10 Best Low-Risk Investments of 2020 Broken Down For You

In today’s world, investments are more of a necessity than an option. This is because we never know what the future holds.

Good investments offer an alternative source of income to sort out your daily needs and even the possibility to upgrade your lifestyle.

Low Risk Investments

In most instances, though, we hear that you have to go for risky investments if you want high returns. However, you need to get a balance between high and low-risk securities so that in case the market turns volatile; you can avoid making total losses.

Low-Risk Investments Worth Considering

We understand that low-risk investments with high returns are hard to find. For that reason, we have come up with this article to take you through some of our favorite low-risk yet high-yield investments.

Here we go.

1. Preferred Stock

You probably already know a lot about stocks and how risky they can be. And now you’re wondering why the heck we have gone ahead and ranked “preferred stock” among low-risk ventures, right?

Well, unlike ordinary stocks, preferred stock funds are quite different from the common ones. And that is, when you hold one of these, you enjoy fixed dividends. These dividends are not affected by the ebb and flow of the general market at all.

What’s more, even if the company whose preferred stock you hold declares bankruptcy, you’ll get first priority when it comes to receiving payouts.

Generally, these stocks are less volatile than common stocks which, unfortunately, translates to reduced profit potential.

Some example of companies that offer this kind of stock include the:

  • Georgia Power Company
  • MetLife
  • Bank of America
  • Cherry Hill Mortgage
  • Global Net Lease
  • SPDR Wells Fargo

In 2020, MetLife declared its preferred stock dividends at 5.250%.

Likewise, in January 2020, Bank of America issued its preferred stock at 4.300% with the maturity date being set at 2025.

So, as you can see, the returns are quite modest compared to the kind of returns you’d expect from common stocks.

One thing we like about them (preferred stock), though, is that they are quite stable and they’re the kind we’d recommend to anyone planning for retirement.

2. High Yield Savings Accounts

This may surprise you since savings accounts tend to attract meager interest rates that average at about 0.09%. What you may not be knowing is that there are high-yield savings accounts whose interest rates are 20 times higher than the average rate.

We are going to give you a few examples of such accounts:

HSBC Direct Savings

HSBC
HSBC Logo. Image Courtesy/ HSBC

There are many benefits to having a savings account with HSBC, and they include – zero monthly fees or minimum account balance requirements. But of relevance to us is the annual returning on your savings that can be as high as 20 times what your local bank offers.

You may also like the fact that you have the option of setting up direct deposits of your paychecks or recurring deposits from another account.

The HSBC Direct savings account is available on both individual and joint basis.

Discover Online Savings

The Discover brand is mostly famous for the many credit card offers it has. What is rarely mentioned are the high interest rates on its savings accounts.

Besides that, there is the sign-up bonus, and other generous fee offers that make the account more appealing. There is no monthly maintenance fee, while some services do not charge you anything as you would expect, and they include official bank checks, the return of deposited items, account closures, and so on.

Capital One 360 Performance Savings

With the Capital One 360 Savings, there is no minimum balance requirement, plus you are allowed to make up to six withdrawals per month. Most of all, all balances attract an APY of 1.00%, and the accounts can be individually held or jointly.

The great thing about having this account is that Capital One offers almost all the services that you would find in an ordinary bank. From auto loans to commercial banking, there is very little that this service does not offer.

Citi Accelerate Savings

When you hold this account, you can have peace of mind knowing that the service has one of the highest, and therefore, best interest rates in the banking industry.

The other advantage of being a Citi Bank client is due to the extensive branch network plus their ATMs too are spread across the nation. Find one near you.

We also liked that there is no minimum initial balance requirement at Citi Bank, plus there are many other checking account offers, loan programs, and business banking for you to enjoy.

3. Certificates of Deposit (CDs)

Another category of the best low-risk investments are certificates of deposit, also referred to as CDs, and they offer even higher returns than savings accounts.

CDs have specific maturity dates, which range from weeks to a couple of years. The longer the term of the CDs, the higher the interest rates

Also, you may find CDs that adjust their interest rates over time. Another thing is that these are time deposits.

Therefore, if you withdraw your money before the maturity date, you are going to be slapped with an early withdrawal penalty.

Useful Facts about CDs

In general, CDs are safe investments, although they come with reinvestment risk. This is the risk whereby as interests drop, investors are going to earn less if they plow back the principal and interest on new CDs that have lower interest rates.

Another thing is that CDs typically suit retirees who can lock up some of the moneys they don’t need immediate income from.

The CDs would be a safer investment plus you would be guaranteed of higher payouts.

Keep in mind that since you will be tying up your money until the CDs reach maturity, they do not have the same liquidity as the money markets or savings accounts.

Last but not least, there are different kinds of CDs available, and you can easily find the one that suits your needs.

