While the economy is essentially back on track following the epidemic, there may still be some bumps in the road in 2022.
The stock market has been on fire, and inflation has been on the rise.
If the market settles down or inflation continues to rage, investors must remain disciplined with their investments.
Building a portfolio that includes at least some lower-risk items will help you weather future market volatility.The trade-off, of course, is that by reducing risk, investors are more likely to receive lower long-term profits.
If your goal is to protect cash and provide a consistent stream of interest income, it may be good.
If you want to grow your money, though, you should explore investment strategies that are tailored to your long-term objectives.
Even higher-risk investments like stocks have parts (like dividend stocks) that lower relative risk while still generating appealing long-term returns.
What to consider
Depending on how much risk you’re willing to take, there are a couple of scenarios that could play out:
- No risk — You’ll never lose a cent of your principal.
- Some risk — It’s reasonable to say you’ll either break even or incur a small loss over time.
However, there are two drawbacks: low-risk assets produce lower returns than riskier investments, and inflation can reduce the purchasing power of money held in low-risk investments.
If you simply invest in low-risk assets, your purchasing power will erode over time. It’s also why low-risk bets are better for short-term investments or putting money aside for an emergency fund. Bigger-risk investments, on the other hand, are better suited for higher long-term returns.
Here are the best low-risk investments in January 2022:
1. High-yield savings accounts
Savings accounts, while not technically an investment, provide a modest return on your money.
You can find the highest-yielding options by searching online, and if you’re prepared to look at the rate tables and shop around, you can obtain a bit more yield.
Why should you invest?
In the sense that you will never lose money in a savings account, it is absolutely safe.
Most accounts are insured by the government up to $250,000 per account type per bank, so even if the financial institution fails, you’ll be compensated.
2. Series I savings bonds
A Series I savings bond is a low-risk investment that is inflation-adjusted to help protect your money. When inflation rises, the interest rate on the bond is raised. When inflation lowers, though, so does the bond’s payment.
The TreasuryDirect.gov website, which is run by the US Department of Treasury, is where you can purchase the Series I bond.
“The I bond is a fantastic choice for inflation protection because you receive a fixed rate plus an inflation rate added to it every six months,” explains McKayla Braden, a former senior counselor for the Department of the Treasury, referring to a twice-yearly inflation premium.
Why invest: The Series I bond’s payment is adjusted semi-annually based on the rate of inflation. The bond is paying a high yield due to the strong inflation expected in 2021. If inflation rises, this will also adjust higher.
As a result, the bond protects your investment from the effects of rising prices.
Savings bonds are regarded one of the safest investments because they are backed by the United States government. However, keep in mind that if and when inflation falls, the bond’s interest payout would decrease.
A penalty equal to the final three months’ interest is charged if a US savings bond is redeemed before five years.
3. Short-term certificates of deposit
Unless you take the money out early, bank CDs are always loss-proof in an FDIC-backed account.
You should search around online and compare what banks have to offer to discover the best rates.
With interest rates expected to climb in 2022, owning short-term CDs and then reinvesting when rates rise may make sense. You’ll want to stay away from below-market CDs for as long as possible.
A no-penalty CD is an alternative to a short-term CD that allows you to avoid the normal penalty for early withdrawal. As a result, you can withdraw your funds and subsequently transfer them to a higher-paying CD without incurring any fees.
Why should you invest?
If you keep the CD until the end of the term, the bank agrees to pay you a fixed rate of interest for the duration of the term.
Some savings accounts provide higher interest rates than CDs, but these so-called high-yield accounts may need a substantial deposit.
Risk: If you take money out of a CD too soon, you’ll lose some of the interest you’ve earned. Some banks will also charge you a fee if you lose a portion of your principle, so study the restrictions and compare rates before you buy a CD. Furthermore, if you lock in a longer-term CD and interest rates rise, you’ll receive a smaller yield. To get a market rate, you’ll need to cancel the CD and will typically have to pay a penalty to do so.
4. Money market funds
Money market funds are pools of CDs, short-term bonds, and other low-risk investments that are sold by brokerage firms and mutual fund companies to diversify risk.
Why invest: Unlike a CD, a money market fund is liquid, which means you can usually withdraw your funds without penalty at any time.
Risk: Money market funds, according to Ben Wacek, founder and financial adviser of Guide Financial Planning in Minneapolis, are usually pretty safe.
“The bank informs you what rate you’ll earn, and the idea is to keep the value per share over $1,” he explains.
5. Treasury bills, notes, bonds and TIPS
The U.S. Treasury also issues Treasury bills, Treasury notes, Treasury bonds and Treasury inflation-protected securities, or TIPS:
- Bills mature in one year or sooner.
- Notes stretch out up to 10 years.
- Bonds mature up to 30 years.
- TIPS are securities whose principal value goes up or down depending on the direction of inflation.
