Smart investors know that big risk can mean big rewards. However, they also know that one key to investment success is diversification. A good portfolio will reflect a mixture of industries, investment types, and levels of risk. During times when the market is volatile, it’s particularly important to have some low-risk investments to fall back on.
Low-risk investments tend to have lower rewards. However, what they also offer is reliability. Something like a savings account is an example of a low-risk investment. As low as interest rates may be, they offer a small return. Also, depositors know they won’t lose any of the money they’ve stashed with the bank. In fact, there’s FDIC insurance for their deposits up to $100,000. Other low-risk investments include treasury bills. Their return is based on auction results. Although yields can be low, even 0%, investors will never lose money. They’ll have at least the face value of the bill. Savings bonds are also very secure.
Investment vehicles that might have better results can include money market accounts and CDs. There’s an upper limit to how much interest a savings account can pay. Money market funds are a response to this problem. They make it easy to invest in pooled low-risk securities like T-bills and certificates of deposit. They also offer better returns than a standard savings account.
CDs are a great low-risk investment; they’re guaranteed never to lose value if they’re not emptied early. CDs have higher rates of return than standard savings accounts and are FDIC insured. With a CD, the bank guarantees a rate of interest to be paid after an agreed upon length of time.
The argument against investments like these is that sometimes the return is so low, it can’t even keep up with the rate of inflation. This can be true. However, during a time like the present, when a pandemic has contributed to a recession, these investments are a great option. They ensure that people are getting at least some return at a time when riskier investments in stocks can lead to losses. It’s not a bad thing to hold on to some high-risk investments now; some may still pay off. but government-backed securities and savings accounts are also a great idea.