How to Invest in Certificates of Deposit

  1. If you want to purchase a CD, the process is straightforward. All you need to do is inform your local bank on the CD that you want.
  2. You can either go for the six month CD or the 18-month one. On top of that, you should also state the exact amount that you want to invest in these securities.
  3. Some banks have a minimum limit on what you should invest while others give you the freedom to pump in as low as you want.
  4. Then, when your CD reaches its maturity date, the bank will send you a notification explaining the options at your disposal. You could choose to:
  • Renew the CD
  • Purchase a different CD (switch from a six month to an 18-month CD)
  • Transfer the funds to a savings account
  • Withdraw the funds as a whole

4. Money Market Funds

So, what if you could have one of the finest bankers in town do the spade work for you? That’s precisely what the money market funds are all about.

You typically invest your money along with other investors to create a pool of funds. These funds are then managed by experienced fund managers on your behalf.

The fund managers basically invest in a variety of ventures among them:

  • Certificates of deposit
  • Government securities
  • Low-risk securities

And although the returns from such ventures tend to be modest, they are far more stable than penny stocks and forex.

But much as they are stable, not all money market funds are insured by the federal government. So, it’s important to inquire about this before investing.

Other than banks, mutual fund companies and brokerage companies provide money market funds.

You can take this option if you’re risk averse. In fact, some pundits only recommend money market funds as “a place to store cash.”

Some of the best money market funds in the US include:

  • BMO Harris
  • UFB Direct
  • Quontic Bank
  • First Internet Bank

If you prefer more of a hands-on approach, you might want to buy the CDs and government securities yourself.

5. Credit Card Rewards

Credit Card Rewards low-risk investments
Credit card rewards. Image Courtesy/

You may be wondering how something that is often associated with debt could be one of the most conservative investments that you could try out, we are going to spell it out for you.

Let’s talk about cashback credit cards that reward their loyal customers every quarter. What an average individual would do is rush to the nearest shopping mall to spend big.

However, a smart investor would invest that cashback into something remarkably big. When you earn a cashback reward, you could contribute to your investment of a similar amount.

Alternatively, you have the option of requesting to be given your reward in the form of a check. The next step would be for you to endorse this check to your investment fund.

Additionally, there are plans whereby you can channel your reward directly to your account of choice, such as education savings, retirement funds, or for a particular charity.

Such a program works as a conjunction of the credit card company and an investment bank of your choice.

So, instead of using your effort to make monthly contributions, the process will be largely automated.

Examples of Credit Cards that You Could Use to Make Contributions to Your Investment Fund

As we mentioned earlier, there are some credit card companies that make a contribution for you. They include:

  • American Express Platinum Card
  • American Express Schwab Investor Card
  • The Morgan Stanley Credit Card by American Express
  • Fidelity Rewards Visa Signature
  • American Express Platinum Card for Morgan Stanley
  • Upromise Mastercard from Barclays

6. Peer-to-Peer Lending

As the name suggests, this is a type of business that involves lending money to other individuals and companies, rather than investing in company shares. The idea is that these entities would pay you back with some interest.

Investors dealing with these unsecured loans claim to make double-digit returns of up to 12%. This is quite appealing to the many investors who have been let down by the low rates in savings accounts and bonds.

How P2P Works

This is an arrangement that involves advancing loans without involving any banker in the process. Instead, you would be investing in the loans via platforms such as LendingClub and Prosper.

Just like banks, the borrower fills out a loan application and gives out his personal information. The investor would then go through these details to help him decide on the best loans to invest in.

These loans tend to have a term ranging between 3-5 years, and you can use the earnings for whatever purpose you desire.

The pricing of the loans depends on credit grades which are based on aspects such as:

  • The loan amount
  • Loan term
  • The borrower’s credit score
  • Debt-to-income ratio

The lending platforms deal with the administrative tasks such as the distribution of the loans, collection of the monthly remittances, and so on. There is a 1% management fee for each loan that is paid to the platform.

Advantages of Peer-to-Peer Investments

There are several benefits of taking part in Peer-to-Peer investments, and they include:

  • The high rates of return
  • You can decide on the type of portfolio that you want to build
  • Instead of investing on whole notes, you have the option of investing in different notes to diversify your investment

The Risks

But not everything is shiny about P2P lending as there are specific problems with this mode of investment:

  • The unsecured loans are easily prone to defaults
  • Highly affected by recessions
  • The investments are not covered by FDIC insurance

7. Mutual Funds

By definition, a mutual fund is a pool of money from different investors and does all the hard work for them. The platform invests the funds in various assets and industries.

The main point here is diversification, and this makes it one of the best safe investments out there.

Purchasing a Mutual Fund

We are going to summarize for you the process of buying a mutual fund in 5 simple steps:

I) Choose between Active and Passive Management

If you want to record an impressive performance at a low cost, then passive investment is the way to go.

II) Determine your Budget

When calculating your budget, the things that you should focus on include the amount you need to get started and how you wish to invest the funds.

III) Decide on where you want to buy the mutual fund

In most instances, you are advised to purchase the funds from a brokerage firm provided that the funds you go for are within your budget.

