Investing in stocks come with a risk, especially in today’s market. Due to increased volatility, people are fleeing to low and no risk investments while waiting out the storm. But this strategy can turn sour due to rising inflation.
To protect your capital from losing its value over time due to inflation, it has to earn equal or greater interest than the country’s inflation rate. There are countless high risk high reward investment opportunities out there, but are there any low and no risk investments with such high returns?
Let’s find out.
It is important to first understand what Inflation really is.
What is Inflation?
According to Investopedia,
“Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time.”
This means that if you hold on to your cash for a period of time, your purchasing power will start to decrease.
Even if you keep your money in a checking or regular savings account, it is still losing its value over time.
According to the Bureau of Labor Statistics consumer price index, prices in 2019 were 2,900% higher than average prices in 1900.
In other words, $100 today will give you the same purchasing power as what $3.50 did back in 1900. That’s losing 96.5% value of your money in 119 years!
How to beat Inflation?
So to preserve your wealth, your money needs to earn equal or greater interest than the inflation rate of your country.
Let’s look at the inflation rate statistics in the United States between 1990 and 2018. The average inflation rate in the US in the last 10 years has been around 1.8%.
So, if your money had earned at least 1.8% interest rate over the past 10 years, your money will experience the same purchasing power today as it did back in 2010.
5 Best Low and No Risk Investments in 2020
Here are a few of the safest investments that will give you a respectable return with low to no risk.
1. High-Yield Savings Account – 1.75%
This is one of the safest investments where you can park your money risk-free while also earning some interest.
Yields have dropped quite a bit over the past year due to Fed lowering their interest rates to zero.
Accessibility
Your money is always accessible. However, you’re permitted to make no more than 6 transactions out of your savings account each calendar month or billing cycle.
Security
Furthermore, deposit accounts offered by banks that are a member of FDIC are insured up to $250,000 per depositor. Therefore, as long as your account balance is under $250,000, your investment virtually has no risk.
In the cases of joint accounts, each contributor to the account is insured for $250,000, meaning that the account itself is insured for $500,000 (assuming each person contributed equally).
Simplicity
This is probably the simplest strategy and requires the least amount of effort on your part. All you have to do is open an account and deposit the money, and you’ll start earning interest each month.
Things to look for
When choosing an account, you should look for banks that provide great customer service, online and mobile banking, competitive interest rates, and charge no fees.
Offer #1 – Currently, CIT bank is offering 1.75% APY on their Savings Builder account.
There are two ways that you can earn the 1.75% interest.
- High Balance Savers – Maintain a minimum balance of $25k.
- Monthly Savers – Open an account with $100 minimum, and make a deposit of $100 per month.
Offer #2 – Another great option is American Express Personal Savings account that is currently offering 1.70% APY.
There’s no minimum balance requirement to earn the APY and no minimum to open an account. There are no monthly fees and they’re known for their outstanding customer service.
American Express is as safe as you can get. You can be rest assured that your money will be safe.
Bonus Offers – If you’re looking for even higher returns through savings accounts, Doctor of Credit provides a whole list of accounts with APY as high as 2.75%.
However, be sure to do your own research as not all institutions listed on the page are well known and may provide sub-par services.
Pros
- Risk-free up to a balance of $250,000 in FDIC insured savings accounts
- Money is always accessible
Cons
- Lower interest rate compared to other investments
- Limit to 6 transactions each month
- Rates may vary in the future
2. Certificate of Deposit – 1.85%
A certificate of deposit (CD) account can be an appealing option for someone who is looking for no risk investments while earning more interest than a savings or money-market account can offer.
If you have money that you’re not going to need for some time, CD’s are a great option to consider.
Security
CD’s are similar to savings accounts in that they’re insured by FDIC up to $250,000 and thus, virtually risk free.
Fixed Term
However, they differ from savings account in that CD’s have a specific fixed term, usually 1, 2, 3 or 5 years and a fixed interest rate. Also, if you need to withdraw your money before the period finishes, you’ll likely face a penalty fee.
How much interest you earn depends on the length of the CD term and the current interest rate.
Currently, Marcus by Goldman Sachs is offering up to 1.85% on their high yield CD.
No Penalty CD
If you want the freedom to pull your money out whenever you want while also earning high interest, Goldman Sachs is also offering a 7-month No Penalty CD of 1.70%.
