Since the beginning of October 2018 to mid-January 2019, the S&P 500 Index has been down ten percent, rebounding back to its starting point at the beginning of 2018–sending its volatility index soaring. It’s no wonder that these erratic developments may send you flying to your broker, asking how you can keep your money safe and secure.
One option is looking into low-risk investments, that give consumers the opportunity to earn a nominal interest rate while maintaining a conservative risk exposure. They help investors keep pace with inflation while giving them peace of mind.
If you’re looking to protect your money or you prefer taking on minimal risk, you may want to consider these low-risk investments.
HIGH-INTEREST SAVINGS ACCOUNTS
If you’re looking for a passive way to earn extra interest, a high-interest savings account can be a good option. Many savings accounts provide minimal interest rates, which ends up costing you money as inflation rises. A high-interest savings account is a risk-free alternative that allows you to earn a nominal interest rate while your money sits in cash.
When comparing high-interest savings account you will want to look for accounts with competitive rates, otherwise known as the APY (Annual Percentage Yield), and no fees. You will also want to review the required deposit minimum, which many banks require in order to offer a higher APY.
Other considerations may include the financial institution’s reputation, customer service experience, accessibility, and ease of online management. As of this writing, Barclays offers 2.20% APY on their Online Saving Account with no minimum balance requirement, and American Express offers a 2.10% APY, with a $1 minimum.
ONLINE CHECKING ACCOUNTS
Similar to savings accounts, online savings accounts allow you to keep your money at a financial institution and earn interest on your deposits. If you need a place to put your money, why not earn a little interest on your cash?
When comparing accounts you will want to look for zero to no fees, no required minimum, or deposit requirements. If you want to have easy access to your funds you will want to make sure you have no ATM fees and a wide network of machines where you can distribute your money.
CERTIFICATE OF DEPOSITS (CDS)
Certificates of Deposits (CDs) generally offer higher interest rates than a traditional savings account, but this comes with a caveat–you cannot touch the money until the CD reaches its date of maturity. If you have a set amount of money you’re willing to put away for a designated amount of time, CDs can be an attractive way to save.
What’s meant by a maturity date? Essentially, it refers to the term of a contract, during which the financial institution guarantees the given interest rate given no matter what happens within the market. As long as your deposit is under $250,000, you’re guaranteed your principal amount with FDIC-insured financial institutions, with APYs between 0.5% and 3%.
In order to avoid potential withdrawal penalties, you must keep 100% of your deposit in your account until the date of maturity. One of the most competitive CDs currently on the market is the Certificate of Deposit from Capital One, offering a 3.10% APY on 5-year terms.
Annuities have gotten a bad reputation due to financial advisors recommending them to investors who they weren’t a good fit for. Many investors shy away from this low-risk investment, wary of advisors’ high commissions and aggressive sales tactics. Annuities don’t have to be intimidating, though, and can be viable investment options for a specific type of investor, even helping stabilize their portfolio over time.
An annuity is a financial contract with an insurance company in which the insurer agrees to provide either a guaranteed return or guaranteed income amount. The investor can decide if they prefer to pay a lump sum or pay monthly. There are different types of annuities, including fixed, variable, or a qualified longevity annuity contract.
A fixed annuity guarantees a specific interest rate, while a variable annuity offers the opportunity to earn a higher interest rate. Of course, with the opportunity for a higher interest rate, the investor must take on greater risk. A qualified longevity annuity contract helps investors save for retirement when they start later than normal. The annuity acts as a 401(k) or IRA, giving the investor more time to build retirement savings at a slower rate.
Annuities are not insured by the Federal government, but by the insurance company issuing the annuity. Many insurance companies have secondary insurance provided by the state guaranty association up to the state’s designated amount. This ensures that your money will be safe with this investment product.
MONEY MARKET ACCOUNTS
A money market is a mutual fund designed for investors who don’t want to lose their principal investment but still want the opportunity to earn interest. This fund pays out a small amount of interest to make saving your cash an attractive low-risk investment.
The goal of this mutual fund is to maintain a Net Asset Value of 1 dollar a share, allowing you to keep your money safe. However, it’s possible for the NAV to drop, but this occurrence is unlikely. You can find money market funds at financial institutions such as Capital One, CIT Bank, and Synchrony.
TREASURY INFLATION PROTECTED SECURITIES (TIPS)
As inflation continues to rise, you may look for a low-risk alternative that will keep pace with the increased cost of living. Treasury Inflation Protected Securities, or TIPS, do just that. TIPS are government-backed bonds that are indexed to inflation. This means that these bonds guarantee a higher rate of return than inflation.
You can purchase TIPS on an individual basis or invest in a mutual fund with a variety of TIPS. You can buy TIPS through the U.S. Treasury, or through a bank, broker or dealer.
Municipal bonds, or munis, are loans that investors give to the government. When the government at the state or local level needs to borrow money, they use a municipal bond. This type of bond is exempt from Federal income tax, making it a good low-risk investment option for investors who want to minimize their taxes.
The likelihood of the government defaulting on the loan is very low. If the government does default, they can raise taxes or issue new debt to pay off the old debt. This security makes municipal bonds a low-risk alternative to other investment options.
You can purchase a bond through a broker or other financial institution.
US SAVINGS BONDS
Like TIPS, US Savings Bonds are backed by the U.S. Federal government. There are two main types of US Savings bonds: Series I and Series EE. Series I bonds have fixed interest rates and an adjustment for inflation. This makes them similar to TIPS; both provide inflation protection as the Federal Reserve increases rates. With Series I bonds, the inflation-linked rate increases every six months. The adjustments might, therefore, be negative, making your return drop.
Series EE bonds have fixed rates which are applied to the bond at the end of every month. You must hold the bond until maturity to avoid early withdrawal fees. If you’re interested in purchasing a US Savings Bond you can visit TreasuryDirect.gov.
THE BOTTOM LINE
With the rise of inflation, many investors are looking for low-risk investments. They want to make sure that a portion of their life savings is secure, safe from the turbulence which has characterized our current stock market. The low-risk alternatives we’ve discussed above can help your portfolio stay on pace with inflation while giving you peace of mind.
As you shop for a low-risk investment option, do your research and educate yourself. If you’re unsure about a potential investment vehicle, seek financial advice from a qualified financial professional you trust. Ask questions and discover the right investment for your financial goals and objectives.