Wealth creation involves the use of money to generate more money. And there are many investment vehicles that can help you do that. However, not all investments are the same. Some are safer than others, while others are riskier.
While the idea of generating more wealth with little to no effort is very appealing to a lot, investing in something can still be very intimidating, especially if you’re a beginner investor with little to no experience.
Doing your own research is always the key to understanding the world of money. (Watch videos, read books, or get a mentor. DO as much research as you can!) And the good thing is you’re doing it right now! So, congratulations!
One of the things that beginner investors think about is whether or not they will lose their money in the process. Because let’s be real here, any form of investment has risks associated with them. And as someone new to investing, the last thing you want is to lose all your money.
That’s why low-risk investments are the perfect introductory investments for beginner investors.
Before we dive into different low-risk investments for beginner investors, let’s talk about risk, and how we will define low-risk investments.
Risk in investing is basically the possibility of your investments to lose most or all of its value. Risk is an essential concept in investing. You gotta take into account the risk of investing into something. Although risk cannot be perfectly measured or quantified, it serves as an indicator for investors when analyzing potential investments.
Low-risk investments are not necessarily safe investments. There is still a possibility of your investment to lose value even if it is “low-risk”. So it is better to say that the investments we’re about to look into as relatively safe investments.
So to simplify things for us, we will consider low-risk investments as investments that are relatively safe, has some guarantee on the return of all or most of your principal and can net you some sort of return passively.
Low-Risk Investments
for You to Consider!
- High-Yield Savings Accounts
By now, you’re tired of me talking about or mentioning high-yield savings accounts. While it isn’t exactly an investment, the fact that you are putting in money into these types of account to make it grow passively gets it into my list of low-risk investments.
HYSAs typically generate 5 to 10 times more on annual interests compared to traditional savings accounts. While typical savings accounts generate 0.01% or less in interests per year, HYSAs can generate up to 0.25 to 2% in interest on the money you put in.
It’s not a life-changing “investment,” but it is definitely low-risk. The only risk that I can think of is if the bank you chose didn’t insure the money you saved and shut down the next day. So make sure the bank you’re opening your HYSA is FDIC-insured.
If you were to create an HYSA, obviously do not consider this as a form of income. You cannot rely on savings interest for your necessities. The biggest reason you should be even putting your money in an HYSA is to have your emergency money grow until it is time for you to use it.
Some of examples of high-yield savings accounts in the United States are Ally Bank, Wealthfront, Marcus by Goldman Sachs, Vio Bank and many more.
I haven’t done a High-yield Savings Account recommendation article yet, but here’s one from BankRate.com to fill the need for now.
- Certificate of Deposits or CDs
Certificate of Deposits are fixed income securities or time deposits that have a specific term and a fixed interest rate. They’re similar to HYSAs in a sense that you’re making money from interest, but different because of its liquidity.
With CDs, your investment is locked in for a specific term. Terms vary from a couple of months to a year or a couple of years. The interest rates also vary depending on the term you choose. The shorter the term, the lower the interest rate. The longer the term, the higher the interest rate. The amount you deposit can also affect your interest rate. But those are all up to the institution you’re looking at.
CDs are safe and low-risk because they are generally insured and offered by every bank or credit union.
A drawback with CDs is that you cannot take out the money you deposited until it reaches maturity, or when the term ends. If you take it out early, your institution has set out Early Withdrawal Policies when first getting a CD. There, it will state what penalties you will incur if you withdraw early. Penalties differ from each institution, but the most common one is being charged with a few months’ interest you’ve earned on that CD.
Another risk, as stated by Investor.gov, is that “inflation will grow faster than your money, and lower your real returns over time.” Because you have a fixed rate, if the inflation surpasses your interest rate, your investment will lose value. You still made money, but your buying power has already declined.
Here’s a screenshot of a calculator to show you what I mean.
You invest $1,000 in a CD with a 12-month term. According to BLS.gov, the reported annual inflation rate is 1.4%. If you have a CD earning you 1%, at the end of the term, your investment will grow to $1,010. But if we adjust it for inflation, your investment’s value is at $996.06. That’s a loss of buying power of $3.94.
But if you invested in a CD with 2% interest, at the end of the term, your investment will grow to $1,020. Adjusted for inflation, the value is at $1,005.92. That translates to a gain in buying power of $5.92.
Go and ask your bank what CDs they offer to see what works best for you. But if you’re feeling lazy and don’t wanna do extensive research, here’s an article from The Balance about the Best CD Rates as of today.
- Government Securities
Government Securities are securities offered and backed by a governmental body. In the United States, the most popular form of government securities are those offered by the U.S. Treasury such as Treasury Bonds, Bills, Notes, TIPS or Treasury Inflation-Protected Securities, Floating Rate Notes and Savings Bonds.
According to Investopedia,
Government securities are debt instruments of a sovereign government. They sell these products to finance day-to-day governmental operations and provide funding for special infrastructure and military projects. […] By issuing debt, governments can avoid hiking taxes or cutting other areas of spending in the budget each time they need additional funds for a project.
Investopedia; Government Security Definition
Investors consider government securities as low-risk because of the issuer: the government. Investments are promised to be return in full when the maturity date arrives. Interest payments are made throughout the term of the security creating a good stream of income for investors.
For example, Treasury Bills mature in a few days to 52 weeks and you get paid the interest at the maturity date. Treasury Notes mature in 2, 3, 5, 7, and 10 years and pay interest every six months. Treasury Bonds mature in 20 or 30 years and pay interest every six months. TIPS are securities where your principal is adjusted based on the changes of the Consumer Price Index. They mature in 5, 10 or 30 years and pay interest every six months.
TreasuryDirect.gov has a list of the products they offer and give you a more detailed look on the remaining two securities: Floating Rate Notes and Savings Bonds.
- Money Market Funds
Money Market Funds are a type of mutual fund that pools together low-risk investments including CDs, debt securities, repurchase agreements and treasury bills with short-term maturities. This type of investment is very liquid and returns are paid to investors in the form of dividends.
These funds aim to maintain a net asset value of $1 per share. Any excess is good for investors as it is paid in dividends, while falling below the $1 NAV is really bad. In the money market fund world, that is called “Breaking the Buck”. It is very rare for money market funds to break the buck, but it does happen. Since it’s history, there has only been 3 times when funds broke the buck, in 1974, 1994 and 2008.
Money market funds are typically offered by investment fund companies and brokers to investors looking for highly stable, liquid and short-term investments. However, there are some cons to money market funds such as not being FDIC-insured, no capital appreciation and its sensitivity to interest rate fluctuations.
It’s best use is to hold cash only for a short duration, and should never be considered as an investment for retirement planning.
Also, if you’re looking into Money Market Funds, you need to know about the recent (4 years ago) money market reform. Vanguard made a great summary about the reform.
The most important element is the liquidity fees and gates. The SEC realized that in order to minimize what had happened back in 2008, there needed to be some regulation with money markets. This way, investors will not liquidate their investments in panic and not cause any severe stress in the financial markets and allow fund managers to respond in a prudent manner.
Fidelity, Charles Schwabb, Vanguard and E*Trade are a couple of firms that offer various money market funds. I’m sure there are a lot more but I’ll let you do your own research and see what’s best for you.
So there you go! Four low-risk investments for beginner investors that you can look more into today. The key to building wealth is always doing your research. See what is still out there and what works best for you!