When investing money, we all want good returns with minimal risk. However, the reality is that higher returns often come with higher risks. So what constitutes a ‘safe’ investment? Generally, safe investments refer to those with low volatility and a high certainty of preserving capital. Let’s explore several types of lower-risk investments for building a secure financial foundation.
Government bonds and Treasury bills offer stability but low returns
Government bonds and Treasury bills are considered very safe investments since they are backed by the full faith and credit of the government. However, the tradeoff is that they offer relatively low interest rates. For those with a low risk tolerance, the safety and preservation of principal provided by these instruments may be attractive. But investors seeking higher growth may want to look elsewhere.
Savings accounts and CDs protect capital through FDIC insurance
Savings accounts and certificates of deposit (CDs) at banks are insured by the FDIC up to $250,000 per depositor, per account ownership category, per institution. This makes them virtually risk-free up to the coverage limits. However, interest rates are very low. Savings accounts and CDs are suitable for short-term savings goals and emergency funds, not long-term growth.
Money market funds offer higher returns but are not FDIC insured
Money market funds invest in very short-term, high-quality debt securities and pay dividends that may be higher than savings accounts or CDs. However, they are not FDIC insured, so they do carry a small amount of risk. The net asset value aims to stay at $1 per share, but this is not guaranteed. Overall, money market funds can be a relatively safe parking place for cash.
Index funds provide diversification and growth potential
Index funds like S&P 500 index funds offer broad diversification and stability. Over the long run, index funds mirror the performance of the overall market. While they can experience volatility, index funds allow investors to tap into the growth potential of stocks with lower risk than picking individual stocks.
High-quality bonds balance safety and income
Highly-rated investment grade corporate and municipal bonds can provide relatively safe income streams for fixed income investors. Government agency bonds like those from Ginnie Mae also offer security. Bond funds holding high-quality issues with intermediate durations can balance safety, income, and moderate interest rate risk.
In summary, safe investments like government securities, bank accounts, money market funds, index funds and high-quality bonds allow investors to balance lower risk with modest returns. Diversifying across these instruments can produce a secure portfolio foundation.