And, obviously, when we invest our hard-earned dollars, we want to generate high returns while enduring little risk. Well, to a point. In terms of returns, there are better low-risk investments than others, but it is definitely still true that the higher return you want, the more risk you'll have to accept.
You simply cannot afford to see a huge drop in the market right before you need to begin withdraws. Here are a few of the best low risk investment options, some that even let you earn a respectable return with almost no risk at all.
If you screen your loans poorly, peer to peer lending can be extremely risky. However, screening properly and choosing only the best rated loans is a great way to secure a decent return with little risk on your part.
If you screen your loans well and avoid some of these defaults, then you can earn some really nice returns. I had one friend make a 5, dollar investment in Lending Club and was able to buy into different loans. Now that is diversification!
If lending money on the internet sounds scary, you can rest assured it isn't. Lending Club in particular has done a great job in setting up their collection practices in order to protect their investors.
Learn more about how I did with P2P lending in my review of LendingClub or Prosper or get started with peer-to-peer lending with companies like Lending Club and Prosper. Depending on your appetite for risk and how much capital you have to invest, you could score some decent returns without the stress that comes with high risk investments.
If you're looking for a risk-free way to earn some interest on your money, a high yield savings account might be your answer. With these accounts, you'll earn a nominal amount of interest just for keeping your money on deposit.
Other than opening your account and depositing your money, this strategy requires almost no effort on your part, either. The best high yield savings accounts offer competitive interest rates without charging any fees. When choosing an account, you'll also want to look for a bank with a good reputation for providing quality customer service, easy access and online account management, and easy deposits.
If you're interested in my thoughts on which bank to go with, check out this post:. The idea that credit card rewards could provide a low-risk return on your money might sound preposterous, but it's not that off the wall when you really think about it. If you want to learn more about the easy money you can score with credit card rewards, check out our guide on the best cash back credit cards. Annuities are a point of contention for some investors because shady financial advisors have over-promoted them to individuals where the annuity wasn't the right product for their financial goals.
They don't have to be scary things; annuities can be a good option for certain investors who need help stabilizing their portfolio over a long period of time. If you're in the market for an annuity, however, be aware of the risks and talk with a good financial advisor first. Annuities are complex financial instruments with lots of catches built into the contract. Before you sign on the dotted line, it's important to understand your annuity inside and out. There are several types of annuities, but at the end of the day, purchasing an annuity is on par with making a trade with an insurance company.
They're taking a lump sum of cash from you. In return, they are giving you a stated rate of guaranteed return. Sometimes that return is fixed with a fixed annuity , sometimes that return is variable with a variable annuity , and sometimes your return is dictated in part by how the stock market does and gives you downside protection with an equity indexed annuity.
If you are getting a form of guaranteed return, your risk is a lot lower. Unlike the backing of the Federal government, your annuity is backed by the insurance company that holds it and perhaps another company that further insurers the annuity company. Nonetheless, your money is typically going to be very safe in these complicated products. No matter how hard you look, you won't find an investment more boring than a Certificate of Deposit. If you're in the market for one of these low-risk investment vehicles, you can get one through your bank, credit union, or even through your investment broker.
With a Certificate of Deposit CD , you deposit your money for a specific length of time in exchange for a guaranteed return on your money no matter what happens to the interest rates during that time period. The government is guaranteeing you cannot have a loss, and the financial institution will give you some interest on top of that.
How much interest you earn is dependent on the length of the CD term and the current interest rates when you purchase your CD. Interest rates are generally fairly low at the moment, but you can usually get more interest if you get a certificate of deposit for a period of at least years. Earn a risk-free return on your cash with a Certificate of Deposit.
You can open a CD with great interest rates with:. These bonds come with two methods of growth. The first is a fixed interest rate that doesn't change for the length of the bond. The second is built-in inflation protection that is guaranteed by the government. Whatever rate inflation grows during the time you hold the TIPS, your investment's value will rise with that inflation rate. For example, you might invest in a TIPS today that only comes with a 0. That's less than certificate of deposit rates and even basic online savings accounts.
The latter option makes managing your investments easier while the former gives you the ability to pick and choose with specific TIPS you want. The fund also tries to pay out a little bit of interest as well to make parking your cash with the fund worthwhile. These funds aren't foolproof, but they do come with a strong pedigree in protecting the underlying value of your cash.
