While no investment can ever be 100% “safe,” with a recession looming, it’s sensible to start exploring lower-risk investment strategies. What makes one investment riskier than another? And are there any relatively safe investments that still offer high returns?
Editor’s Note: Before you invest your money, be sure to talk with a financial advisor. They can help you assess your risk tolerance and choose the best portfolio to meet your financial goals.
Safest Investments
High-Yield Savings Accounts
A traditional savings account earns so little interest that it’s negligible. That’s the main reason why you should move the bulk of your savings—other than your emergency fund—into investments that will grow your wealth.
High-yield savings accounts are an alternative to traditional savings accounts that offer a more favorable interest rate. Many of them are only available online, which can make it difficult to know which ones are reputable. Luckily, there are plenty of lists—like this one from Bankrate—to demystify the process. The accounts that offer the best interest rates may also require larger minimum deposits. Shop around to find one that meets your financial needs.
Certificates of Deposit
Certificates of deposit—more commonly called CDs—are accounts that provide a fixed interest rate over a set period of time. Typically, you agree to deposit a certain amount of money for anywhere between six months and five years. As long as you don’t touch the money in that time, you’re guaranteed to get the agreed-upon rate of return. There’s very little risk in a CD—but there is also a lower reward and stiff penalties for early withdrawal. CDs can sometimes lose value during periods of rapid inflation, too.
As Investopedia explains, not all CDs are created equal:
Shopping around is crucial to finding the best CD rates because different financial institutions offer a surprisingly wide range. For example, your brick-and-mortar bank might pay a pittance on even long-term CDs, while an online bank or local credit union might pay three to five times the national average.”
Government Bonds
Government bonds are one of the safest long-term investments you can make, as they are heavily protected against potential default. Short of total governmental collapse, you’re going to get your money back.
Essentially, when you buy a Treasury bond, you are loaning the government an amount of money for a set amount of time. You’ll be paid interest at regular intervals, and once the bond’s term is complete, it reaches maturity and you receive your money back. Bond terms can vary, just like CDs, but the length to maturity is often much longer. Some bonds may have terms of 10, 20, or even 30 years.
With any long-term, fixed-income investment, there’s a risk that rising inflation could drive down the value of your bond. Because you cannot easily “cash out” a Treasury bond, you will have little choice but to leave your money locked up in a less-than-stellar investment.
Safer Investments
Mutual Funds
Trading individual stocks can be risky and time-consuming. That’s why many people who want to invest in the stock market choose to do so through a mutual fund. These companies pool money from individuals and use those funds to invest in a portfolio of stocks, bonds, and other financial instruments.
The main benefit of a mutual fund is the hands-off nature for investors. Once you’ve paid your money, experts can do the hard work of searching for the best returns. Mutual funds are considered a relatively safe investment path because they tend to have diverse portfolios managed by professionals. Unlike CDs or bonds, investors have the option to withdraw their money at any time.
Exchange-Traded Funds
Exchange-traded funds, or ETFs, are similar to mutual funds. They both involve investing in a varied portfolio of securities, but there are some key differences. ETFs are traded like stocks, so prices will change depending on the snapshot of the market when you invested. Mutual fund orders happen just once a day, so everyone who invests tomorrow, for example, will receive the same price regardless of the market at the time they invested.
According to Charles Schwab, one of the biggest benefits of an ETF is the lower burden of capital gains: “ETFs often generate fewer capital gains for investors since they may have lower turnover and can use the in-kind creation/redemption process to manage the cost basis of their holdings.” You’ll also have a little more control over how your money is invested since you can decide to buy and sell ETFs as an individual.
Riskier Investments
Real Estate
Real estate is a time-honored form of investment, but that doesn’t mean it’s without risk. The ups and downs of the market can be quite dramatic—who here remembers the housing bubble?
Traditional real estate investing is unique among the strategies on this list because you don’t have to supply the entire amount upfront. A mortgage plus a down payment allows you to purchase a property even if you don’t have enough liquid capital to buy it upfront. This makes real estate appealing to “flippers,” who buy inexpensive homes to renovate and then resell quickly, as well as landlords looking to develop a portfolio of rental properties.
You can also buy fractional shares of real estate—typically commercial properties—with a real estate investment trust (REIT). These are traded just like ETFs. It’s also possible to invest in a real estate investment group (REIG), which functions similarly to a mutual fund where the assets are rental properties such as condos or apartment buildings. These are both much more “hands-off,” and REITs allow you to invest as much or as little as you want.
Individual Stocks
The internet has made stock market investing more accessible than ever before. It’s possible to buy and sell stocks on your phone. That’s something of a double-edged sword for amateur investors. The ease of buying stocks and the ability to control when, where, and how much you buy is very tempting.
Sometimes, investors in single stocks do very well. Everybody has wondered from time to time what it would have been like to be an early investor in Apple or Amazon. However, you’re just as likely to end up betting on the wrong horse. In addition, trading stocks requires a great deal of time and effort. Warren Buffet has made this type of investing his life’s work. Unless you’re willing to devote years to learning how to do it, you might be better off going with a mutual fund.
Read More: How The World’s Wealthiest People Spend Their Money
Hedge Funds
The Motley Fool describes hedge funds as “a way for wealthy individuals to pool their money together and try to beat average market returns.” Think of a hedge fund as a mutual fund on steroids combined with a “members only” club mentality. These limited investment partnerships are available only to “accredited investors” with liquid assets totaling at least $1 million.
“Restricting themselves to accredited investors allows hedge funds to take more aggressive approaches to investing since they’re not heavily regulated by the SEC like mutual funds,” Adam Levy explains for The Motley Fool. This means that the managers of the hedge fund can pursue the kind of tactics that more conservative, risk-adverse investors would fear.
Hedge funds are popular with wealthy investors because they promise better returns than the stock market average. However, despite the fact that both hedge funds and mutual funds are managed by financial experts, they’re much riskier than mutual funds. Hedge funds also both demand management and performance fees.
Riskiest investments
Meme Stocks
While individual stocks can be a risky investment, so-called meme stocks are even riskier. Getting stock tips from amateur investors on Reddit message boards is dodgy at best. While some investors who bought and sold GameStop stocks at the exact right moment did make serious money, that’s the exception and not the rule.
GameStop is the most famous meme stock, but Reddit investors also pursued AMC theaters and Clover Health. More recently, an attempt to influence the market by scooping up shares of Revlon and Bed Bath & Beyond. So far, results have been mixed to poor.
Read More: Smart Investing Tips That Don’t Involve GameStop (Or Any Meme Stocks)
Cryptocurrency
Cryptocurrency is notoriously volatile. As of this writing, Bitcoin has dropped from a high of $68,000 in November 2021 to the current value of under $20,000. Despite being touted as safe, the blockchain has seen hackers steal millions in crypto in recent years. This type of digitally mined asset is also a disaster for the environment since it requires ever-increasing amounts of power to run the computers used to generate it.
Crypto enthusiasts insist that Bitcoin, Ether, and the like are the way of the future. However, the value of these coins has been dropping precipitously—calling into question whether cryptocurrency is as “recession-proof” as some investors claim.
NFTs
Non-Fungible Tokens (NFTs) roared onto the investing and art scenes in 2021. Some of these digital artworks sold for millions, backed by the expectation that early investors were riding a wave straight into the future.
Unfortunately, most people who bought NFTs soon found that it was nearly impossible to break even, let alone turn a profit on their virtual investment. The jury is out on whether this market will ever recover, but at the present moment, it seems like NFTs are one of the riskiest possible investments you can make.
