When it comes to questions about investing and personal finance, the answers can be so subjective. Asking “which investment type typically carries the least risk” can prompt an answer that “it depends” on who is doing the investing.
You can also get into the can of worms that everyone perceives investment types differently (being better or worse than others).
In this post, contributor Andy Shuler breaks down some of the common investment types that you might be considering, and specifically puts them into the context of a “least risky” type of mentality. We’d love to hear your thoughts in the comments below if you agree or disagree.
A lot of times I’ll talk about ways to maximize your potential gains and that should always be your #1 goal when investing, but the honest truth is that sometimes, having your money in an asset class that might have a lower perceived return is actually the safest option.
For instance, if the market is getting extremely volatile, moving some of your money into safer funds like a High-Yield Savings Account or CD, or into bonds, might be perceived as less risky.
But what does “less risky” even mean? I think to most people it means that there is a lower percentage chance that something negative will happen. That likely sounds like a pretty obvious answer.
But I want to challenge that really quick – risk, in my eyes, is doing something that might jeopardize the potential positive impact of a situation.
So, risk in the stock market can really be viewed as two different ways – is the “risk” that your money is in the market crashes? Or, is the “risk” that your money is sitting in cash when the market rebounds or takes off?
Both sound risky to me, and to be quite honest, situations that I would like to completely avoid if possible, as I’m sure you would as well. Regardless, I am going to list out five investment types that I think are great options to hedge your bets as they carry the least amount of risk of losing their value.
- High-Yield Savings Account
- This is definitely the least risky “investment” that you can have. Most High-Yield Savings Accounts will allow you to earn between 2-2.5% APR, which isn’t really that bad when you consider the fact that you’re likely earning .01% interest in your current savings account, like I used to be with my Fifth Third account. Yes, I know that expected return on this really isn’t close to a lot of the alternatives, but you are getting a guaranteed return which is something that can’t be said for other investment types.
- Savings Bonds
- While a Savings Bond does allow you to buy a bond at a discounted price to what the value is at its maturity, it will require your money to be essentially “tied up” in that bond for a very long period of time, such as 20 years or even more at times.
- There are various types of bonds that you can purchase that will give you a strong guaranteed return, but the key is that you will need to be comfortable with the concept of not touching that money for a very long time to realize the true benefit of the bonds.
- Certificate of Deposit (CD)
- A CD is similar to a bond in concept as your money will be tied up for a certain amount of time, but it is for a much shorter time than a Savings Bond. I have the Savings Bond listed as 2 and a CD at 3, but they really are a tie for second in my eyes. The risk comes down to whether or not you are comfortable with the fact that you won’t need to touch that money. If you can guarantee that you won’t need it, then a Savings Bond is less risky.
- Currently, Ally is offering a 2.5% APR for a 12-month CD. When you really think about it, this might be a great, safe alternative if you are getting nervous about the stock market or potentially trying to just maximize your gains for a short-term goal such as paying for a down-payment on a house.
- Exchange Traded Funds (ETF)
- While ETFs do carry risk, they are much less risky than picking individual stocks in the stock market. I think ETFs are a great way for people to start out their investing journey as their risk is now spread amongst a wide variety of companies rather than one specific company.
- For instance, you can buy an ETF, such as SPY, that is indicative of the S&P 500, that will give you some exposure to 500 different companies. This also can limit your upside, but if your goal is simply to minimize the risk/downside, this might be a great option for you.
- Dividend Stocks
- Dividend stocks are naturally safer than other investment types as they are likely going to continue paying out a quarterly dividend payment. Yes, this is definitely not a guarantee that the dividend payments will increase each quarter or that they will even continue, but that is typically the goal of all companies once they introduce dividends to their shareholders.
- Along with that, being in a dividend stock is extremely liquid. At any point in time you can sell out of your ownership in that company if you sense that things might be gearing up for some turbulence in the future. I admit that there definitely is risk in a dividend stock, just as there is in any stock, but the fact that it has a dividend definitely gives me that extra feeling of comfort.
- I would encourage you to look at how the company has been performing as you normally do and pay specific attention to the recent dividend growth if that’s going to be one of the main reasons for you to be investing in that stock.
Overall, all five of these options don’t have a ton of risk as long as you know what you’re getting into and are prepared. As is the case with almost anything, I recommend you do a cost/benefit analysis, even if only in your head, to understand your goals.
For instance, The High-Interest Savings Account might be perfect for you if you just want your 2% return and are ready to get on with your day.
If you want the opportunity for some greater returns, then maybe a dividend stock or an ETF is the way to go, but you also need to understand that it will also carry greater risk of the downside.
A general rule of thumb is that the younger you are, the riskier you should be as you will have time to make it up if things take a turn for the worst.
I 100% agree with that advice, but you have to know yourself.
A lot of people think that they have a high-risk tolerance and then sell their stocks when the market dips and miss out on the swing back up – or in other words, they bought high and sold low.
This, my friends, is the worst thing that you can do. Take some time to figure out exactly how much you can stomach and that will help you align your actions with your emotions.