Understanding Lower-Risk Investments in Today’s Market

By Rebecca Lake · January 25, 2024 · 16 minute read

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Understanding Lower-Risk Investments in Today’s Market

There’s no such thing as a safe investment, but some types of investments may be less risky than others. For instance, bonds tend to be less risky than stocks, though that’s not always the case. Depending on an individual investor’s risk tolerance, knowing which investments tend to be more conservative and which tend to be riskier, can be important to forming an investment strategy.

The Essence of Conservative Investing

It’s difficult to identify the least-risky investments on the market since they’re all subject to different types of investment risk. Your personal risk tolerance as an investor also comes into play, as you may have a much higher or lower appetite for risk compared to someone else. When viewed through that lens, an investment that seems relatively conservative to you might seem risky to someone else.

Defining Lower-risk Investment

You might assume that it simply means any investment that carries zero risk — but that’s not necessarily a definitive answer, or a realistic one, since all investments have risk. As such, when constructing a portfolio, it’s important to look at the bigger picture which includes an individual investment’s risk profile as well as an investor’s risk tolerance, as mentioned. Risk capacity, or the amount of risk required to achieve a target rate of return, can also play a part in investing decisions, and which can help investors define lower-risk investment options.

The Appeal of Fixed Income

Fixed-income securities can be particularly attractive to risk-averse investors. These types of securities tend to have lower associated risks, guaranteed returns, and maybe even tax benefits — but that’s balanced out by lower potential returns, and other types of risk. With that in mind, it may be a good idea to look at fixed-income investments right out of the gate for relatively conservative investment options.

Evaluating Risk in Investments

It’s not necessarily easy to evaluate an investment’s relative risk or risks. But investors can likely do well by learning about the types of risks that an investment may be associated with, and how those risks can line up with their strategy or portfolio.

Key Principles for Secure Investments

Perhaps the most important method involved in discerning how risky an investment is the specific type of risks it introduces to a portfolio.

Investors who choose products and strategies to avoid market volatility leave themselves open to a variety of risks. When researching less-risky investments, it’s important to consider how different risk factors may affect them. Here are some of the most common types of risk you might encounter when building a diversified portfolio.

•   Inflation risk. This is the risk that your purchasing power can erode over time as inflation increases.

•   Interest rate risk. Fluctuating interest rates can influence returns for less-risky investment options such as bonds.

•   Liquidity risk. Liquidity risk refers to how easy (or difficult) it is to liquidate assets for cash if needed.

•   Tax risk. Task risk can influence an asset’s return, depending on how it’s taxed.

•   Legislative risk. Changes to investing or tax regulations could affect an investment’s return profile.

•   Global risk. Certain investments may be more sensitive to changing geopolitical events or fluctuations in foreign markets.

•   Reinvestment risk. This risk refers to the possibility of not being able to replace an investment with one that has a similar rate of return.

Risk vs Return: Finding the Balance

There’s a reason the sayings “nothing ventured, nothing gained” and “no risk, no reward” have been around so long. But having some knowledge of where various investments fall on that range of risks — as well as the types of risks to which a particular investment could be exposed — may help investors find the returns they need while still holding on to some sense of control.

Netting bigger potential rewards often means taking on more risk, investors may benefit from understanding the degree of risk they’re comfortable with and capable of enduring. That’s why it’s important to research every asset they add to their portfolio — or get help from a professional advisor when choosing between the riskiest and least-risky options.

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Lower-risk Investment Options in 2024

Among lower-risk investments on the market in 2024, here is a sampling of what investors might want to choose from, or research further.

High-yield Savings Accounts

Typically offered via online banks, high-yield savings accounts pay a higher interest rate than other types of deposit accounts. That said, since current interest rates are extremely low, these accounts are providing scant returns.

High-Yield Savings Accounts Pros

•   You’re unlikely to lose your principal in a savings account.

•   High-yield savings accounts are FDIC insured, so you won’t lose your deposit if your bank closes.

•   Savings accounts are highly liquid, meaning you can access your money quickly at any time.
High-Yield Savings Accounts Cons

•   Since interest rates on these accounts are lower than inflation, your money could lose purchasing power over time.

