Which Investment Type Typically Carries the Least Risk?

This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.

Investing in interest-bearing securities is one way to build savings. Not only are you putting money away for the future, but you can also pad your savings with the interest and returns you receive. That said, if an investment performs poorly, there’s the possibility of losing some or all of the money you invested. 

Fortunately, there are many types of investments, some of which have little to no risk. These low-risk investments may help you balance your investment portfolio and reduce the risk of losing all your savings.

So, which investment type typically carries the least risk? Learn about that and more below.

Which investment type typically carries the least risk?

When you hear about Wall Street movers and shakers, you often hear about boom-or-bust stocks where someone made a great investment, bought low and sold high. These are inspiring stories, but they aren’t the norm. In fact, many investors have a delicate balance of high- and low-risk investments.

But, which investment type typically carries the least risk? Below are some low-risk investments that can help balance out your portfolio.

High-yield savings account (HYSA)

There are many places to save your money, but one of the more secure places to stash it and make some risk-free money is in a HYSA.

A high-yield savings account, just as its name implies, is a savings account with a higher interest rate — meaning it pays you more interest over time. While the national average interest rate on a savings account is small at 0.06%, a HYSA can earn 0.60%.

Regardless, the interest rate is small relative to the returns you may get from a good stock. However, a HYSA returns consistent profits with no risk of losing your money. Plus, with a HYSA, you have complimentary access to your cash, as you can make up to six withdrawals from a savings account per month without incurring a penalty.

Certificate of deposit (CD)

A Certificate of Deposit (CD) is another investment option that involves little to no risk. With a CD, you agree to place a specific amount of cash into an interest-bearing account for a predetermined period of time. As a result, you get a guaranteed return on that money. Generally, the longer the CD is and the more you deposit, the higher the interest rate is.

As of May 11, 2022, the average CD rates are as follows:

• One-year CD: 0.24%

• Five-year CD: 0.41%

• One-year jumbo CD: 0.26%

• Five-year jumbo CD: 0.42%

While those interest rates look low, they’re simply the averages. In some cases, you can find a five-year CD as high as 2.25% interest with no minimum deposit.

The downside to a CD is you must leave the cash in the account for the prescribed period. If you withdraw it early, you’ll usually incur a penalty.

Money market account (MMA)

Money Market Accounts (MMAs) are like HYSAs in that they’re essentially savings accounts with higher-than-average interest rates. Yes, the average MMA rate is relatively low at 0.07%, but if you find the right bank, you may be able to get upwards of 0.8%.

Like an HYSA, you can make only six money market bank account withdrawals per month, then you’ll start incurring fees for each withdrawal. Otherwise, you can use the cash as you please.

The big downside to an MMA is the financial institution sometimes requires a large minimum deposit to get the highest interest rate.

Bonds

Bonds are yet another low-risk investment option. There's a wide range of bonds you can choose from, such as U.S. Treasury bonds and municipal bonds. There are even corporate bonds.

Essentially, you are lending money to the bond issuer, and they are promising you a fixed interest return after so many years. The end of the term is the bond’s maturity date, which can be any number of years.

As for returns, long-term government bonds average a 5% yearly return on your investment. Shorter-term bonds have lower returns.

Because bonds have a fixed return upon maturity, they are generally considered a secure investment. The issue is, to see larger returns, you may need to lock up your cash for 15 to 30 years, limiting your liquidity — or ability to access the cash — for the long term.

Mutual funds

Mutual funds are made up of multiple stocks, bonds and securities, thereby giving you built-in diversity and lower risk than individual stocks. Portfolio managers manage and sell these funds, so you remain relatively hands-off. However, they are not available on the open stock market, so you must go through the portfolio manager or brokerage to purchase one.

Mutual funds are considered a great pathway to diversity and limited risk for inexperienced investors. However, unlike others on this list, there is still a risk of losing all your money. Plus, because mutual funds are managed, you will pay a fee for owning a piece of one.

Exchange-traded funds (ETFs)

Like mutual funds, ETFs contain multiple stocks, bonds and securities, giving you built-in diversity. However, unlike mutual funds, ETFs are available on the open stock market for anyone to buy. They are not managed, so they have fewer fees than mutual funds.

Diversity is key, so speak with an advisor

While low-risk investments are great for protecting your savings, they are not necessarily ideal for growth. Most investors are better suited with an investment portfolio made up of both low-risk, low return and higher-risk, high-return investments.

This is where a financial advisor can help. They can review your investment strategy and your goals. Then, they can suggest investment opportunities that align your strategy with your goals. 

For example, an advisor may suggest focusing on high-risk investments with higher return potential to a young investor who has a higher risk tolerance and is looking to grow their nest egg.

However, to an older person nearing retirement, they may recommend the least risky investments to protect their savings while still growing incrementally until they retire.

Low-risk investments are part of a healthy portfolio

No matter the amount of risk you can tolerate in your investment strategy, low-risk investments can be a part of any investment strategy. Yes, the big-growth stocks are known for quick increases, but they can also come with larger risks. Having some low-risk investments can set a nice financial foundation to build upon.

So, which investment type typically carries the least risk? Whether it’s HYSAs, CDs, MMAs, ETFs, mutual funds or other low-risk investments, your financial advisor can guide you on the proper mix of high- and low-risk investments to align with your personal finances and savings goals.

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