7 Safe Investments for Beginners

Paid non-client promotion: Affiliate links for the products on this page are from partners that compensate us (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate investing products to write unbiased product reviews.

• Risk is inherent to investing, and there’s no ironclad rule about the best way to approach it.
• Risk tolerance is based on your emotional response to financial risk, while risk capacity is more objective.
• Balancing risk tolerance with risk capacity is key to developing the right investment plan for you.

When it comes to investing, nothing is 100% safe. Investing means you’re putting money into something — a financial asset of some sort, or a financial institution that holds your funds — in the hopes of getting a return. Where there’s the chance of a gain, there’s always going to be the chance of a loss, too. Risk and reward are two sides of the same investing coin. 

That said, not all investments are created equal, risk-wise. Some investments — either by design or based on historical precedent — tend to be relatively stable and generally preserve your capital. In other words, they will almost always return to you what you put in, plus some extra return as well, but perhaps not as much as you could make with higher-risk investments.

Still,  you want to be mindful of how even within the following seven categories of low-risk investment options, there are varying degrees of risk. And what’s considered safe to one person might not be considered safe to another. Also, to further mitigate risk, you might consider diversifying your investments across several different low-risk categories.

What is a low-risk investment?

Investment risk comes in several varieties, ranging from something intrinsic to the individual investment — like a company’s earnings, which often affects its stock price — to big-picture items, like the overall performance of the stock market or the outlook for the economy. 

Still, risk can be characterized in a couple of general ways, says Tricia Rosen, principal at Access Financial Planning: volatility and liquidity.

“Volatility is how much the value of a security moves up or down — both in quantity and speed,” Rosen says. “Liquidity is access to your asset. An asset is less liquid if it takes longer to convert the asset to cash or if there’s a decrease in the value associated with converting the asset.”

There’s no single definition or magic number to define “low-risk,” but low-risk investments do share some traits. They tend to be non-volatile — with no big price swings — and they tend to be liquid — that is, easily sold and turned into cash. 

7 low-risk investment options

If you don’t have much stomach for the ups and downs that can come with investing in many stocks, real estate, and other investments or you’re a beginner investor, then you might prefer relatively low-risk — albeit lower reward — options such as the following: 

High-yield savings accounts

High-yield savings accounts are essentially just savings accounts that pay above-average interest rates. Some high-yield savings accounts are online-only and operate on more of a standalone basis, as opposed to some traditional savings accounts that are linked to checking accounts within the same bank. Still, high-yield savings accounts are generally FDIC-insured (or NCUA-insured at credit unions) and offer easy access to funds, much like regular savings accounts.

Not everyone considers high-yield savings accounts to be investments, as some just use these accounts to store money. But in today’s high-rate environment, they start to get more appealing as investments. The returns might still be lower than some stocks and bonds, but the upside is that you’re almost certainly not going to lose any money, as even if the bank fails, the FDIC or NCUA steps in, generally covering at least $250,000 in deposits. Plus, you can typically withdraw your money at any time.

You can search online to find the best high-yield savings account rates, which can change over time.

Certificates of deposit (CDs)

CDs are offered by banks, and credit unions sell essentially the same product known as share certificates. These products are technically a type of savings account, but you usually can’t add or withdraw money after the account is opened. Also, some brokerages sell CDs, typically by repackaging bank or credit union CDs, and which function a bit more like tradeable bonds.

That said, bank or credit union CDs usually offer a fixed rate of interest in exchange for keeping your funds in the account for a certain amount of time — often ranging from six months to five years. Usually, the longer the term, the higher the annual percentage yield (APY), although lately the opposite has been true. 

Also, APYs for CDs are usually a little higher than they are for high-yield savings accounts, to account for the lower liquidity. If you withdraw funds early before the term ends, you usually have to pay a penalty, but that usually just means forfeiting some of the interest you would have otherwise earned. So, choosing a term depends on your confidence in being able to keep your funds locked up for that long, while also comparing interest rates.

Meanwhile, CDs generally protect your principal with FDIC or NCUA insurance, like high-yield savings accounts, although it’s possible you could lose a little bit if a bank or credit union has steep early withdrawal penalties.

