When it comes to investing, some people look to investment opportunities with large potential returns. They may hope to make a large amount of money in very little time, and you might find this option intriguing. Unfortunately, the higher the potential return, the higher the risk of loss! There’s a very real possibility that you lose your money with no return at all. A key investing principle is that the amount of potential return usually equates directly to the amount of risk. So to reduce the risk of losing your money, you might choose an investment opportunity with less return.
An investment with a low return doesn’t have to be a bad thing. These investments are generally safer, and you will be able to start earning money with a smaller chance that you lose your investment. But there are countless relatively low risk investment opportunities to choose from, and it can be hard to find the best long term stocks in the market. We have gathered together some of the safest investments to help get you started creating a safe portfolio. Here are five types of investment opportunities that are low risk.
A savings account with your bank is probably the most basic safe type of investment. You may already have one. Essentially, a savings account allows you to put money you don’t need immediate access to into an account where it can accumulate interest over many years. The interest rates are low right now—though they vary from bank to bank—with many banks the FDIC insures your deposits for up to $250,000 per account. That means that you have as minimal risk as possible, making it one of the best long term “stocks” to invest in when it comes to safety.
But with that extremely minimal risk comes very little reward. You won’t be able to make any significant amount of money with a savings account at today’s interest rates. So even though it might be one of the safest investments, a savings account is just the beginning. Put your savings into an account to begin accumulating interest if you need time to consider how to expand your portfolio.
Certificates of deposit (CDs) are again one of the safest investments out there. That also means CDs have some of the lowest returns. A CD is essentially a fixed-term loan that you make to your bank. To get CDs, you will agree to let your bank keep your money, usually in $1,000 increments for a specified amount of time. In exchange for keeping your money, the bank will pay you a guaranteed interest rate when the certificate “matures” or finishes.
Like with the savings accounts, CDs are insured by the FDIC for up to $250,000 per depositor. This insurance helps make CDs safe. One drawback of CDs is they are only worth their full amount if they are allowed to completely mature. If you cash in a CD early, you won’t get as much money as you could later and you will face early withdrawal penalties (EWPs). When using CDs it can be best to stagger when they mature, so you are able to get money when you need it. CDs are another low risk investment portfolio item that earn small amounts of interest.
Like a CD is a loan to a bank, a Treasury security is essentially a loan to the U.S. government. These investments are sold at an auction, so the amount of money they cost can vary day-by-day, but you usually buy them in $100 dollar increments. There are four types of these securities, and all four are considered very safe investments, making these securities a low-risk option for your portfolio.
The first type of security is Treasury bills, which are short term investments that mature within a year or less. The second type is Treasury notes. These are for longer periods of time, but you get paid interest every six months. The final type is a Treasury bond. This security takes 30 years to mature and also pays interest every six months.
Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) are zero-coupon bonds that are sold at a discount to the face value. They don’t offer any interest payments and mature at their face value (or par). Any Treasury issued debt with a maturity of 10 years or longer can be converted into Treasury STRIPS by investment firms who own the underlying securities.
Bonds can be another low risk investment option, though there are various options to choose from. Each bond option has varying degrees of risk and return potential. One of the safest options is a government bond fund. In this type of fund, you are actually investing in a packaged form of Treasury securities. The short-term and mid-term investments are relatively safe (though not as safe as a savings account or CD) and can have a slightly higher return than safer investment options.
There are other types of bonds that can be low risk with the potential for a decent return. Some other options include municipal bonds (where you invest in local infrastructure) or short-term corporate bonds (where you invest in a corporation for a short amount of time). Municipal bonds are also tax-free, which can help you save more money. Corporate bonds are the riskiest, but they also have a higher potential for return. Overall, bonds provide a way to gain more return on your growing portfolio with moderate risk.
Although whole life insurance is not classified as an investment for legal purposes, it is a recognized “form of investment” that many people forget about. Many types of insurance are really only good to cover your property or replace income, but whole life insurance can actually be a form of investment that helps you accumulate cash value. Essentially with whole life, you are investing by paying premiums for the policy, and then your return is the accumulated cash value you build in your policy.
Whole life insurance is a relatively safe “form of investment” if you choose a beneficial policy that helps you accumulate cash value. The real benefit of whole life insurance is you can use your accumulated cash value while you’re still alive like you would with any other investment, and it will help you build a financial legacy and provide for your family after you die. Here at McFie Insurance, we specialize in designing and selling whole life insurance policies that are a safe and valuable “form of investment”.
Opting for a slower but steady return is the safer way to go if you want to grow your wealth. In high risk investments, the risk of losing money is very high and losing money will not make you wealthier.
When it comes to investing, think “slow and steady wins the race” because that’s often how it turns out. The one who gets a modest but steady return can far outpace the investor who seeks large returns and loses money along the way.