•   High-yield savings accounts offer a lower rate of return compared to other conservative investments or those with moderately higher risk.

•   Some banks place limits on the number of withdrawals that you can make from a savings account each month.

Recommended: Breaking Down the Different Types of Savings Accounts

Bonds and Treasury Securities

Investors typically consider savings bonds one of the least-risky investment options. Investors can purchase EE savings bonds (the most common type of savings bond) from the U.S. Treasury Department for half the face value and accrue interest monthly based on a fixed rate.

The interest rate is set for the first 20 years after purchase, and the Treasury guarantees an EE bond will be worth at least its face value when those 20 years have passed. After that, the Treasury resets the interest rate and extends the maturity by 10 more years.

Investors don’t have to hold onto a savings bond for the entire 30 years, but they do have to wait at least a year before redeeming it. And they’ll forfeit three months’ interest if they redeem a savings bond during the first five years after its purchase. The current rate for EE bonds is 0.10% annually. The return may be more conservative, but it’s also slow.

Further, Treasury securities (bills, notes, and bonds) provide funding for the government in exchange for a fixed interest rate. So, they are sold and backed by the “full faith and credit” of the U.S. government.

Because the government has the means to repay its investors (by printing more money or raising taxes), it’s highly unlikely it will default on these obligations, so investors get a practically guaranteed return of their principal and any interest they have coming, as long as they hold onto the security until its maturity date. For those reasons, Treasury securities land in the less-risky investments category.

Different types of government securities come with different lengths of maturity, and their interest rates reflect those term lengths. Treasury bonds have a higher interest rate in exchange for a longer term (30 years), but that lengthy term can be a drawback.

US Treasuries Pros:

•   Since they’re backed by the government, securities are among the least-risky investment options.

•   Varying maturity terms allow for flexibility when using securities to diversify a portfolio.

•   Interest is guaranteed if investors hold U.S. securities to maturity.

US Treasuries Cons:

•   Though conservative, you likely will not see sizable gains from this type of investment.

•   Once you buy a Treasury security the terms won’t change, even if newer bonds are paying higher rates.

•   Selling a bond before it matures could be difficult if there are bonds with more favorable terms on the market.

Certificates of Deposit (CDs)

A certificate of deposit account or CD is a time deposit account. These accounts require you to save money for a set time period, during which you can earn interest. Once the CD matures, you can withdraw your original deposit along with the interest earned. You can open CD accounts at brick-and-mortar banks and credit unions or online financial institutions.

CDs are similar to a savings account, and they’re FDIC-insured, which means the government will cover the depositor’s principal and interest (up to $250,000) if the bank or savings association issuing the CD fails. But unlike other bank accounts, savers must leave their money in the account for a designated period of time — usually from a few months to a few years. The longer the term, the higher the interest rate. And if savers take out the money early, they might have to pay a penalty (although there are some exceptions).

CD Pros:

•   Lower-risk as interest rates can be guaranteed for the CD’s maturity term.

•   FDIC coverage minimizes the risk of losing money if your bank closes.

•   The ability to earn interest on funds you don’t need to use for the near term.

CD Cons:

•   Withdrawing money from a CD before maturity can trigger an early withdrawal penalty.

•   When interest rates are low, CD interest earnings may not keep pace with inflation.

•   Some CDs may require larger minimum deposits to open.

Money Market Funds & Accounts

Money market funds are fixed income mutual funds that invest in short-term, lower-risk debt securities and cash equivalents. You may find them offered by banks though you’re more likely to encounter them at an online brokerage. They’re not to be confused with money market accounts, which are on demand deposit accounts also offered by banks and credit unions. Money market funds must comply with regulatory requirements regarding the quality, maturity, liquidity, and diversification of their investments, which can make them appealing to investors looking for a conservative and steady security that pays dividends.

But the less-risky and short-term nature of the investments within these funds means that returns are generally lower than those of stock and bond mutual funds with more risk exposure. That means they may not keep pace with inflation.

Money Market Fund Pros:

•   Money market funds are a conservative investment that carry less risk than traditional mutual funds or exchange-traded funds (ETFs).

•   Unlike CDs, savings bonds or U.S. Treasury securities, you’re not necessarily locked in to money market funds for a specific time period.