Series I savings bonds

One risk of investments like CDs and high-yield savings accounts is that high inflation could cut into or sometimes outpace returns, meaning you’re losing purchasing power, even if your balance isn’t literally decreasing. However, Series I savings bonds, also known as I bonds, are U.S. government bonds that are indexed to inflation. So if inflation increases, the interest that you earn on I bonds also increases, though the downside is that during periods of low inflation, you won’t earn as much. 

Still, I bonds have a fixed rate determined at the time of purchase, so you know you’ll always earn at least that amount, plus an inflation rate that gets adjusted every six months. Also, I bond interest income is exempt from state and local taxes. And because I bonds are backed by the government, these are generally accepted to have a very low risk of default. 

I bonds last for 30 years, though you can withdraw your money anytime after 12 months. However, if you cash out before five years, you lose the last three months of interest that you would have otherwise earned.

You can purchase up to $10,000 in electronic I bonds per year by opening a TreasuryDirect account, and you can also buy up to $5,000 paper I bonds per year when filing your tax return.

Treasuries

Technically I bonds could be considered Treasuries as they’re issued by the U.S. Department of the Treasury, but Treasury marketable securities (or Treasuries) differ in that these fixed-income instruments aren’t tied to just one person the way savings bonds are. Instead, you can trade Treasuries prior to maturity, much like corporate bonds. 

U.S. Treasury bonds are essentially loans you make to the U.S. government: You buy the bond (or the note or the bill, as the shorter-term loans are called) and the government promises to pay you back later with interest. The terms range from 4 weeks to 30 years. 

Similar to I bonds, Treasury Inflation Protected Securities (TIPS) adjust rates based on inflation, while other types of Treasuries like T-notes, T-bills, and T-bonds pay fixed interest rates. Interest income from Treasuries are also generally exempt from state and local income taxes.

Treasury marketable securities are sold via a government auction, so the demand for these securities affects the price. Usually institutional investors participate in these auctions, but you may be able to buy newly issued Treasuries through your bank or broker. However, it’s more common for individuals to trade Treasuries on the secondary market, meaning you’re buying or selling ones that have already been issued, similar to trading stocks. Or you might invest in a Treasury ETF or other fund that trades like a stock while holding a basket of Treasuries, but keep in mind that secondary market transactions can have different tax implications.

Because Treasuries are backed by the “full faith and credit” of the U.S. government, they’re considered one of the safest investments. The tradeable value can fluctuate based on interest rates, but if you hold until maturity, you’ll get your full principal back plus interest, unless the government defaults on its Treasury obligations, which most experts agree will not happen. Funds that invest in Treasuries, however, can fluctuate a bit more in value and don’t necessarily have as much principal protection, but they’re still generally lower risk than other bond funds because of the stability of the underlying investments.

Money market funds

Money market funds — not to be confused with money market accounts, which are like savings accounts — are mutual funds that invest in short-term, high-quality debt instruments that pay out earnings in dividends while almost always maintaining a stable share price or net asset value (NAV) of $1. 

Because these funds invest in high-quality, low-risk assets like Treasuries and highly rated corporate bonds, they typically offer safety and liquidity, while paying slightly higher interest rates than some other vehicles like savings accounts and many CDs. 

You can often find money market funds through brokerage accounts, and many brokerage firms offer their own money market funds as a proxy for a savings account. If you want a place to keep your cash within your brokerage account, then it’ll often go into what’s known as a sweep account that invests your cash in money market funds. If you want to withdraw that money, you can typically sell your investment and receive cash the next business day.

Dividend-paying stocks

To be clear, not all dividend-paying stocks are safe/low-risk investments, but some established companies that pay dividends offer more stability than those whose returns only come from stock price appreciation. 

With dividends, companies are returning money to investors periodically, such as monthly or quarterly, often based on how much profit they made, though other factors can influence dividend rates. As such, investors can earn some return without having to sell shares. Even if the stock market starts to stumble, you can still gain some income from dividends, so there’s less risk of having to sell your shares at a loss if you need the cash.

Because many dividend stock investors are investing based on these payouts, rather than speculating on the stock price, there can be less volatility in the share price. A stock that does not pay dividends generally has its value more so determined by future growth potential, while a dividend-paying stock perhaps more so accounts for the company’s current profitability or ability to keep paying dividends. On average, dividend-paying stocks are typically less volatile than non-dividend-paying stocks, according to Fidelity.

Still, you likely want to engage in diversification among dividend-paying stocks and other assets to reduce risk, as a dividend-paying stock can still be vulnerable to downfalls.

