Best low-risk investments of 2023

Key points

• Low-risk investments offer minimal downside for upside potential.
• You can use low-risk investments for short-term financial goals.
• Low-risk investments can be part of any well-diversified portfolio.

When it comes to investing, risk and reward go hand in hand. The more risk you’re willing to take, the greater your potential reward. But sometimes, the risk just isn’t worth the reward. This is where low-risk investments come in.

“When it comes to low-risk investments, it all depends on your personality, risk tolerance, objectives and investment horizons,” says Lori Gross, lead investment advisor at Outlook Financial Center. “Risk is always present, so how much are you willing to take to achieve your objectives?”

Let’s explore some of the best low-risk investments for more conservative goals.

What is a low-risk investment?

A low-risk investment is designed to minimize the chance you lose money. It prioritizes capital preservation over potential growth, resulting in products with minimal price fluctuations.

“Risk-averse investors, and those with a short investment horizon, often prefer the safety of low-risk investments rather than the ups and downs of riskier investments like stocks,” says Kristy Akullian, senior iShares investment strategist at BlackRock. 

“Many investors pair low-risk investments and those with more upside potential to produce a smoother return stream. And, in periods of high macroeconomic and geopolitical uncertainty like we’re in today, many investors simply prefer more certain outcomes and gravitate toward lower-risk investments,” Akullian adds.

It’s important to remember that low risk does not mean any risk. Low-risk investments do involve some risk of loss, even if it’s much lower than many other investments.

When choosing low-risk investments, consider your time horizon and goals. 

Low-risk investments are typically best for short-term goals — think within three to five years — where you are willing to forgo higher potential long-term returns in exchange for the reassurance that your investment is unlikely to lose value right when needed.

Who is a low-risk investment best for?

Low-risk investments are best for short-term savings. If you plan to use your funds within the next three to five years, it’s best to avoid too much risk. You don’t have time to wait for the investment to recover from near-term losses. 

For longer-term financial goals, you’ll do better with riskier investments that have the potential for higher returns.

5 types of low-risk investments

1. Treasury bills, Treasury notes and TIPs

Treasury bills, Treasury notes and Treasury Inflation-Protected Securities, known as TIPS, are government-backed fixed-income investments that provide a fixed rate of return over a given period.

Treasury bills and notes offer shorter durations than Treasury bonds, which don’t pay back the principal for 20 or 30 years. Bills mature from one month to one year, while notes range from two to 10 years. 

The shorter time to maturity reduces risk since your money is locked up for a shorter period.

Most Treasury securities pay interest every six months until maturity, except for bills. Since bills have such short times to maturity, you’ll only receive one interest payment, along with the principal, back at the time of maturity.

The benefit of government-issued fixed income is that the investment can be sold quickly and that the government will pay you back.

While a corporation may go bankrupt and default on its debt, there’s little chance the U.S. government will be unable to pay back its obligations.

Since each of these fixed-income securities has a fixed rate of return with little chance of default, you know in advance how much income you’ll receive — making them helpful for structuring an income portfolio.

The disadvantage of government-backed securities is that they often provide a lower return than other investments, as per the “lower risk equals lower return” adage. 

The rate of return can be so low that it may not even keep up with inflation, says William Haight, a registered representative at Capital Choice Financial Group. That’s where investing in TIPS comes into play.

TIPS are Treasurys with a principal adjusted for inflation and maturities ranging from five to 30 years. 

If inflation rises, the principal will increase proportionally. If deflation occurs, the reverse happens. The upside to this is that you don’t need to worry about inflation eroding your purchasing power. 

Upon maturity, you’ll still get the original amount if the principal is lower than the amount originally invested. 

The downside is that since interest is based on principal, you won’t always know how much interest you will receive from TIPS.

Pros and cons of Treasury bills, Treasury notes and TIPs

2. Fixed annuities

A fixed annuity is a contract between you and an annuity provider, where you make one or more payments to the provider in exchange for a guaranteed fixed rate of return for a specified period. 

You can receive those guaranteed payments over time or as a lump sum during the payout period. Your policy will determine the exact terms.

“The good part about a fixed annuity is that you know how much money you will make from it, and you can keep that rate for a set amount of time,” Haight says. “Some good things about this are that you make money regularly, and you don’t have to pay taxes on what you earn until you take it out.” 

In other words, earnings grow tax-deferred, but you will pay taxes on withdrawals. This means you pay ordinary income rates rather than the lower capital gains rates some investment income qualifies for.

Fixed annuities can be immediate or deferred. With an immediate annuity, you will begin receiving payments from your annuity within the first year you purchase it. For this to be possible, you’ll generally need to fund the annuity with a single lump sum.

Deferred annuities are a bit more flexible. With these contracts, you won’t begin receiving income from your annuity until at least one year after you purchase it. This allows you to make periodic contributions instead of a single lump payment.

Haight warns that with either type of fixed annuity, you might face charges if you try to cash out early. Annuities are also not designed to generate high returns. While your downside is limited with a guaranteed rate of return, you won’t experience as much of the market gains during strong bull markets.

Pros and cons of fixed annuities

3. Money market funds

Money market funds are a type of fund that invest in short-term debt securities such as Treasury bills and certificates of deposit, known as CDs. These funds are designed to be a cash alternative if you’re willing to take slightly more risk for a potentially greater return. Along with this increased upside comes a greater chance of losing money than in a savings account, but this risk is minimal.

Since money market funds only invest in very short-term and low-risk securities, they’re considered one of the least risky investment vehicles.