•   Money market funds can generate returns above high yield savings accounts or CDs.

Money Market Fund Cons:

•   A lower risk profile also means a lower return profile compared to other mutual funds or ETFs.

•   Risk doesn’t disappear entirely; you could still lose money.

•   Certain money market funds may offer greater liquidity than others.

Corporate Bonds

Corporate bonds may not be as conservative as CDs or government bonds, but investors generally consider them a lower risk than stocks. The term “investment grade” lets investors know a bond is a lower risk based on ratings received by either Standard & Poor’s or Moody’s. You can purchase corporate bonds through some online brokerage accounts.

Investors expect that a higher-quality investment-grade bond — rated AAA, AA+, AA, and AA- by Standard & Poor’s — will perform consistently and pay interest on a regular basis. Bonds rated A+, A, and A- also are considered stable, while those rated BBB+, BBB, and BB- may carry more risk but are still considered capable of living up to their debt obligations. Like other types of bonds, corporate bonds are susceptible to interest rate risk, and with a longer commitment, there’s typically more exposure to that risk.

Corporate Bond Pros:

•   Investors can earn interest from corporate bonds for reliable income.

•   May offer higher yields than other types of bonds, with longer terms generally producing higher yields.

•   Higher-grade bonds generally have a lower default risk, making them relatively less-risky investments with high returns.

Corporate Bond Cons:

•   Default risk could mean losing money if the bond issuer fails to uphold their end of the bargain.

•   Interest rate risk can negatively impact a corporate bond investor’s return profile.

•   Longer bonds may carry a higher degree of risk compared to bonds with shorter terms.

Preferred Stocks

Preferred stocks, or preferreds, may be an appealing option for conservative investors looking for a higher yield than CDs or treasuries have to offer. Preferreds are often referred to as a “hybrid” investment, because they trade like stocks but are like bonds in that they provide income. You can trade shares of preferred stock in some online brokerage accounts.

These investments generally pay quarterly dividends that you can use as income or reinvest for more potential growth. In a worst-case scenario, if a company can’t pay its preferred dividends for a while, the money owed accumulates as backpay. And when the company resumes payments, preferred shareholders get their accumulated dividends before those who own common stocks.

You can sell preferreds at any time, but they’re typically used as a long-term investment. Just as with corporate bonds, companies that are more financially stable will receive higher marks from credit ratings agencies, so investors can have some idea of what they’re getting into.

Still, the ins and outs of buying preferred shares can be complicated, so beginners may want to work with a financial professional who is experienced in this type of investment.

Preferred Stock Pros:

•   Preferred stock can offer consistent income in the form of dividends.

•   Preferred stock shareholders take priority for debt repayment in the event that the company goes bankrupt.

•   Investors can realize capital gains when selling preferred stock if shares have appreciated in value.

Preferred Stock Cons:

•   Companies that offer preferred stock can reduce or eliminate dividends so payouts are not necessarily always guaranteed.

•   Like other stocks, preferred stocks can be riskier investments than bonds or similar securities.

•   Preferred stock shareholders are not assigned voting rights.

Blue Chip Stocks

Stocks issued by big companies that have a reputation for performing well in good times and bad are typically known as blue chips. They aren’t immune from big losses, but they tend to handle market drops better than other stocks. You can purchase blue chip stocks through an online brokerage account.

These companies have a history of dependable growth and paying consistent dividends. Investors who want to do some research can get insight on blue chips by checking out the “Risk Factors” section of a company’s annual 10-K filing.

Companies must list their most significant risks, usually in order of importance. Some risks apply to the entire economy, some to that particular industry, and a few may be specific to that company.

Blue Chip Stock Pros:

•   Blue chip stocks are typically associated with stable companies, making them less susceptible to market volatility.

•   Some Blue chip stocks pay regular dividends

•   Blue chip stocks have the potential for long-term, steady growth which can allow investors to reap the benefits of capital appreciation.

Blue Chip Stock Cons:

•   Blue chip stocks are not entirely insulated against market volatility or its accompanying downside risk.

•   Blue chip stocks may have limited growth potential, as these are companies that are already well-established.

•   Investors interested in adding innovative companies to a portfolio may be disappointed by blue chips, as these are usually older companies with a set business model.