While you may not earn a lot of interest on your investment, you won't have to worry about losing vast amounts of your principal or the day-to-day fluctuations in the market.
When a government at the state or local level needs to borrow money, they don't use a credit card. Instead, the government entity issues a municipal bond. These bonds, also known as munis, are excempt from Federal income tax, making them a smart investment for people who are trying to minimize their exposure to taxes. Most states and local municipalities also exempt income tax on these bonds, but talk to your accountant to make sure they are exempt in your specific state.
What makes municipal bonds so safe? Not only do you avoid income tax which means a higher return compared to an equally risky investment that is taxed , but the likelihood of the borrower defaulting is very low.
There have been some enormous municipality bankruptcies in recent years, but this is very rare. Governments can always raise taxes or issue new debt to pay off old debt, which makes holding a municipal bond a pretty safe bet. You can buy individual bonds or, better yet, invest in a municipal bond mutual fund at brokers like:.
The likelihood of default on this debt is microscopic which makes them a very stable investment. Series I bonds consist of two components: They are somewhat similar to TIPS because they have the inflation adjustment as part of the total return. The fixed rate never changes, but the inflation return rate is adjusted every 6 months and can also be negative which would bring your total return down, not up.
Series EE bonds just have a fixed rate of interest that is added to the bond automatically at the end of each month so you don't have to worry about reinvesting for compounding purposes. Rates are very low right now, but there is an interesting facet to EE bonds: That equates to approximately a 3. If you don't hold to maturity you will only get the stated interest rate of the bond minus any early withdrawal fees.
Another bonus to look into: You can do that directly through TreasuryDirect. Another controversial investment is cash value life insurance. This insurance not only pays out a death benefit to your beneficiaries when you die like a term life insurance policy , but also allows you to accrue value with an investment portion in your payments.
Whole life insurance and universal life insurance are both types of cash value life insurance. While term life insurance is by far a cheaper option, it only covers your death. One of the best perks of using cash value life insurance is the accrued value can not only be borrowed against throughout your life, but isn't hit with income tax.
While cash value life insurance isn't for everyone, it is a clever way to pass some value onto your heirs without either side being hit with income tax. Just like high yield savings accounts, online checking accounts let you earn small amounts of interest on the money you deposit.
If you're going to park your money in the bank anyway, you could surely appreciate earning some interest along the way. Best of all, many online checking accounts charge zero or minimal fees to get started. When looking for an online checking account that actually lets you earn interest, look for a bank with excellent customer service, a user-friendly online interface, and competitive interest rates. If you want utmost flexibility, it's also important to seek out an account that doesn't impose account minimums or deposit requirements.
And if you want to withdraw money frequently, you'll want to make sure you have access to local, no-fee ATMs as well. If you have some extra money you won't need for a while, you can occasionally earn some free cash with a bank bonus. Most banks will offer a bonus as an incentive for you to sign up, and these bonuses can be worth several hundred dollars on their own. Bank bonuses are sometimes regional, however, and can depend on the local banks in your area and the products they offer.
In exchange for your bank bonus, you'll be asked to keep your money on deposit for anywhere from 6 to 18 months. In addition, you may have to set up direct deposit to your new account, or use a bank-issued debit card for a certain number of transactions within the first few months. Just remember to read through all the fine print to learn about any fees that might be levied and how you can avoid them.
By jumping through these hoops, you can usually earn a few hundred dollars for your efforts. Best of all, you won't have to worry about losing a single cent of your deposit.
And if you decide not to keep the account for the long haul, you can always close it once you earn the bonus and meet all of the bank's requirements. Here are a few investments to consider to add a bit more risk to your portfolio. One of the easiest ways to squeeze a bit more return out of your stock investments is simply to target stocks or mutual funds that have nice dividend payouts. A safer bet would be to invest money into a dividend stock mutual fund.
With this type of mutual fund, the fund company targets stocks that pay nice dividends and does all of the work for you. You also get diversification so that one or two stocks can't tank your entire investment. Want to add some dividend paying investments to your portfolio? Adding on to the dividend stock theme is preferred stock.More...