Any investment is a tradeoff between risk and return. For beginners, striking this balance may seem like a daunting task.
However, regardless of what you may have overheard, getting an investment that suits you is a pretty straightforward thing. It’s also good to know that whether you are a seasoned investor or just starting, it’s advisable to put your money in low-risk investments in order to safeguard your capital.
On the flip side, investing by its very nature is a risky undertaking. So don’t start looking for investments that are 100% safe. Be willing to go for safe investments knowing at the back of your mind that your capital could be at risk, and returns may not be 100% guaranteed.
So the main question becomes, are there low-risk investments that can give you high yields? Despite the adage that the more you risk, the higher your return, there are several ways you can employ to reap relatively high yields while at the same time keeping your risk low.
You should, however, exercise caution while investing since the risk is relative and varies from one person to another. Also, conduct enough due diligence before taking up any investment vehicle. Sound interesting? Below are safe investments you can make without putting too much on the line while getting a relatively decent return.
1. Real Estate Crowdfunding
This strategy helps you minimize your risk at the same time, expecting a predictable return on investment. The method is relatively new in the market and involves investing in a variety of real estates like office buildings or family homes.
Crowdfunding firms, after pooling funds from many investors, allocate your shares for the real estate project, depending on the size of your investment. All you have to do is put your money in a project or become an online property-owner and then expect returns. Here you enjoy the benefits of being a landlord without having to go through the pains of incurring maintenance costs.
Since there is risk in all investments, ensure you do your due diligence on the firms you use for crowdfunding. For instance, check to find out if the investments in real estate are in family homes built in good neighborhoods. An example of a place to start your Crowdfunding journey is Reality Mogul.
2. High Yield Savings Accounts
Having high-interest savings accounts is arguably the most straightforward strategy to grow your money with minimum risk. You can even minimize your risk further by ensuring you choose banks that are FDIC insured. By doing this, you typically guarantee yourself of getting your money up to $250,000 in case the bank goes under either as a result of the non-payment of debts or any other thing.
Although most financial experts don’t consider savings accounts as an investment vehicle, you can still make some money using the least effort possible. To delve further, you can earn up to 2.4% return on your deposit without lifting a finger.
On the contrary, this strategy has very modest returns compared to other high-risk investments. Marcus by Goldman Sachs, can start you off as you explore other options for a savings account.
3. Capitalizing in Money Market Funds
Being extraordinarily safe and reasonably easy to use, money market funds are used by investors who seek relatively higher returns than those provided by savings accounts. It is ideal for investors who are willing to put aside their money for a relatively short time.
These funds work by investing in reasonably steady funds like treasury bills. Despite them not being FDIC insured, they participate in investments that deal with securities that have exceptionally high credit ratings.
This element almost guarantees your investment and any interest you may have earned during the investment period. An added benefit of using money market funds is their high liquidity. This aspect means that you can request to withdraw your funds before the agreed-upon maturity period.
The disadvantage is that you will not benefit from the full interest that you would have received if you waited for the entire maturity period. The cons of this investment vehicle are their low earnings when compared to high-risk options. But for short term investors with short-lived goals like paying for the down payment of a house in 13 months, this investment is for you.
Although not insured by the FDIC, the Vanguard Prime Market Fund is an ideal fund to check out.
4. Peer to Peer Lending (P2P)
You can consider investing in these platforms as low to medium risk. Despite some investors reporting relatively good returns using this strategy, caution should be exercised since there is a level of risk associated with this type of investment.
Here you invest in a piece of a personal loan made to an individual. The pieces are called “notes” and can be acquired for as little as $25. So if you have $1000 to invest, you can diversify your notes by purchasing 40 different notes.
Still, understanding that these are unsecured loans issued to people either for businesses, vacations, or even debt consolidation will make you aware of the inherent risk of default. Defaults reduce your percentage gains. However, to minimize your risk, you can choose various notes, based on their grade loan.
For instance, those that are very highly rated, meaning their risk of default is very low, attract minimal profits going up to a single digit. On the other hand, those lowly rated are risky, but their inherent reward can go up to 20%. The choice is yours.
To get the optimum mix of risk and return, you need to invest in a collection of both high and low-grade loans. As one of the most recognizable P2P platforms, Lending Club is an example of a good place to kick you off.
5. Deposit Certificates
Also known as CDs, these are like savings accounts on steroids. The main difference between a CD and a high yield savings account is that once you deposit your money in a bank, you have to wait till full maturity period.
Failure to adhere to this, would mean either foregoing your interest in totality or even getting charged a percentage of the principal amount deposited. So if you are the investor that does not need access to their money for a duration of time, this will do the trick.
Their return is slightly higher than that of a savings account and can give you an interest of up to 4%. Examples of CDs include the HSBC CDs.
6. Treasury Inflation-Protected Securities
These securities cushion your investment from inflation, hence guaranteeing your outlay is always positive. Also known as TIPS, their value is adjusted for inflation by the use of the results of the consumer price index (CPI).
Unlike other securities, TIPs will protect you from negative returns. For instance, if you invest in a bank that promises you 1% and the inflation is 1.5%, you have a negative return of -0.5%. Now with TIPs, you never have to worry about inflation. This fact is because the TIPs security will adjust the interest you are going to receive by matching it with the prevailing inflation rates in the market.
So why pick this investment vehicle over others? The pros of TIPs are many, including the fact that they are backed by the federal government, and therefore it is guaranteed you will not lose your investment.
Also, the minimum entry to invest in TIPS is quite low. In fact, you can get one with as little as a $100 investment. Getting the investment is relatively easy either through a bank, broker, or exchange-traded funds (ETFs). It is recommended to use EFTs due to their low transaction fees.
On the other hand, the drawbacks include their lack of liquidity coupled with low returns. These investments are for the type of investor who is willing to put an investment for up to 30 years. The reason is you may need this much time to get any yield on investment.
While an increase of 0.9% looks meager to many, it is guaranteed and may look good for a 30-year investment. Also, it is a popular choice among fixed-income investors seeking to cushion their investments from inflation shocks. You can check out the treasury site for more info on purchasing TIPs.
7. Corporate Bonds
If you are one of the brave investors and is seeking a little bit of risk to give you the opportunity of higher returns, then corporate bonds are for you. In as much as they are not a sure thing like government-backed bonds, they can be relatively safe if you look to the right companies.
In a nutshell, corporate bonds work when a buyer agrees to purchase the face value of a bond for the company to invest. The bonds are usually a minimum of $1000. In return, the firm can reach a decision to pay the person an agreed-upon interest mostly semiannually. Then upon maturity of the bond, the firm agrees to refund the principal sum together with interest.
Similarly, you can minimize the risk of default by going for very safe rated companies. This fact is because of the different security ratings for firms when it comes to corporate bonds. For instance, AAA-rated corporate bonds are the most secure. As a matter of fact, some companies are rated even higher than the federal government itself.
On the other hand, if you go for companies without a triple-A rating, you risk your principal amount. The upside is the reward is relatively high. Corporate bonds are an asset class that can give you up to 5%. To avoid sleepless nights, conduct due diligence before putting your money in any corporate bond. You can find out more on corporate bond rankings before deciding on the best bond to invest in.
The Bottom Line
In as much as you may want to secure your financial future early, it is vital to keep your risk low. You don’t want to start losing your principal money, especially if you are a beginner. Start with low-risk investments as you educate yourself slowly during your investment journey. If you’re unsure of any investment vehicle, don’t hesitate to speak to a qualified financial advisor before risking your capital.