Why invest: All of these securities are very liquid and can be purchased and sold directly or through mutual funds. Risk: Unless you buy a negative-yielding bond, you will not lose money if you hold Treasurys until they mature.
If you sell them before they mature, you risk losing some of your principle because the value fluctuates with interest rates. Interest rates rise, which lowers the value of existing bonds, and vice versa.
6. Corporate bonds
Corporations can also issue bonds, which range from low-risk (issued by large profitable enterprises) to high-risk (issued by smaller, less successful companies). High-yield bonds, also known as “junk bonds,” are the lowest of the low.
“There are low-rate, low-quality high-yield corporate bonds,” explains Cheryl Krueger of Growing Fortunes Financial Partners in Schaumburg, Illinois. “I think those are riskier because you’re dealing with not only interest rate risk, but also default risk.”
- Interest-rate risk: The market value of a bond can fluctuate as interest rates change. Bond values move up when rates fall and bond values move down when rates rise.
- Default risk: The company could fail to make good on its promise to make the interest and principal payments, potentially leaving you with nothing on the investment.
Why invest: Investors can choose bonds that mature in the next several years to reduce interest rate risk.
Longer-term bonds are more susceptible to interest rate movements. Investing in high-quality bonds from reputed multinational corporations or buying funds that invest in a broad portfolio of these bonds can help reduce default risk.
Bonds are often regarded to be less risky than stocks, but neither asset class is without risk.
“Bondholders are higher on the pecking order than stockholders,” Wacek explains, “so if the company goes bankrupt, bondholders get their money back before stockholders.”
7. Dividend-paying stocks
Stocks aren’t as safe as cash, savings accounts, or government bonds, but they’re safer than high-risk investments like options and futures. Dividend companies are thought to be safer than high-growth equities since they provide cash dividends, reducing but not eliminating volatility.
As a result, dividend stocks will fluctuate with the market, but when the market is down, they may not fall as much. Why invest: Dividend-paying stocks are thought to be less risky than those that don’t.
“I wouldn’t call a dividend-paying stock a low-risk investment,” Wacek says, “since there were dividend-paying stocks that lost 20% or 30% in 2008.” “However, it has a smaller risk than a growth stock.”
This is because dividend-paying companies are more stable and mature, and they provide both a payout and the potential for stock price increase.
Danger: One risk for dividend stocks is that if the firm runs into financial difficulties and declares a loss, it must reduce or abolish its dividend, lowering the stock price.
8. Preferred stocks
Preferred equities have a lower credit rating than regular stocks. Even so, if the market collapses or interest rates rise, their prices may change dramatically.
Why invest: Preferred stock pays a regular cash dividend, similar to a bond. Companies that issue preferred stock, on the other hand, may be entitled to suspend the dividend in particular circumstances, albeit they must normally make up any missing payments. In addition, before dividends may be paid to common stockholders, the corporation must pay preferred stock distributions.
Risk: Preferred stock is a riskier variant of a bond than a stock, but it is normally safer.
Preferred stock holders are paid out after bondholders but before stockholders, earning them the moniker “hybrid securities.” Preferred stocks, like other equities, are traded on a stock exchange and must be thoroughly researched before being purchased.
9. Money market accounts
A money market account resembles a savings account in appearance and features many of the same features, such as a debit card and interest payments. A money market account, on the other hand, may have a greater minimum deposit than a savings account.
Why invest: Money market account rates may be greater than savings account rates.
You’ll also have the freedom to spend the money if you need it, though the money market account, like a savings account, may have a monthly withdrawal limit.
Risk: Money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC), which provides guarantees of up to $250,000 per depositor per bank. As a result, money market accounts do not put your money at risk. The penalty of having too much money in your account and not generating enough interest to keep up with inflation is perhaps the most significant danger, since you may lose purchasing power over time.
10. Fixed annuities
An annuity is a contract, usually negotiated with an insurance company, that promises to pay a set amount of money over a set period of time in exchange for a lump sum payment.
The annuity can be structured in a variety of ways, such as paying over a certain amount of time, such as 20 years, or until the client’s death.
A fixed annuity is a contract that promises to pay a set amount of money over a set period of time, usually monthly.
You can contribute a lump sum and start receiving payments right away, or you can pay into it over time and have the annuity start paying out at a later date (such as your retirement date.)
Why invest? A fixed annuity can provide you with a guaranteed income and return. It can help you feel more secure financially, especially if you are no longer working.
An annuity can help you build your income while avoiding taxes. You can contribute an unrestricted amount to the account.
Risk: Annuity contracts are notoriously complicated, and if you don’t read the fine print carefully, you could not get precisely what you expect.
Because annuities are illiquid, it might be difficult or impossible to break out of one without paying a hefty penalty.
If inflation rises significantly in the future, your guaranteed payout may become less appealing.
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