When Low Risk Investments Are Good Choices

Low risk investments involve trade-offs. GetttyImages

All investments have risk, even the low risk savings account at your bank. The challenge is to find an investment that is paying you an acceptable return for the risk you are taking.

Below we’ll start by taking a look at seven low risk investments to consider. Then we’ll look at when low risk investments are a good choice and what you should expect from them.

Stable value is an investment option that is available within most (but not all) 401k plans. It is a low risk investment with an objective of preserving your princpal, providing liquidity so you can transfer out of it at anytime, and achieving returns comparable to short and intermediate term bonds but with less volatility (less up and down fluctuations). Most near retirees should consider stable value as part of their portfolio within their 401k plan.

6. Fixed Annuities

Fixed annuities are issued by an insurance company. They are low risk because the insurance company contractually agrees to pay you a fixed interest rate. A fixed annuity is like a CD except the interest accumulates tax-deferred. Unlike a CD you’ll pay a penalty tax if you withdraw the interest before you reach age 59 . The interest rate guarantee is only as good as the insurance company issuing it. Your money in an annuity is exposed to some risk if the insurance company goes out of business. If you are under the state guaranty limits. your money should still be protected. Fixed annuities are a good choice is you are in a high tax bracket, want your money to be safe, and won’t need to use it until 59 1/2 or later.

7. Immediate Annuities

An immediate annuity guarantees you a specific monthly amount of income. Just as with the fixed annuity the guarantee is only as good as the insurance company issuing it. Your money in an annuity is exposed to some risk if the insurance company goes out of business. If you are under the state guaranty limits, your money should still be protected. Immediate annuities are the best choice when you are older and want income guaranteed to last the rest of your life.

Returns for Low Risk Investments

It is unrealistic to expect high returns from low risk investments. There is no free lunch and investments that offer the potential for higher returns also come with a higher degree of risk. This graph shows you returns for low risk investments. It is one of a series of graphs that allows you to compare the performance of low, medium and high risk investments.

Before You Decide on a Low Risk Investment

I think it makes sense to measure investment risk on a scale of 1 to 5, with a 5 being can I lose all my money and 1 being can I lose any money. The investments described above are a 1 or 2 on this scale. To learn more this type of investment risk scale read:

When Low Risk Investments Are Good Choices

Low risk investments are the optimal choice for all of the following situations.

• You don’t know what else to do with your money right now.
• It’s for your emergency fund .
• You may need to use the money in less than ten years.

If you are investing money you won’t need to use within the next ten years you may want to consider something that offers the potential for a higher return, which may also entail taking on additional risk.

The process of building a portfolio means you thoughtfully select investments with different levels of risk so they work together toward a common goal. Learn more in 4 Ways the Average Investor Can Manage Risk .