Top 5 of the Best Low-Risk Investments

As a general rule: the higher the expected return of an investment, the greater the risk an investor must take—no risk, no return. While some of the riskiest investments, such as IPO stocks or high-yield bonds, have the potential to deliver impressive returns, conservative investors prefer to forgo these potential “big” gains in order to avoid capital losses. 

This is where low-risk investments come into play. So, which investments are considered low risk? Are there investments with no risk at all? And are there different types of risks to watch out for? We cover all of this below.  

What are the best low-risk investments? 

If you are a conservative investor with a low risk tolerance, you will naturally place more emphasis on preserving capital rather than on growth or market returns. In this case, defensive investments can be a good option. They are considered lower risk and aim to provide investors with a certain level of passive income while protecting the invested capital. Defensive investments typically consist of debt instruments such as bonds, cash, and fixed-income assets. Stocks (i.e., shares in a company) and alternative investments fall into the category of growth investments. It should be noted that growth investments are associated with higher risks but can also generate higher returns.

High-Yield Savings Accounts

Okay, high-yield savings accounts are technically not an investment. They are savings accounts that pay you (the account holder) a higher monthly interest rate (compared to other transaction accounts) when certain conditions are met. These typically include minimum monthly deposits and limits on withdrawals.

High-yield savings accounts are practically 100% risk-free (as they are bank accounts) and can provide small, steady returns over time. However, keep in mind that interest rates on these accounts are variable, meaning they rise or fall with the market. Therefore, it is important to look for options that offer the highest possible interest rates and low account fees to offset such fluctuations.

If the bank goes bankrupt, deposits are usually protected by the state up to 100,000 euros. To be on the safe side, you should not exceed this amount—or, if you have more funds, consider spreading them across multiple banks.

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Certificates of Deposit

Certificates of deposit (CDs), also known as term deposits, are savings accounts that pay a fixed interest rate on a fixed amount of money for a fixed period of time. This period can range from six months to one year, five years, or even 10 years. One of the biggest drawbacks is that if you withdraw your money before the maturity date, you may have to pay early withdrawal fees and may not receive the full interest rate. 

Nevertheless, certificates of deposit are considered one of the safest investment options, as the bank pays you interest for keeping your money in the account and not touching it. If you redeem your certificate of deposit at maturity, you will receive 100% of your principal back, plus the interest earned over the fixed term.

Unfortunately, interest rates on certificates of deposit typically lag behind inflation, meaning there is a risk that your money loses purchasing power over time, as your interest earnings may be offset by inflation. Certificates of deposit are available with different terms and yields across banks and credit unions.

You should also consider what is known as counterparty risk. If the bank (your counterparty in this case) goes bankrupt, you may not get your money back. This differs from investing in an exchange-traded fund, which consists of separate underlying assets.

Government Bonds 

Government bonds, also known as sovereign or treasury bonds, are medium- to long-term debt securities that pay regular interest (coupon payments) over the life of the bond. In other words, government bonds are a loan from you to the government. The government owes you this money and repays your original investment (the loan) along with interest at maturity. Government bonds are issued by national governments to support public spending or finance budget deficits. 

It is worth noting that government bonds issued by major industrialized countries such as the United States or European nations typically offer lower yields because the risk of default is very low—governments rarely, if ever, fail to meet their obligations.

Keep in mind that bond interest rates are fixed for the entire term. If interest rates rise, you could be holding a bond that pays below-market rates. If you do not hold the bond until maturity, you may incur capital losses.

Corporate Bonds

Corporate bonds are also debt securities issued by private companies and for-profit organizations to raise capital for growth, operations, projects, and more. Corporate bonds are essentially a loan from you to a company, without involving equity or shares. They pay regular interest and provide investors with a fixed passive income over the life of the bond. The main advantage of bonds is that you know exactly what you will receive, although your return potential is limited by the interest rate. 

Corporate bonds are considered riskier than government bonds because (a) governments are less likely to go bankrupt, and (b) they can raise taxes to pay interest. Corporate bonds compensate for this additional risk by offering higher interest rates.

Keep in mind that bonds are not immune to price fluctuations. Bond prices can decline when interest rates rise or when the issuer experiences a negative credit event. Focus on investment-grade bonds with a AAA rating, where the risk of the company going bankrupt and failing to repay is below 1%.

Dividend Stocks

Dividend stocks are another relatively low-risk and reliable investment, typically issued by established companies with a proven track record of paying profits to shareholders. Dividend investing involves buying shares of companies that regularly distribute dividends. Dividends are portions of a company’s earnings, usually paid out to shareholders on a quarterly basis. This is a great way to generate passive income and benefit from capital gains through long-term appreciation in market value. 

Dividend stocks are associated with lower risk than regular stocks and are an attractive option for conservative investors, as dividend payments can help offset losses when share prices decline. You can also achieve good diversification of dividend income through mutual funds and exchange-traded funds (ETFs). Dividend stocks can provide a steady source of income during retirement. 

What are the different investment risks?

Understanding investment risks can help you, as an investor, decide which assets to invest in—and which to avoid—based on your risk tolerance and long-term financial goals. Investment risk can be simply defined as the possibility of losing the money you have invested. This can happen for a variety of reasons, such as your investment losing value due to inflation or market fluctuations, or not performing as expected.

The risks that can affect the value of your investments include:

• Interest rate risk: Changes in interest rates can reduce the purchasing power of your invested money while also lowering your returns. This can occur with fixed-income investments.
• Market risk: Economic and market changes, as well as various geopolitical events, can cause the value of your investments to decline. 
• Industry risk: Industry-specific events and news can impact certain sectors (e.g., mining, finance, etc.) and affect the value of your investments. 
• Liquidity risk: When you cannot sell your investment and access your money without risking capital losses. 
• Credit risk: When a company or government is unable to repay its debt to you.
• Inflation risk: When the value of your investments does not keep up with or exceed inflation.
• Currency risk: When exchange rates affect the value of your investments abroad, whether you have invested in a company operating overseas or hold assets in a foreign currency.

What is the safest form of investment?

Investments such as high-yield savings accounts and certificates of deposit are considered the safest forms of investment, as you will always receive your capital back at the end of the term, along with the (albeit low) fixed interest earned during that time. Banks also guarantee term deposits and savings balances up to a certain amount.

However, cash-based investments do not keep pace with inflation, meaning that while you may gain a dollar, you lose purchasing power. Inflation is the rate at which prices in the economy rise, reflecting a decline in the purchasing power of money. Bonds and stocks are much more likely to outperform inflation over the long term.

Are there investments that are risk-free?

There are no completely risk-free investments—even those that guarantee a return of capital still carry some level of risk, albeit significantly reduced.

Keep in mind that low-risk investments typically offer lower returns, while medium-risk investments may provide higher returns. Another drawback of low-risk investments is inflation, which can erode purchasing power (the real value of money), meaning the money you invest today may be worth less in the future.