Investment Strategies for the Conservative Investor

An investor who takes a defensive posture, or attempts to stick to less risky investments is often referred to as “conservative” – which is different from a conservative political leaning. Conservative investing is, as noted, defensive, and seeks to preserve wealth by reducing risk in a portfolio.

The opposite of conservative investing is aggressive investing. Investors in one camp or another can and will use different strategies and assets that align with their risk tolerances and time horizons. Generally, a conservative investor is perhaps more likely to stick to a buy-and-hold strategy than, say, one that involves a lot of day-trading or options trading. That’s because, over time, a buy-and-hold strategy may prove less risky as the market tends to rise over time.

Balancing Your Portfolio with Lower-risk Investments

Along with a longer-term investment strategy, conservative investors may lean into less risky investments, which can include bonds, index funds, mutual funds, and more. They may still add some riskier investments or assets to the mix, in order to provide a little bit of additional growth potential, but the balance between the risk of some investments and the lower risk of others is what a conservative investor is aiming for.

How to Identify and Select Lower-risk Investments

Investors doing their best to seek out and choose relatively lower-risk investments for their portfolio will need to do their homework. That includes looking at some key metrics that may help discern how volatile an asset’s value could be.

A good place to start is by looking at an asset’s standard deviation, which can help determine the volatility associated with an investment. Experienced investors can go even deeper, looking at Sharpe ratios, Betas, and Alphas – which are fairly high-level metrics.

Due Diligence and Diversification

When deciding how much risk to take, investors typically consider several factors, including their age, personality, and purpose. Investors who can’t handle a lot of risk for any or all of those reasons may wish to lean toward those investments that are typically the most conservative.

But another way to help protect a portfolio is through diversification: choosing investments from different asset classes, in different sectors, and with different risk factors. For example, you may choose to invest in a mix of conservative investments such as bonds or U.S. Treasury securities alongside higher risk investments, such as individual stocks or cryptocurrency.

Having some lower-risk assets in a portfolio can minimize the impact of volatility in other assets. Typically, investors with a long time horizon (such as young investors saving for retirement) can take on more risk in their portfolios, while those with shorter-term goals may want a more conservative approach. Investors with a low tolerance for risk may prefer conservative investments during times of uncertainty.

Diversification can help to balance risk so you don’t have to make an either-or choice with regard to a risky investment or conservative investment. The various assets in your portfolio can counterbalance one another as the market moves through changing cycles.

Special Considerations for Lower-risk Investments in 2024

As noted throughout, there are some special considerations investors will want to make when looking at their lower-risk investment options.

For one, depending on market trends, returns on lower-risk investments may be disappointing to some investors. As discussed, assets with lower associated risks tend to be associated with lower growth or returns. Conversely, higher-risk investments may have higher associated gains. Think about the difference in how the value of a stock might increase compared to the value of a bond – assets accrue value in different ways and at different rates.

Another thing to think about is inflation, which is the tendency of money to lose value over time. One of the reasons that many people invest is to try and see their wealth grow faster than the rate of inflation (which is, traditionally, around 2% annually, but may be higher or lower). If they’re successful, their wealth grows, rather than erodes, over time.

There’s a lot to consider when trying to outpace inflation, including the balance of risks and rewards, as mentioned. But many investments that can offer relatively high yields or dividends (like certain bonds) can also be at risk of interest rate changes. During times of high inflation (as experienced in the U.S. and much of the world in 2021, 2022, and 2023), central banks may increase interest rates to slow the economy.

That change in interest rates may cause some investments to lose value. Again, this is a consideration many investors, especially in 2023 and 2024, should be aware of.

Next Steps for the Prudent Investor

For conservative investors, or even those who are merely looking to add a dimension of lower risk to their portfolios, there are a lot of potential strategies and investment types out there. But, again, there’s no single “correct” thing to do for every investor – you’ll need to give some serious thought to your risk tolerance, time horizon, overall financial goals, and weigh the pros and cons of conservative investing accordingly.

As for next steps? It may involve speaking with a financial professional for some guidance. It may also just entail taking a look at your existing holdings, looking for areas where you can mitigate risk, and rebalancing or reallocating your resources accordingly.

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