Every investor wants a large return, but this isn’t the only one. Professionals examine investments not only for absolute return potential but also for a concept known as “risk-adjusted return.” The main fact is that not all returns are created equally, and savvy investors look for chances where they can maximize their return relative to the risk they are taking, even if it means accepting lesser returns.
With that in mind, you might choose a 2% annual return investment over a 20% annual return one. Why? Because the consistent 2% return may turn out to be a superior value over time due to its low risks, especially for a risk-averse investor, provided it is guaranteed, such as through a U.S. Treasury, while the route to the 20% return entails the danger of losing 40%.
For the individual investor, this balance becomes even more crucial. Knowing that returns and risk must be weighed equally when comparing investments allows you to see how even a tiny return could amount to a sizeable sum if the investment is truly risk-free.
9 Risk-Free Investments That Pay Off
The top nine risk-free investments with high returns are shown below:
Accounts with high yields
Deposit certificates
Accounting for money markets
Government debt
Treasury Securities With Inflation Protection
Governmental bonds
Business bonds
ETF or S&P 500 index fund
Stock dividends
With these, it’s doubtful that you’ll see exponential growth, but it’s also rare that you’ll lose the money you need to provide for your family.
Accounts with high yields
A high-yield savings account is virtually the gold standard of safe investments because there is absolutely no risk involved. The Federal Deposit Insurance Corp., which covers losses to your deposits up to $250,000, is there to keep them from happening at virtually any bank.
The fact that rates on high-yield savings accounts might change depending on the health of the market is one of its few limitations. When rates are falling, payouts might not appear as appealing.
Rates have been progressively increasing since the start of the year, and the top high-yield savings accounts are now yielding above 4% for the first time in years. High-yield savings accounts are an excellent investment since as of April 17, the national average savings rate was 0.39%.
High-yield savings accounts are reasonably liquid investments, so you can immediately access your money without incurring any fees if you need it right away, even though they might not be as exciting as potential stock market winnings.
That makes putting away your emergency money, which you should have if you’re serious about lowering your chance of financial ruin, a really good investment.
Vouchers of Deposit
Savings accounts and certificates of deposit are nearly identical. Since the majority are FDIC insured, there is no risk. They are still liquid, though.
When investing in a CD, you typically accept a time horizon of one month to as long as ten years. Although a few CDs permit early withdrawals without penalties, you often incur costs if you use your funds before the CD’s term expires. On the one hand, that significantly reduces the value of CDs for your savings or emergency fund.
On the other hand, it ought to imply that you’ll be compensated with a better rate of return in return for that lack of simple access. Basically, if you’ve pledged to leave it alone for a specific period of time, banks will have an easier job reinvesting your savings. You ought to be receiving a greater rate in return.
Think about the following before purchasing a CD:
Regardless of whether you might require that cash before the CD matures. If the response is affirmative, you should search elsewhere.
Whether you actually are receiving an interest rate that is higher than what is offered by high-yield savings accounts. If you can discover a savings account that pays more than the CDs at your bank, there’s really no use in acquiring a CD as the only benefit you receive is higher rates.
Cash Management Accounts
Similar to CDs or savings accounts, money market accounts function according to certain rules. They often provide rates that are higher than savings accounts, but they also have more liquidity than CDs and may even let you to use a debit card or write checks, giving you additional flexibility when used in conjunction with savings accounts.
The MMA might be the best option if all you plan to do with the account is make deposits and write a monthly rent check, for example. But the return is everything, so shop around and weigh your options against CDs and high-yield savings accounts in addition to other money market accounts.
The biggest drawback of a money market account, it should be noted, is that many banks will enforce a restriction of six transactions each month. If you go over that limit, you’ll be punished; if you keep going over it, the bank will have to convert your account to a checking account or perhaps close it.
Tax-Exempt Bonds
Even while a 4% return on a high-yield savings account is higher than you’re likely to get on a standard savings account at your bank, if you want to develop a robust portfolio, you’ll likely need at least some investments that are taking a little bit more risk. Bonds, which are essentially structured loans provided to a major corporation, are the next tier up from banking products in terms of higher risk and higher returns.
T-bonds, commonly referred to as Treasury Bonds, are backed by the U.S. government’s full faith and credit. In many ways, treasury will function on your end just like a CD. This is how it goes:
You make an investment with a fixed interest rate and a bond’s maturity set anywhere between one month and thirty years from the time you purchase it.
While holding the bond, you will get regular “coupon” payments for the interest, and when the bond expires, your principle will be refunded.
The face value of your bonds will fluctuate over time based on the current interest rates, stock market performance, and a variety of other things, while your coupon payments are entirely foreseeable and secure. Yes, that might work out for you, but only because you’ve increased your risk. Therefore, it is undoubtedly a riskier investment if you aren’t relatively convinced that you can keep the bond until maturity.
Treasury Securities With Inflation Protection
In response to inflation, many consumers buy Treasury Inflation-Protected Securities, or TIPS. Your interest payments will be far less than what you would receive on a typical treasury of the same maturity. But you’re agreeing to that lower rate because the Consumer Price Index-measured inflation will cause your principal’s value to rise or fall. When inflation reaches 5% in April 2023, TIPS investors will be wealthy while those who purchased bonds at a fixed rate of 2% will effectively be losing 3% annually.