Besides that, go for a brokerage firm whose analysts take their time to educate you on the funds before you invest in them.

IV) Pay attention to the fees

Mutual funds without transaction fees are handy if you want to minimize costs.

V) Manage your Portfolio

It would be wise if you rebalance your portfolio at least once a year. This would help you stick to your goal of diversifying your portfolio.

8. Investment Grade Corporate Bonds

Companies may also issue bonds. Typically, low-risk bonds are those issued by the large profitable companies.

The concept behind these bonds is relatively simple to understand. When a company wants to raise cash, it can either sell its shares by issuing stock, or it can take debts by issuing bonds.

You can invest in corporate bonds in two different ways. You could buy the individual bonds via a broker, or you could purchase via mutual funds or ETFs whose sole focus is corporate bonds.

Bond Valuation

To evaluate a prospective corporate bond, you have to observe its yield advantage in comparison to US Treasuries, which are considered to be default risk-free.

The highly-rated firms such as Microsoft have good-looking balance sheets. So, they can offer low-return bonds as the investors are sure there is no likelihood of the company defaulting.

On the other hand, the lowly-rated firms are at more risk of default. Therefore, they offer high-yield bonds to woo investors their way.

What to invest in depends on your level of risk appetite.

9. Treasury Bonds

US Treasury Bonds are also considered low-risk investments
Close up image of the US Treasury department. Image Courtesy/

We cannot complete our discussion on conservative investments without mentioning US Treasury Bonds. These are securities issued by the government to raise money that is going to help in funding different government programs and projects.

These securities are perfect for those investors looking for the lowest-risk investment available. T-bonds have a maturity date of 30-years, and they are backed by ‘the full credit and faith’ of the government.

This may explain why there is no record of the US treasury ever failing to pay back its lenders.

Why are US Treasuries considered the safest investments to go for? Well, it is probably due to the government guarantee that you will receive the face value of your investment. The only catch is that you have to hold the bond until the maturity date comes.

NB:

You should know that the principal investment is the entirely risk-free one. However, Treasuries are prone to specific risks such as inflation risk, opportunity cost, and interest rate risk.

10. Savings Bonds

The last item on our list offers a smart way for you to let your money work for you. Just like the treasury bonds, Savings Bonds are a very stable investment due to the backing they get from the US federal government.

The US savings bonds are of two types; Series I and Series EE.

The former comprises of a fixed rate of return and an adjustable interest-linked return. The inflation return rate is adjusted every six months and may even get to a negative percentage.

As for the Series EE bonds, their fixed interest rate is automatically added to the bond at the end of each month.

Another thing about Series EE bonds is that you get the assurance from the treasury that the bond value is going to double if you hold it to maturity, i.e., 20 years.

If you decide not to get to the maturity date, you will receive the interest rate that is stated less any early withdrawal fees.

Another advantage of EE bonds lies in their use to pay for education. Here, you can fail to include a portion or all of the interest that you earn from your taxes.

NB:

You have to be sure that you get everything right as you fill out the paperwork at your first time investing in savings bonds. If you mess up, you may end up with thousands of tax penalties to pay up in the future.

Frequently Asked Questions

The following queries and their responses should go some way in boosting your knowledge of the topic.

What is the safest investment with the highest return?

A: There are no entirely risk-free investments. However, some are largely safe and they include high-yield savings account, certificates of deposit, treasuries, money market accounts, peer-to-peer lending, mutual funds, just to mention a few.

How can I double my money fast?

A: There are several ways through which you can double your investment. You could go for the classic way whereby your money would grow in a span of several years.

There are also the speculative means that involve investing in options, penny stocks or even day trading.

You could also go for the tax-advantaged accounts which are normally offered by some employers.

What would you do with $20K?

A: There are several smart ways that you could invest such an amount of money.

It may take you a while to raise that kind of money, and rather than let it stay idle and lose value to inflation, you could invest with a Robo advisor like Trade Ideas, invest in real estate, do a 401K swap or invest in peer-to-peer lending.

How much do I need to invest to make $500 per month?

Working with a hypothetical 5% return rate per annum, you would need to invest $120,000 to be earning $500 per month or $6000 per year.

So, of course, the interest rate provided by your investment of choice will directly affect the amount of capital you need to inject to get such returns per month.

If you go for high risk ventures e.g. ones that provide 90% returns per annum, you’d definitely need to commit only a small amount of capital to get 500 bucks per month. For example, working with 90% p.a, you’d need to invest $6,700.

On the contrary, a low-risk option with returns of 1% would require you to commit roughly $600,000 to get 500 bucks per month.

Final Word

If there is anything that we learn from the major crises facing the world is that the market can be very volatile.

So, however daring you are, it is always important to play safe to avoid having your investments wholly wiped out.

We hope that our analysis of the best low-risk investments will help you decide on the ideal security to invest in.

Further Reading

How Investors Can Receive Compounding Returns
What’s Best Time of the Day to Buy Stocks?
Motley Fool Stock Advisor Review: Unbiased Opinion

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