risk losing your interest and even some principal if you need to withdraw money early.
2. Money Market Funds
Not to be confused with money market accounts, money market funds are actually mutual funds that invest in low-risk, short-term debts, such as CDs and U.S. Treasurys. (More on those shortly.)
The returns are often on par with CD interest rates. One advantage: It’s a liquid investment, which means you can cash out at any time. But because they aren’t FDIC insured, they can technically lose principal, though they’re considered extraordinarily safe.
3. Treasury Inflation Protected Securities (TIPS)
The U.S. government finances its debt by issuing Treasurys. When you buy Treasurys, you’re investing in bonds backed by the “full faith and credit of the U.S. government.” Unless the federal government defaults on its debt for the first time in history, investors get paid.
The price of that safety: pathetically low yields that often don’t keep up with inflation.
TIPS offer built-in inflation protection — as the name “Treasury Inflation Protected Securities” implies. Available in five-, 10- and 30-year increments, their principal is adjusted based on changes to the Consumer Price Index. The twice-a-year interest payments are adjusted accordingly, as well.
If your principal is $1,000 and the CPI showed inflation of 3%, your new principal is $1,030, and your interest payment is based on the adjusted amount.
On the flip side, if there’s deflation, your principal is adjusted downward.
4. Municipal Bonds
Municipal bonds, or “munis,” are bonds issued by a state or local government. They’re popular with retirees because the income they generate is tax-free at the federal level. Sometimes when you buy muni bonds in your state, the state doesn’t tax them either.
There are two basic types of munis: General obligation bonds, which are issued for general public works projects, and revenue bonds, which are backed by specific projects, like a hospital or toll road.
General obligation bonds have the lowest risk because the issuing government pledges to raise taxes if necessary to make sure bondholders get paid. With revenue bonds, bondholders get paid from the income generated by the project, so there’s a higher risk of default.
5. Investment-Grade Bonds
Bonds issued by corporations are inherently riskier than bonds issued by governments, because even a stable corporation is at higher risk of defaulting on its debt. But you can mitigate the risks by choosing investment-grade bonds, which are issued by corporations with good to excellent credit ratings.
Because investment-grade bonds are low risk, the yields are low compared to higher-risk “junk bonds.” That’s because corporations with low credit ratings have to pay investors more to compensate them for the extra risk.
6. Target-Date Funds
When you compare bonds vs. stocks, bonds are generally safer, while stocks offer more growth. That’s why as a general rule, your retirement portfolio starts out mostly invested in stocks and then gradually allocates more to bonds.
Target-date funds make that reallocation automatic. They’re commonly found in 401(k)s, IRAs and 529 plans. You choose the date that’s closest to the year you plan to retire or send your child to college. Then the fund gradually shifts more toward safer investments, like bonds and money market funds as that date gets nearer.
7. Total Market ETFs
While having a small percentage of your money in super low-risk investments like CDs,
money market funds and Treasurys is OK, there really is no avoiding the stock market if
you want your money to grow.
If you’re playing day trader, the stock market is a risky place. But when you’re committed to investing in stocks for the long haul, you’re way less exposed to risk. While downturns can cause you to lose money in the short term, the stock market historically ticks upward over time.
A total stock market exchange-traded fund will invest you in hundreds or thousands of companies. Usually, they reflect the makeup of a major stock index, like the Wilshire 5000. If the stock market is up 5%, you’d expect your investment to be up by roughly the same amount. Same goes for if the market drops 5%.
By investing in a huge range of companies, you get an instantly diversified portfolio, which is far less risky than picking your own stocks.
8. Dividend Stocks
If you opt to invest in individual companies, sticking with dividend-paying stock is a smart move. When a company’s board of directors votes to approve a dividend, they’re redistributing part of the profit back to investors.
Dividends are commonly offered by companies that are stable and have a track record of earning a profit. Younger companies are less likely to offer a dividend because they need to reinvest their profits. They have more growth potential, but they’re also a higher risk because they’re less-established.
The best part: Many companies allow shareholders to automatically reinvest their dividends, which means even more compound returns.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to DearPenny@thepennyhoarder.com.