Preferred stocks

Preferred stocks act as somewhat of a hybrid between stocks and bonds. These lesser-known securities are technically ownership shares of a company, like stocks, but these shares typically pay higher dividend rates, sometimes at a fixed interest rate similar to bonds. 

Yet preferred stocks sometimes pay higher rates than bonds, as there can be slightly more risk. In the event of a bankruptcy, for example, bondholders have a higher claim to repayment than preferred shareholders. 

That said, preferred shares come before regular shares and usually have less volatility since the emphasis is on dividend payouts, not share price. But the tradeoff is that preferred stocks often have lower returns than common shares, as you might not participate as much in share price gains, since the trading values are separate. 

Not all brokerages provide access to preferred stock, but you can search for ones that do if you’re interested in adding these investments to your portfolio.

Factors to consider when choosing safe investments

Not everyone agrees on what’s a safe investment, as people can have different risk management preferences and different investing goals. Some, for example, aren’t willing to invest in dividend-paying stocks because there’s still a risk of losing money, as opposed to an investment like CDs that are almost guaranteed to at least protect your principal. 

To figure out what safe means to you, consider factors such as:

Risk tolerance

As an investor, your personal perspectives and responses to potential loss are what determine your risk tolerance. This is often defined as the emotional, subjective viewpoints on financial risk for an investor.

Risk tolerance isn’t easily quantifiable, of course, because emotions rarely are. Warren Ward, a  CFP® professional with WWA Planning & Investments, says he defines risk tolerance for his clients as how “emotionally comfortable” they are with risk.

One way to determine your risk tolerance is by asking yourself hypothetical questions, such as: “How would you react if the value of your investments dropped by 20%?” Financial advisors and planners often use this approach to gauge clients’ risk tolerance. 

The three most common levels of risk tolerance are:

• Conservative: Conservative investing avoids unnecessary risk and focuses more on avoiding loss than on pursuing gains from investments. 
• Moderate: A moderate investor is willing to take some risks, but has backstops in place to prevent losing too much. 
• Aggressive: An aggressive investor is comfortable with higher potential risks in exchange for potentially higher returns. 

Risk tolerance differs a bit from risk capacity, which is how much risk you can afford to take as an investor and depends on aspects such as your earning power, time horizon, and current assets.  

Robert R. Johnson, a chartered financial analyst (CFA) and professor of finance at Creighton University, points out that certain circumstances typically increase your risk capacity. A longer time horizon, substantial assets, and significant earning power all offer greater ability to bear risk. Conversely, factors like a short time horizon, less money in savings, and lower income potential reduce your risk capacity. 

Ward says risk capacity is “just basic math” that shows your ability to withstand a financial setback. Look at these primary factors to determine your risk capacity:

• Income you’ll require during retirement
• Number of years until retirement 
• Current income and savings rate
• Current assets accumulated

If a 20% setback in the next year means you wouldn’t be able to afford your living expenses, for example, then you might need to reduce risk, whereas if that setback only occurs in your retirement account that you have decades to recover from, you might be willing to take more risk.

Time horizon

As mentioned, time plays a big role in determining risk. Generally, the longer your time horizon, the more risk you can take in terms of volatility. If you have 30 years until retirement, a stock market crash doesn’t necessarily matter, because over those 30 years, there will typically be some strong years and some bad years, but overall, markets tend to trend upward.

If you need cash in the short term, though, like you have an upcoming tuition payment of tens of thousands of dollars, you might choose a more stable investment like a short-term CD, money market fund, or high-yield savings account.

Liquidity needs

Timing also relates to liquidity. If you have short-term financial needs, you want to make sure your investments are liquid.

Although liquidity is often a component of low-risk investments, many of them do lock up your money. CDs often charge an early withdrawal penalty, and I bonds need to be held for at least a year, for example. So, you might prefer taking on slightly more risk with dividend-paying stocks, for example, if you want the liquidity of being able to sell those assets essentially at any time.

Return expectations

Lastly, consider your return expectations to figure out how much risk you want to take. Low-risk investments protect you on the downside, but often don’t offer much on the upside. And the safer they are, the less they typically pay.

In that sense, there’s an opportunity cost risk to “safe” investments. But if you don’t mind getting low returns as long as your principal is relatively secure, you might be happy with some of these investments.

FAQs about safe investments