10 best low-risk investments in 2024: Definition from Digimagg

In a potentially volatile market, diversifying with low-risk investments can help safeguard against economic downturns. While lower risk may yield lower returns, it's beneficial for preserving capital and generating steady interest income. For growth-oriented investors, exploring strategies aligned with long-term goals, like dividend stocks, can offer attractive returns with reduced risk.

Factors to take into account

Depending on your risk tolerance, you might encounter a few potential outcomes:

No risk: Your principal remains intact without any losses.
Some risk: It's reasonable to expect either breaking even or experiencing minor losses over time.

However, there are two important considerations: low-risk investments typically yield lower returns compared to riskier options, and inflation can diminish the value of money invested in low-risk assets.

Opting for solely low-risk investments may result in a decline in purchasing power over time. Hence, they are better suited for short-term investments or emergency funds. Conversely, higher-risk investments are more suitable for long-term financial goals.

Top low-risk investment options

Money market funds

Money market funds combine various low-risk investments such as CDs and short-term bonds to diversify risk. These funds are typically available through brokerage firms and mutual fund companies.

Rationale for investment: Unlike Certificates of Deposit (CDs), money market funds offer liquidity, enabling you to withdraw your funds without penalties.

Risk: Money market funds are generally considered safe. Ben Wacek, founder and financial planner at Guide Financial Planning in Minneapolis, notes that these funds aim to maintain a stable share value, typically at $1.

High-yield savings accounts

Although not technically categorized as investments, savings accounts provide a modest return on your funds. The highest-yielding options are often found through online research, and you may secure slightly better yields by comparing rates across different institutions.

Rationale for investment: High-yield savings accounts offer complete safety as your principal amount remains secure. Most accounts are backed by government insurance, providing coverage of up to $250,000 per account type per bank, even in the event of a financial institution's failure.

Risk: While cash maintains its dollar value, inflation can gradually diminish its purchasing power over time.

Series I savings bonds

Series I savings bonds are low-risk bonds designed to adjust for inflation, safeguarding investments. The bond's interest rate increases in tandem with inflation, but decreases if inflation declines. These bonds can be purchased from TreasuryDirect.gov, operated by the U.S. Department of the Treasury.

Investment rationale: Series I bonds adapt their payments semi-annually based on inflation rates, offering protection against escalating prices.

Consideration: Backed by the U.S. government, savings bonds are among the safest investment options. However, it's crucial to note that the bond's interest payment decreases when inflation subsides.

Early redemption of a U.S. savings bond incurs a penalty equivalent to the last three months' interest if redeemed before five years.

Short-term certificates of deposit (CDs)

Short-term bank CDs offer a loss-proof option backed by FDIC insurance, provided funds are not withdrawn prematurely. To secure the best rates, thorough online research and comparison shopping across banks is advisable. Given recent substantial increases in interest rates, opting for short-term CDs and reinvesting if rates rise further could be prudent. It's essential to avoid committing to below-market CDs for extended periods.

Investment rationale: By maintaining the CD until the term expires, the bank guarantees a fixed interest rate over the specified duration.

Consideration: While some high-yield savings accounts may offer higher interest rates than certain CDs, they often require larger initial deposits.

Risk: Early withdrawal from a CD typically results in a loss of earned interest. Some banks may also impose penalties, potentially affecting the principal amount. Furthermore, locking into a longer-term CD amidst rising rates may lead to lower yields. Cancelling the CD to obtain a market rate usually incurs a penalty.

Corporate Bonds

Companies issue bonds ranging from relatively low-risk (issued by large, profitable companies) to high-risk, known as high-yield or "junk" bonds.

Cheryl Krueger, founder of Growing Fortunes Financial Partners, notes that high-yield corporate bonds carry both interest-rate and default risks.

Interest-rate risk: Bond values fluctuate with changing interest rates, rising when rates fall and declining when rates rise. Default risk: Companies may fail to meet interest and principal payments, potentially resulting in loss of investment. Investment Rationale: To mitigate interest-rate risk, investors can choose shorter-term bonds, as longer-term bonds are more sensitive to rate changes. Selecting high-quality bonds from reputable companies or diversified bond funds can help mitigate default risk.

Risk: While bonds are generally considered less risky than stocks, neither asset class is entirely risk-free. In the event of bankruptcy, bondholders typically have priority over stockholders in repayment.

U.S. Treasury Securities and TIPS The U.S.

Treasury issues various securities, including Treasury bills, notes, bonds, and Treasury inflation-protected securities (TIPS):

• Treasury bills mature in one year or less.
• Treasury notes have maturities of up to 10 years.
• Treasury bonds have maturities extending up to 30 years.
• TIPS are securities whose principal value adjusts based on inflation.

Investment rationale: These securities are highly liquid and can be traded directly or through mutual funds.

Risk: Holding Treasurys until maturity generally ensures no loss of principal, except for negative-yielding bonds. Selling before maturity may result in loss of principal due to fluctuating values affected by interest rate changes. Bond values typically decrease with rising interest rates and vice versa.

Preferred stocks 

Preferred stocks share similarities with lower-grade bonds rather than common stocks. However, their values may experience significant fluctuations during market declines or when interest rates rise.

Investment rationale: Similar to bonds, preferred stocks provide regular cash payouts. Companies issuing preferred stock may have the option to suspend dividends in certain circumstances, although they are often required to make up any missed payments. Preferred stockholders also receive dividends before common stockholders.

Risk: Preferred stocks are considered riskier than bonds but generally safer than common stocks. They are sometimes referred to as hybrid securities, as preferred stockholders are paid out after bondholders but before common stockholders. While preferred stocks trade on stock exchanges like other stocks, careful analysis is necessary before making a purchase.

Money market 

Accounts Money market accounts function similarly to savings accounts, offering benefits like a debit card and interest payments. While they may require a higher minimum deposit than savings accounts, money market accounts typically provide higher interest rates.

Investment rationale: Money market accounts offer flexibility for accessing funds while potentially providing higher interest rates compared to savings accounts. It's essential to search for competitive rates to maximize returns.

Risk: Money market accounts are FDIC-insured, ensuring principal protection up to $250,000 per depositor per bank. The main risk lies in potentially earning insufficient interest to outpace inflation, leading to a loss of purchasing power over time.

Fixed annuities

A fixed annuity is a contractual agreement, often with an insurance company, guaranteeing a predetermined level of income over a specified period. This income can be structured to pay out over a fixed duration or until the annuitant's death.

Investment rationale: Fixed annuities offer a secure source of income, particularly during retirement. They allow for tax-deferred growth and contributions without limits. Additional benefits, such as death benefits or minimum guaranteed payouts, may also be included in the contract.

Risk: Fixed annuity contracts can be complex, and careful examination of the fine print is crucial to avoid unexpected terms. Annuities are relatively illiquid, and early withdrawal penalties may apply. Moreover, in periods of substantial inflation, the guaranteed payout may lose its attractiveness.