While the U.S. economy has largely climbed out of the depths of 2020, there may still be quite a few bumps on the road ahead in 2021. The stock market enjoyed a substantial bounce in the second half of last year, and investors may still want to maintain discipline in the event that the market cools off. Building a portfolio that has at least some less-risky assets can be useful in helping you ride out future volatility in the market.
The trade-off, of course, is that in lowering risk exposure, investors are likely to see lower returns over the long run. That may be fine if your goal is to preserve capital and maintain a steady flow of interest income.
But if you’re looking for growth, also consider investing strategies that match your long-term goals. Even higher-risk investments such as stocks have segments (such as dividend stocks) that reduce the risk while still providing attractive long-term returns.
What to consider
Depending on how much you’re willing to risk, there are a couple of scenarios that could play out:
There are, however, two catches: Low-risk investments earn lower returns than you could find elsewhere with risk; and inflation can erode the purchasing power of money stashed in low-risk investments.
So if you opt for only low-risk investments, you’re likely to lose purchasing power over time. It’s also why low-risk plays make for better short-term investments or a stash for your emergency fund. In contrast, higher-risk investments are better suited for higher long-term returns.
Here are the best low-risk investments in February 2021:
- High-yield savings accounts
- Savings bonds
- Certificates of deposit
- Money market funds
- Treasury bills, notes, bonds and TIPS
- Corporate bonds
- Dividend-paying stocks
- Preferred stock
High Return
A higher-than-normal amount of revenue an investment generates over a given period of time as a percentage of the amount of capital invested. There is no hard-and-fast definition of high return; it is compared to other return rates. In general, an investment that generates a high return usually has a high level of risk.
Bottom line
Investing can be a great way to build your wealth over time, and investors have a range of investment options, from safe lower-return assets to riskier, higher-return ones. That range means you’ll need to understand the pros and cons of each investment option to make an informed decision. While it seems daunting at first, many investors manage their own assets.
But the first step to investing is actually easy: opening a brokerage account. Investing can be surprisingly affordable even if you don’t have a lot of money. (Here are some of the best brokers to choose from if you’re just getting started.)
You should always have cash reserves in a liquid savings account that you can tap quickly if necessary. But for money that you need to be somewhat liquid but hope to earn a higher return on, you do have options. Money market funds, annuities, government and high-grade corporate debt are some of the best low-risk, higher-yield ways to grow your money even when interest rates are low.
