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Keeping part of your portfolio in safe investments is a smart source of diversification. When volatility rises and the markets swoon, you benefit from the stability provided by holding safe, highly liquid investment assets.
Low price volatility and little chance of losing your principal investment are hallmarks of safe investments. They tend to have lower returns than riskier assets, but that's for the best. Investors choose safe investments if they want to protect their capital.
The best safe investments in April 2024
| Investment type | Security | Liquidity |
|---|---|---|
Treasury bills, banknotes and bonds | High | High |
Money Market funds | High | High |
Inflation Protected Securities (TIPS) | High | High |
Savings accounts with high returns | High | High |
Series I Savings Bonds | High | Lav |
Certificates of Deposit (CDs) | High | Lav |
Investment grade corporate bonds | Moderate | Moderate |
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Treasury bills, banknotes and bonds
- Security:High
- Liquidity:High
US government bonds are considered the safest investments in the world. That's because they are backed by the full faith and credit of the U.S. government.
Government bonds offer fixed maturities and fixed interest rates.Treasury bills, commonly known as Treasury bills, have maturities of four, eight, 13, 26 and 52 weeks. Treasury bills have maturities of two and ten years.Government bondshas a term of 20 to 30 years.
The market for Treasury bills, notes and bonds is bigger and more liquid than anything else. This means you won't have any trouble selling government bonds if you need to cash out your bonds before they reach their full maturity date.
Money Market funds
- Security:High
- Liquidity:High
Money Market fundsThey are highly liquid, ultra-safe mutual funds that are a popular choice for short-term cash management. They hold short-term debt securities with high credit quality, such as Treasury bills, commercial paper, and certificates of deposit (CDs).
Money market funds have low costs and very high liquidity, but also offer lower returns than most other types of fundsinvestment associations. When market professionals talk about moving portions of their portfolios "into cash," they typically mean putting it into money market funds.
Like any mutual fund, money market funds cannot guarantee income or savings on principal, but their strict qualifications help them achieve greater principal preservation than other options.
Inflation Protected Securities (TIPS)
- Security:High
- Liquidity:High
Sold in terms of five, ten or thirty years, inflation-protected government bonds (TIPS) are government bonds that do exactly what their name suggests: protect your money from the ravages of inflation.
With TIPS, the value of your principal increases or decreases over the life of the security, depending on the current priceCPI inflation. The interest rate on each security is fixed, but as the principal fluctuates in value, so do your interest payments.
If the principal amount at maturity is higher than your original investment, you keep the increased amount. If the principal amount is equal to or less than your principal amount, you will receive the original amount back. TIPS pays interest every six months, based on the adjusted principal amount.
Savings accounts with high returns
- Security:High
- Liquidity:High
While the above options offer unparalleled liquidity, no other safe investment offers the easy access you get with a high-yield savings account. Deposits up to $250,000 are insured by the Federal Deposit Insurance Corp., making them ultra-safe investments.
A high-yield savings account is a type of savings account that typically pays a higher interest rate than a traditional savings account. Thatbest high yield savings accountstypically offered by online banks and credit unions.
Series I Savings Bonds
- Security:High
- Liquidity:Lav
I bindis a type of American savings bond that aims to keep pace with rising prices. This means they are specifically designed to protect your cash value against inflation.
I-bonds will also never lose the principal value of your investment, and the redemption value of your I-bonds will not decrease. In addition, they are exempt from state and local income taxes, and the interest earned is added to the value of the bond twice a year, causing the principal on which you earn interest to grow every six months.
Although I-bonds are very safe investments, they are not nearly as liquid as the above options. You cannot cash out your I-bonds until you have had them for a year. To receive all the interest due, you must own it for at least five years. If you pay out anywhere between one and five years, you will lose three months of interest.
Certificates of Deposit (CDs)
- Security:High
- Liquidity:Lav
Deposit slipsCombine decent interest rates with guaranteed returns on your principal, and they also benefit from FDIC insurance on balances up to $250,000.
While these qualities make CDs a very safe investment, they are not considered highly liquid assets. They offer a range of terms, from three months to ten years, but withdrawing the principal before the maturity date often means paying early withdrawal penalties or interest payments.
CDs are best for short-term financial goals when the expiration date matches your time horizon, that is, when you think you'll need your money.
Investment grade corporate bonds
- Security:Moderate
- Liquidity:Moderate
Investment grade corporate bonds are fixed income securities sold by companies to finance their operations. These types of fixed income securities are highly rated by credit rating agencies, which assess the financial health of the issuing companies. Investment grade means that the companies will most likely pay you interest and repay your principal.
Because companies can and do go bankrupt, corporate bonds are less safe than the options mentioned above. However, unlike stocks, companies are still required to make timely payments to bondholders.
If companies get into trouble, they may experience a credit downgrade, meaning their bonds may no longer be investment grade. In exchange for these higher risks, the potential returns are better than the above options. And the investment-grade corporate bond market is considered highly liquid.
What is a safe investment?
Safe investments are those that should preserve your principal, grow modestly, yet be liquid enough to convert into cash when you are ready.
There are many types of safe investments on the market today. We've included what our experts think are some of the best options in the list above.
How does a safe investment work?
A safe investment works by minimizing risks. But by minimizing risk, you can also sacrifice liquidity and growth.
For this reason, it is often recommended that younger investors – those further away from retirement age – take a chance on more volatile investments with the potential for higher returns.
The closer you get to retirement age, the less risk you want to take with your investments. This is because there are fewer opportunities to build or restore your principal if it is lost.
Which safe investments do you need?
No investment is completely safe from risks. To decide what's best for you, consider how much risk you're willing to tolerate and how much liquidity you need.
If stability is your ultimate goal, any of the above options allow you to invest in a way that almost guarantees that you'll end up with at least a little more money than you started with.
Safe investing Frequently asked questions (FAQ)
What is the safest investment with the highest return?
Safe investments typically provide modest returns at best. The goal is not high returns, but rather preservation of your principal and good liquidity so that you can access your capital when you need it. The return on the above investments largely depends on the prevailing market conditions.
What percentage of your portfolio should consist of safe investments?
The percentage of your portfolio to allocate to safe investments depends on your individual financial situation, investment objectives and risk tolerance. As a general rule of thumb, some financial experts suggest allocating about 10% to 20% of your portfolio to safe investments.
What are the safest types of investments?
U.S. Treasury bonds, money market funds and high-yield savings accounts are considered by most experts to be the safest types of investments available.
