June 26 2020

7 Low-Risk Investments with Great Rewards

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7 Low-Risk Investments with Great Rewards

Investing can seem intimidating, especially when you get started for the first time. We especially know that when it comes to growing your financial portfolio, things may get risky when times get tough. As some assets may have taken an unexpected turn in 2020, low-risk investments have become a hot topic.

It’s understandable to seek out safer investments during times of uncertainty, so thankfully there are plenty of low-risk options to consider. Keep in mind, each investment has its own trade-offs in terms of risks and benefits. And of course, the most rewarding investments typically come with more risk.

While each investment type performs and operates in its own way, they all have the same general components. They are built to invest money, charge interest rates, and hopefully earn you a profit. Between low-risk and high-risk investments, there are plenty of variables when it comes to understanding the terms and conditions. It may take a little digging to fully understand each type’s terms and conditions, so we’ve helped outline a few common ones below. If you’re looking to grow your capital, these eight low-risk investments may be good options for you.

You may be familiar with the idea that riskier investments yield the potential for higher returns. On the other side, you must remember that lower risks typically have lower yield returns. But, that doesn’t mean you aren’t able to make a profit from your investments. For some low-risk investments, you don’t even need more than $100 or less to start out.

1. High-Yield Savings Accounts

Definition:

High-yield savings accounts are like your everyday savings account, just with higher interest rates. These accounts can be used for long-term savings goals or to hold extra money from your checking account. For example, if you were to start saving for a house or building up an emergency fund, this could be a great option. You’re able to contribute to your savings and earn higher interest than the standard savings account.

Flexibility:

These accounts are flexible. Since they are a savings account, you can withdraw money up to six times per month. If you want to cash out, you’re more than able to upon your request. Under some circumstances, banks may request an early notice before doing so.

Cost:

Some banks may have you pay a minimum deposit upon opening an account. Other than that, savings accounts normally don’t cost anything to start.

How are these safe?

Since your money isn’t locked up in a contract, these accounts are known to be one of the safest investments. You’re able to withdraw your money whenever you need, but still earn a slight profit over a long period of time paid out monthly.

2. Cash Management/Sweep Accounts

Definition:

Cash management, also known as sweep accounts, are normally investment opportunities offered by a brokerage firm. This is when you have a specific amount taken out of a commercial account and put into an investment account. You’re typically able to choose your investment account, amount, and date. Sweep accounts are also most known for being a cash hold option in any investment account. When many individuals go to add cash to an investment account to place a new trade, some cash may be left in the sweep account, if not used in full. That way, you ensure your money isn’t sitting anywhere for extended periods of time without making a profit.

For example, you contribute $100 and buy 3 shares of an ETF whose price is $33 each. You would spend $99, with $1 left in your sweep account. These accounts are also commonly used for dividend payments to be held.

Flexibility:

Flexibility will depend on the type of investment account the sweep cash is held, and where you want to move your money. If the cash is in a brokerage account, you can move it out, and into a savings or checking account within a few days. You could also easily move this money to another investment account as brokerage accounts aren’t tax advantaged. Issues may arise if your money’s in a tax advantaged account, like an IRA. Then, moving the sweep money becomes more difficult. To get money out of a tax advantaged account, it requires a rollover. Rollovers are easier done at another account at the same institution. Moving cash between the same tax advantaged account types, if done properly, will not cause a taxable event. Moving from a tax advantaged to a non-tax advantage account, if don’t improperly, will cause taxes.

Cost:

The initial cost of setting up these accounts depends on the brokerage bank who holds the money. Sweep accounts can come with fees to use the service. Depending on the provider chosen and how much cash you have to manage, this may differ. Some providers may even offer a sweep account as a benefit to your account.

How are these safe?

Depending on where the sweep cash is, it could be FDIC insured. Usually, if it’s held at a bank or SPIC insured, if it’s held at a brokerage firm, considering checking before investing. Depending on your account choice, you may be able to cash out quickly, while others may take longer.

3. Certificate of Deposit (CDs)

Definition:

A CD is a fixed amount of money you contribute to savings for a fixed amount of time. In exchange, banks will pay interest to use your money elsewhere during that time period. Initially, banks can loan out your money to earn a profit off interest rates that you get a percentage from. With this type of investment, you’re able to choose the time period you want to invest for. Usually, the longer the CD, the higher the interest. Also, the higher interest rate CDs normally require a minimum contribution amount.

Flexibility:

As most banks are expecting to hold your money for that fixed timeframe, it isn’t as easy to get your cash sooner than expected. You may then be faced with different fees depending on your bank’s guidelines.

Cost:

You’re able to choose the amount you would like to contribute to a CD. Plus, there isn’t a cost specifically associated with opening a CD. You could invest anywhere from $0 to hundreds or thousands of dollars in a CD. Keep in mind, most CDs will automatically renew. If you want to use your cash for something else, check in with your bank before your contract is up.

How are these safe?

CDs are federally insured up to $250,000 per person by the FDIC. This covers all accounts in your name at a specific bank. This guarantees you’ll get your money back, but how much you get depends on your bank’s circumstances.

4. Treasury Securities

Definition:

Treasury securities are treasury bills, notes, and bonds. When you buy treasury securities you are buying the debt of the government. This debt is usually used to fund government projects. These securities are issued by the United States. Department of Treasury. In most cases, your earnings may be exempt from state and local taxes since they are government issued.

