The ten safest investments available in October 2022.
With excessive inflation threatening the economy, the Federal Reserve has moved to hike interest rates. In the coming months, investors should anticipate a choppy ride, therefore it is vital that they maintain discipline. Building a portfolio with at least a portion of less-risky assets can assist you in weathering market volatility.
In exchange for reducing their risk exposure, investors are likely to obtain lesser profits over the long term. If your objective is to protect capital and keep a continuous flow of interest income, it may be acceptable.
But if you seek growth, you should examine investment strategies that align with your long-term objectives. Even riskier investments, such as equities, have components (such as dividend stocks) that lower relative risk while still offering significant long-term returns.
What to contemplate
Depending on the amount of risk you’re ready to take, a number of outcomes are possible:
You will never lose a single cent of your principal.
Some risk — It is realistic to assume that, over time, you will either break even or experience a little loss.
There are, however, two caveats: returns on low-risk investments are lower than returns on riskier investments, and inflation can diminish the purchasing power of low-risk investments.
If you choose exclusively low-risk assets, your purchasing power will likely decline over time. This is also why low-risk investments are preferable for short-term or emergency fund holdings. In contrast, investments with a higher level of risk are more suitable for larger long-term returns.
Here are October 2022’s top low-risk investments:
High-interest deposit accounts
Series I savings bonds
Quickly maturing certificates of deposit
Money market funds
Treasury bills, notes, bonds, and Treasury inflation-protected securities
Currency exchange accounts
a fixed annuity
The top low-risk investments for 2022
1.High-interest savings accounts
While savings accounts are not technically investments, they do offer a tiny return on your money. You can find the highest-yielding options online, and if you’re prepared to peruse the rate tables and shop about, you can earn a bit more yield.
Why spend: In the sense that you will never lose money, a savings account is absolutely safe. The majority of accounts are insured by the government up to $250,000 per account type per bank, so you will be compensated even if the bank fails.
Risk: Cash does not depreciate in value, although inflation might reduce its purchasing power.
2. Series I savings bonds
A Series I savings bond is a low-risk, inflation-adjusted bond that safeguards your money. When inflation increases, the bond’s interest rate increases. However, when inflation lowers, so does the bond’s payment. TreasuryDirect.gov, which is maintained by the U.S. Department of the Treasury, sells Series I bonds.
McKayla Braden, former senior advisor for the Department of the Treasury, explains, “The I bond is a solid choice for protection against inflation since you get a fixed rate and an inflation rate added to it every six months.” This refers to an inflation premium that is updated twice a year.
The Series I bond’s payment is adjusted semi-annually based on the inflation rate. With high levels of inflation, the bond yield is substantial. This will be increased if inflation continues to climb. Therefore, the bond protects your investment from the ravages of rising prices.
Savings bonds are backed by the U.S. government, making them one of the safest investments available. However, remember that the bond’s interest payment will decrease if and when inflation returns to normal levels.
Risk: If a U.S. savings bond is redeemed before five years, a three-month interest penalty is assessed.
2.Certificates of deposit with a short maturity
Bank CDs are always risk-free in an FDIC-insured account, unless the funds are withdrawn early. To discover the best rates, you should surf around online and compare the offerings of several banks. In 2022, when interest rates are already on the increase, it may be prudent to purchase short-term CDs and then reinvest as rates rise. You should avoid being stuck into below-market CDs for an extended period of time.
A no-penalty CD is an alternative to a short-term CD since it allows you to avoid the normal early withdrawal penalty. Therefore, you can withdraw your funds and invest them in a higher-yielding CD without incurring the customary fees.
Why spend: If you maintain the CD until maturity, the bank commits to pay you a fixed rate of interest for the duration of the term.
Other savings accounts provide higher interest rates than some certificates of deposit, although these so-called high-yield accounts may demand a substantial initial deposit.
Risk: If you withdraw cash from a CD early, you will normally lose a portion of the earned interest. Before investing, it is essential to study the rules and compare CD rates, as some banks impose a loss of a percentage of the principle as well. Moreover, if you lock yourself into a longer-term CD and general interest rates rise, your yield will decrease. To obtain a market rate, you must cancel the CD and often pay a penalty for doing so.
4. Money market funds
Money market funds are pools of CDs, short-term bonds, and other low-risk investments sold by brokerage firms and mutual fund providers in order to diversify risk.
Why invest: Unlike a certificate of deposit, a money market fund is liquid, meaning you can normally withdraw your cash at any time without incurring a penalty.
Risk: Ben Wacek, founder and chief financial advisor of Guide Financial Planning in Minneapolis, deems money market funds to be relatively risk-free.
“The bank will inform you of the rate you will receive, and its purpose is to ensure that the value per share does not go below $1,” he explains.
5. Treasury bills, bonds, and notes
Treasury bills, Treasury notes, Treasury bonds, and Treasury inflation-protected securities, or TIPS, are also issued by the U.S. Treasury.
Treasury bills mature within one year.
Treasury notes have a maximum maturity of 10 years.
Treasury bonds have maturities of up to thirty years.