Most money market funds strive to maintain a net asset value, or NAV, of $1 per share so that investors can treat these funds as cash. You can sell shares of a money market fund like any fund. It allows you to get CD-like rates without the lockout periods that CDs require.

There are three categories of money market funds:

1. Government money market funds invest in short-term Treasurys.
2. Prime money market funds invest in short-term bank debt and corporate debt.
3. Municipal money market funds invest in municipal bonds and other debt securities.

Money market funds provide investors with regular but minimal income that may be taxable or tax-exempt, depending on the types of securities held within the fund. You won’t outpace inflation with money market funds, but you might outearn your bank savings account. The key is to consider money market funds as an alternative to cash, not a place to park your long-term savings.

Pros and cons of money market funds 

4. Corporate bonds

These are debt securities issued by corporations. When you buy a corporate bond, you lend your money to the issuing corporation in return for regular interest payments and a return on your initial investment when the bond matures — assuming the corporation doesn’t default on its debt.

Corporations are more prone to financial trouble than the U.S. government, making corporate bonds riskier investments than U.S. Treasurys. A corporation could go bankrupt and never pay back its bondholders.

There are tiers of corporate bonds based on their level of risk:

• Investment-grade corporate bonds are considered less risky because the issuing corporation is less likely to default on its debt. But these bonds tend to offer lower yields.
• Noninvestment-grade corporate bonds, also called high-yield or junk bonds, are riskier because the issuing corporation is in a more strenuous financial situation. Still, in return, these bonds offer higher yields.

Bond rating agencies, such as Moody’s, Standard & Poor’s and Fitch assign corporate bond grades that determine if the bond is considered investment or non-investment grade.

The challenge with investing directly in corporate bonds is that you must be prepared to lock up your cash until the bond matures. While you can sell corporate bonds on the secondary market, there is no guarantee of what price the bond will fetch.

To get more liquidity while investing in bonds. These are funds that buy dozens or even hundreds of corporate bonds. You can trade individual shares of the ETF as you would a stock, so in essence you can get the flexibility of a stock with the stability and income of a bond.

“ETFs offer built-in diversification, giving investors exposure to multiple bonds within each category in a single trade,” Akullian says. “In the current market environment, we see tremendous opportunity to earn substantial returns of 4% to 5%, even in low-risk investments like high quality, investment grade credit ETFs.”

Pros and cons of corporate bonds

5. Series I savings bonds

One of the biggest hurdles for low-risk investments is trying to keep up with inflation. Series I savings bonds aim to remedy this.

These bonds offer a fixed rate of return plus an inflation-linked rate, accumulating interest monthly. That interest is compounded semiannually. Every six months, the bond’s interest rate is applied to the new principal value. Currently, the composite rate for I bonds issued from May 1, 2023, to Oct. 31, 2023, is 4.3%.

As a bonus, the income you earn from Series I bonds is exempt from state and local income taxes, which helps keep more of your earnings in your pocket. 

A few stipulations: You can’t cash out for at least one year unless you live in an area affected by a natural disaster. If you cash out in less than five years, you’ll lose the last three months of interest. 

I bonds mature 30 years after issuance, so you’ll see the biggest return if you park your money there and sit tight.

You can buy electronic I bonds in quantities as small as $25, but purchases are capped at $10,000 per person annually. But you can elect to buy an additional $5,000 in I bonds so long as it’s in the form of paper I bonds.

Pros and cons of Series I savings bonds

Key considerations for low-risk investors

• Your time horizon: How long you have until you plan to use the funds you put into the low-risk investment will help determine which type of investment is best for you. For instance, if you know you’ll need the money in the next two years, a five-year bond likely is not the right choice.
• Your priorities: If your objective is capital preservation or liquidity, a low-risk investment like a money market fund may be a good pick. If you want to generate more income, a bond or CD may be better.
• Your risk tolerance: Even low-risk investments involve some uncertainty. A corporate bond is riskier than a government bond, but this added risk is often rewarded through higher coupon rates. It’s generally best to take on as much risk as you can tolerate with long-term investments but no more than you need to generate your desired rate of return.

Frequently asked questions (FAQ)

Are there high-yield, low-risk investments?

Investments labeled “high yield, low risk” usually fall into the category of “too good to be true.” 

Low-risk investments are designed to avoid losses, but to do this, they can’t take risks that would generate high yields. There are varying degrees of risk and yield. Even within low-risk investments, some may provide higher potential returns than others.

Are CDs and high-yield savings accounts low-risk?

A certificate of deposit is an account where you deposit money for a set period of time in exchange for a fixed interest rate. CDs can be a useful place to grow your funds, particularly when interest rates are high.

A high-yield savings account is a savings account that pays a relatively high interest rate. It could be ideal if you’re looking for a safe, accessible place to store your funds and earn interest.

If you’d like to earn money while taking relatively little risk, a high-yield savings account or certificate of deposit account could make sense.

What are potential downsides of low-risk investments?

Each low-risk investment is different and comes with its own potential downsides. In general, however, the downside of low-risk investing is that there is less to gain in terms of potential returns.

Do any investments have zero risk?

No investment is risk-free. Even the money in your savings account bears some risk. There’s the risk that the bank could crash, but even greater is the risk that your money won’t keep up with inflation.

Any investment that doesn’t return at least the same rate as the annual inflation rate is technically losing money every day by eroding your purchasing power. So while low-risk investments may appear safe on paper, they can actually cost you your long-term goals if you don’t pair them with higher-growth options to outpace inflation.