Flexibility:

With treasury securities, you can’t break your maturity date. Even though you may not get out of your investment, you can sell it to someone else. In that case, you will get what they’re willing to pay for it. You’re able to either sell your treasury bond or wait until it matures. When selling, you may have to meet up with your bank, a broker, and a dealer that might take on additional fees. Along with that, most individuals may not be buying individual bonds. Instead, you may likely buy a mutual fund or ETF focused on treasuries, in the case there may be a fee to buy or sell the fund from the brokerage.

Cost:

The costs of investing in treasury securities may vary. You could spend anywhere from $0 all the way up to $5 million. New issue treasuries may have no online transaction or purchase fees. If you choose to invest in assistance of a broker, you may have a broker-assisted fee.

How are these safe?

These investments are also known to be one of the safest investments. Treasury securities are normally backed by the U.S. government, and your earnings may be tax exempt.

5. Money Market Funds

Definition:

Money market funds are normally short-term investments with short-term interest rates. Many people choose to invest in money market funds rather than cash for higher interest rates.

Flexibility:

You’re able to cash out these investments, but that does normally come at a cost. You may have to pay liquidation fees and wait to get your earnings for a fixed period.

Cost:

These funds are inexpensive, being set at the net asset value (NAV). Even though they may be inexpensive to get, they might come with different fees. When you start out, you may agree to pay monthly deposits or choose to invest some of your retirement savings.

How are these safe?

These investments are high-quality, short-term investments that allow you to have more flexibility than long-term investments. Unfortunately, the FDIC does not insure this type of asset because it’s not a cash instrument. Money mutual funds are invested in debt paper which are covered, at most, by SPIC insurance.

6. Preferred Stock

Definition:

Investing in preferred stocks is like investing in a regular common stock or share in a company. But, this kind of stock is usually also accompanied with a promised dividend payment. Preferred stockholders hold the priority of dividend payments over common stockholders, meaning they will get their dividends paid first. What is left is then paid to common stockholders.

Preferred stock has the market volatility of the stock market, but also pays regular dividends like a bond. This makes preferred stock investing a crossover of the traditional characteristics of the stock and bond market.

Flexibility:

You’re able to sell your stocks whenever you choose, but like owning any other stock, you may face a price decrease or, even better, an increase. Some preferred stocks also come with a conversion option. This is where a company buys back the preferred stock from you or converts your stock to common stock. Each preferred stock share is part of a series that has its own rights. Be sure to check all the details of any preferred stock before you buy, as there are many nuances that aren’t always the same.

Cost:

Most stocks vary in price and fees. Most of the time, the highest-earning stocks are the ones that cost more per share. However, you’re able to invest as much or as little as you’d like, whenever you’d like. Some stocks may have transaction fees when buying or selling.

How are these safe?

Even though preferred stocks get paid before common stocks, their payment still isn’t guaranteed. When you’re investing your money into stocks, you hold company and stock market risk.

7. Fixed Annuities

Definition:

An annuity is an insurance contract that guarantees regular and recurring income payments to the contract purchaser. There are many types of annuities and they can vary in structure and price. A fixed annuity is the simplest form of an annuity. With fixed annuities, you pay into the annuity and in return, they give you a fixed stream of income. This income usually comes monthly, over a set period of time that could be as long as you live. For example, Social Security and Pension plans are structured like annuities.

Flexibility:

Each annuity product is structured differently. Be sure to carefully review the contract and the details with a trained professional before purchasing.

Since there are many types of annuities, there are products that are structured better for some individuals than others. For example, if someone is nervous about the market and wants to ensure they can cover their basic expenses for life, they can buy an annuity that pays them that amount monthly. Another example of an annuity type is an immediate annuity. This type allows you to give an insurance company a sum of money today in exchange of monthly payments starting immediately.

While there’s flexibility in the types of products offered, this is usually not as easy to get out of these contracts once you have purchased. Annuities are notorious for having huge surrender charges that can be up 20 percent of your initial investment if you choose to cancel within the first year. Surrender charges aren’t just for the first year. They could last up to five to ten years, slowly decreasing to zero. Most of the time, you’re able to cash out your investment by simply terminating your contract. Keep in mind that when you terminate your contract, you may face fees, taxes, or miss interest payments.

Cost:

Fees on fixed annuities can differ depending on your insurance company. When considering this type of investment, ensure you do your research and read the fine print. Also, be sure to ask the salesperson what commission they would make on this sale and how much these commissions range on different types of annuities. These commission rates are usually rather high, so be careful that you’re not being sold one just because of the agent’s payout benefits. Lastly, understand the taxes and keep in mind these annuity payments may be taxed like regular income.

How are these safe?

As fixed annuities have a fixed interest payment amount over a fixed time period, you know when you’ll get your cash and how much. Keep in mind the impacts of interest rates and inflation over the life of your contract.

When getting started with investing, it may sound intimidating. However, it can be a fantastic way to work toward your long-term financial goals. Even the best investors didn’t make a profit out of the blue — they established a healthy investment mindset. When taking strides towards investing, outline your goals, and regularly pay attention to different investment markets.

Remember, all investments aren’t made to be equal. Be sure to check out each investment’s terms and conditions to fully understand each contract’s time frame, payment styles, and investment risk. Check out our investment calculator to see your estimated investment growth over time. Download our app to see how much you’d like to consider investing in the near future.