Pros
- Higher interest rate than a savings account
- Not affected by interest rate volatility
Cons
- Fixed Term (6 mts to 5 yrs)
- Early withdrawal penalty
- Recurring deposit not allowed
3. Treasury Bills – 1.53% (Tax-Free)
Not many people talk about investing money in Treasury Bills. They are actually one of the safest investments yet provides competitive interest rates.
A Treasury Bill or T-Bill is a short-term debt obligation backed by the Treasury Department of the U.S. government.
In simpler terms, you loan your money to the government, and they pay you interest in return.
No Risk
The chances for the government to default on the loan is next to none, making this a great contender for no risk investments.
Fixed Term
The maturity term for T-bills can range from 4 weeks to 1 year. So your money will be tied up for a period of time if you’re looking into this option.
Currently, a 4-week T-bill will give you a return of 1.53% APY. Check out the latest rates here.
Tax-free
The interest income is exempt from state and local income taxes. This can save you a ton of money.
How to Invest in T-bills
You can buy T-bills from TreasuryDirect.gov in an increment of $100 up to a maximum purchase limit of $5 million. There is an option to reinvest the proceeds from maturing bills automatically to buy another bill of the same term.
Pros
- No Risk
- Interest income is exempt from state and local income taxes
Cons
- Fixed term (1 to 12 months)
- No mobile app
- No chat support
4. Investing in Munis (Tax-Free)
Municipal bonds or “munis” usually have the lowest return, but that’s due to a very good reason.
Tax-Free Return
The interest income paid on municipal bonds is exempt from federal tax. And if you own municipal bonds issued within your state, the interest income can also be free of state and local tax.
The new law caps the state and local tax deduction that can be claimed on federal returns at $10,000. Investing in munis could be especially beneficial if you’re looking to lower your taxable income.
How to invest in munis
An easy way to invest in Municipal bonds would be to buy muni ETFs, such as iShares National Muni Bond ETF. This way you’re investing in over 2000 municipal bonds in a single fund.
Their return since inception of the fund has been just over 4% with a fee of 0.07% which is one of the lowest in the industry. However, please remember that past performance may not be indicative of future results.
Pros
- Tax-Free returns
- Comparatively stable bonds
- Easy to buy and sell
Cons
- Low returns
- Muni ETF price may vary
- Management & Brokerage Fees
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5. Investing in Bonds - 7.52% (Medium Risk)
When you buy a bond, you’re essentially lending your money to the government or a company and getting paid back with interest in return.
Medium Risk
Bonds are not completely risk-free as the price of a bond could go up or down which would fluctuate the payout.
Therefore, it’s a good option for someone who can take a little more risk.
However, it is still relatively safe compared to stocks due to the low volatility. Also, the interest yields depend on the risk that you’re willing to take.
Bonds are countercyclical
Bond prices tend to move countercyclically. As the economy heats up, interest rates rise, depressing bond prices. As the economy cools, interest rates fall, lifting bond prices.
How to invest in Bond
A quick way to get exposure is with bond funds, such as mutual funds or ETFs.
Vanguard Total Bond Market Index Fund is a great way to get exposure to the entire US Bond market by investing in a single fund. Currently, It has an average yield of 1.80% and 0.15% in fees.
This fund is much less volatile. It is for someone who can take a little bit of risk while having the option of taking the money out when you need it.
If you’re looking for higher yields, an aggressive option could be Vanguard High Yield Corporate Fund. As of March 26, 2020, this fund has a YTD yield of 7.75%. After fees, you’re looking at a staggering 7.52% return.
Pros
- Higher Returns
- Easy to buy and sell
Cons
- Medium Risk
- Bond price is Volatile
- Management & Brokerage Fees
Final Thoughts
We may think that if we hold on to cash, we’re not losing its value. But due to inflation, the value of money is continuously depreciating over time.
The purpose of writing this article is not to list out the best investments with the highest returns but to preserve capital without losing its value.
If you’re looking for investments with high growth potential, I will discuss them in future articles.
Depending on your risk tolerance, you would want to get into one or more type of these investments. That way your portfolio is well-diversified with varying risk and growth potential.
What are your go-to safe investments and why?
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