If you have to sell TIPS before they mature, you run the same additional risk as with any other treasury, so you should make sure you won’t need to access that money before maturity.
Governmental bonds
Municipal bonds are a decent choice for marginally better yields with only marginally additional risk because they are issued by state and municipal governments. The United States government failing is extremely unlikely, however there have been instances of major cities declaring bankruptcy and handing their bondholders substantial losses.
However, most individuals are undoubtedly aware that significant cities rarely file for bankruptcy; however, if you want to be extra cautious, you should avoid any states or cities with sizable unfunded pension commitments.
Additionally, the federal government has made interest from muni bonds tax-exempt at the federal level since it has a vested interest in keeping borrowing costs low for state and local governments. In rare circumstances, munis are also exempt from municipal and state taxes. In contrast to many other solutions, they not only generally still safe but also provide the extra benefit of lowering your tax bill.
Business bonds
Corporations will also issue debt by selling bonds, just like governments of all sizes do. This may imply that you are still in a secure area, similar to munis, although it is not always a definite thing. Many companies that are on the verge of bankruptcy may provide high yields for the high risk (often referred to as “junk bonds”), but those aren’t the best choice if you’re searching for something absolutely safe.
Even though corporate bonds are intrinsically riskier than treasuries and frequently riskier than municipal bonds, they are still quite safe provided you stick to buying bonds from well-known, blue-chip public firms and keep them until maturity.
Thankfully, it is not up to you to determine whether a company is financially sound. Public corporations typically release financial reports that list their assets, liabilities, and income so you may clearly understand their financial position.
Additionally, you can rely on rating agencies like Moody’s or S&P Global Ratings if, like the majority of people, you aren’t truly familiar with balance sheets and income statements. If you retain a AAA-rated bond until it matures, there are often few dangers involved.
ETF or S&P 500 Index Fund
The value of your investment could increase or decrease dramatically on any one day due to the extreme volatility of the stock market. And considering that a lack of capital is the main barrier preventing more individuals from investing in stocks, according to a GOBankingRates poll of non-investors, many families find it difficult to risk money that they only made available for saving by making significant sacrifices elsewhere.
A lower-risk method to get your feet wet in the stock market is with an S&P 500 index mutual fund or exchange-traded fund if you have money you can afford to risk there. These funds follow the market capitalization-based S&P 500 index, which represents the 500 largest U.S. public firms. The S&P 500 is frequently used as a gauge of the American stock market and the country’s overall economy because the companies represent a wide range of market sectors.
Increasing Portfolio Diversity
Your portfolio can be diversified by using index funds or ETFs. Any one firm can have a catastrophe, but if you purchase shares in a fund that holds stock in several different businesses, you greatly reduce your risk. It’s even better if you purchase shares of established, reputable businesses that are referred to as “blue-chip stocks” in the investing world.
A calamity might cause one company to fail, but several hundred at once? It is quite unlikely.
Investing in Stocks for the Long Run
Investing in stocks for a very, very long time is another way to reduce the risk of stock investments significantly. The S&P 500 dropped by around 20% between January and December 2022, demonstrating how unpredictable stock markets can be over any given week, month, or even year. However, when you look at stock markets across decades, they turn out to be very predictable.
The S&P 500 has averaged roughly 10% annual returns over its history. And despite the fact that there have been years when stock prices fell by 30% or even 40%, the markets have always recovered in the years that followed.
Stock dividends
For a number of reasons, dividend stocks present some particularly compelling alternatives. The most direct way for a company to return the profits of its operations to its owners is through a dividend, which is a regular cash payment made to shareholders. Additionally, it often denotes a number of critical elements for the stock’s risk profile.
When determining a stock’s risk, keep the following things in mind:
That dividend is far more reliable and is distributed whether the stock is rising or falling. You are still earning something back even if your stock is underperforming in terms of share value, which makes it simpler to hang onto the stock and ride out a downturn.
A sort of barrier against declining share values is the dividend. While investors frequently pay attention to the “dividend yield,” or the portion of a company’s share price that will be distributed as dividends in a given year, dividends are determined as a per-share payment. You are paying less for the same dividend as stock values decline.
The higher the yield, the more difficult it will be for dividend investors looking for a deal to pass it up. Despite the dividend yield, that won’t mean much for a company that is clearly headed for collapse, making it a bad investment. However, it will support the share price of a company that is simply going through a rocky patch.
Companies can and will reduce their payouts during extremely difficult times. People prefer constancy in their dividends, therefore when a dividend becomes less secure, they typically respond very adversely, which makes it uncommon and usually causes the stock to plunge. However, dividend payments are less reliable than, say, the fixed coupon payment on a bond.
However, a lot of that risk can be reduced if you look around for businesses that not only give a high yield but also have a proven track record of regularly raising their dividend on a regular basis (known as “Dividend Aristocrats”).
Comparing Risk-Free Investments with High Returns
A portfolio with the lowest risk and highest returns is the optimal portfolio. Finding the ideal balance often necessitates making some kind of compromise. Your savings account offers excellent relative certainty, but the profits it will generate are insufficient on their own to truly increase your wealth.
In a similar vein, while the returns offered by an S&P 500 fund are significantly greater over the long term, it’s crucial to consider them in light of the risk that you must take, most notably the potential of short-term double-digit percentage losses, which insured banking products simply do not have.