TIPS are securities whose primary value increases or decreases in response to the direction of inflation.
Why invest: These are all highly liquid securities that may be purchased and sold directly or via mutual funds.
Risk: Unless you purchase a negative-yielding bond, you are unlikely to incur a loss if you hold Treasurys to maturity. If you sell them prior to maturity, you may lose a portion of your investment because the value fluctuates as interest rates rise. Existing bonds lose value as interest rates rise, and vice versa.
Companies may also issue bonds, which can range from very low-risk (issued by large, profitable companies) to extremely dangerous. High-yield bonds, also called “junk bonds,” are the lowest of the low.
There are low-yield, low-quality high-yield corporate bonds, according to Cheryl Krueger, founder of Growing Fortunes Financial Partners in Schaumburg, Illinois. In addition to the interest rate risk, there is also a default risk associated with these investments.
Interest-rate risk: As interest rates fluctuate, the market value of a bond may fluctuate. Bond values grow when interest rates decrease and fall when interest rates rise.
Default risk: The corporation may fail to fulfil its obligation to make interest and principle payments, leaving you with potentially nothing on the investment.
To reduce interest-rate risk, investors can choose bonds with maturities within the next few years. Longer-term bonds are more susceptible to interest rate fluctuations. To reduce default risk, investors may choose high-quality bonds issued by recognised multinational corporations or purchase funds that invest in a diverse portfolio of such bonds.
Risk: In general, bonds are believed to be less risky than stocks, but neither asset type is risk-free.
“Bondholders rank higher than stockholders, so if the company declares bankruptcy, bondholders receive their money before stockholders,” explains Wacek.
7. Dividend-paying stocks
Stocks aren’t as secure as cash, savings accounts, or government debt, but they’re generally safer than volatile investments such as options and futures. Dividend stocks are considered safer than high-growth equities due to the fact that they pay cash dividends, thereby reducing but not eliminating their volatility. Therefore, dividend-paying companies will vary with the market, but may not decline as much during market downturns.
Stocks that pay dividends are often viewed as less hazardous investments than those that do not.
Wacek states, “I wouldn’t claim a dividend-paying stock is a low-risk investment because there were dividend-paying stocks that lost 20% or 30% in 2008.” However, it is generally less risky than growth stocks.
This is due to the fact that dividend-paying companies tend to be more mature and reliable, and they also provide the opportunity of stock price increase.
“You are not just dependent on the fluctuating value of that stock, as you are also receiving a regular income from it,” Wacek explains.
Risk: A danger associated with dividend stocks is if the firm falls into difficult times and declares a loss, requiring it to reduce or cancel its dividend, which will have a negative effect on the stock price.
Preferred equities resemble lower-quality bonds more so than regular stocks. However, their values may fluctuate significantly if the market declines or if interest rates increase.
Similar to a bond, preferred stock provides a regular cash distribution. Infrequently, however, corporations that issue preferred stock may be entitled to suspend the dividend in certain situations, albeit they must typically make up any missing payments. And the corporation must pay dividends on preferred shares prior to paying dividends on common stock.
Risk: Preferred stock is comparable to a bond with a higher degree of risk, but is generally safer than common stock. They are frequently referred to as hybrid securities because preferred shareholders receive payment after bondholders but before stockholders. Prior to purchase, considerable consideration must be given to preferred equities, which are often traded on a stock exchange alongside common stocks.
Money market accounts nine
A money market account may feel similar to a savings account, and it provides many of the same advantages, such as a debit card and interest payments. However, a money market account may have a greater minimum deposit requirement than a savings account.
Money market account rates may be greater than equivalent savings account rates. In addition, you will have the freedom to spend the money if you need it, however the money market account may have a monthly withdrawal limit comparable to a savings account. In order to maximise your profits, you will need to seek for the greatest rates available.
Risk: Money market accounts are insured by the FDIC up to $250,000 per depositor per institution. Therefore, money market accounts pose no risk to your capital. If you have too much money in your account and are not earning enough interest to exceed inflation, you may experience a loss of purchasing power over time.
In exchange for a lump-sum payment, an annuity is a contract, typically with an insurance company, that will provide a specified amount of income over a specified length of time. The annuity can be arranged in a variety of ways, including payments over a defined time such as 20 years or until the client’s death.
The contract for a fixed annuity stipulates the payment of a set sum of money, typically monthly, over a specified length of time. You can donate a flat sum and begin receiving payments immediately, or make contributions over time and have the annuity begin payments at a later date (such as your retirement date.)
Why spend: A fixed annuity can give you with a guaranteed income and return, thereby enhancing your financial stability, particularly during retirement. An annuity can also provide a tax-deferred way to build your income, and you can contribute an unlimited amount to the account. Depending on the contract, annuities may also include additional benefits, such as death benefits or minimum guaranteed payouts.
Risk: Because annuity contracts are notoriously complicated, you may not receive exactly what you expect if you fail to read the fine print carefully. Annuities are relatively illiquid, meaning that it may be difficult or impossible to withdraw funds without paying a substantial penalty. If inflation rises dramatically in the future, the attractiveness of your guaranteed payout may diminish.