Every investor seeks a good yield, but it is not the only element that matters. When evaluating investments, specialists consider not only the absolute return possibilities, but also what is known as "risk-adjusted return.' The understanding is that not all returns are created equal, and savvy investors seek to invest where they can receive the best value for the risk they are willing to take. That doesn’t always mean the highest interest rate. In fact, it can even means accepting lower returns.
In this article, you will learn about the investments that offer this best risk-adjusted return, so you can make the best choice for your financial needs and goals.
Before listing safe investments with high returns, it is important to understand risk-adjusted return. As explained earlier, not all returns are created equal. Thus, the idea that the return should be related to how much risk is being taken in the investment. What this means is that can be a scenario where an investment with 2% return might be more valuable than one with 20% yield. How is that?
To explain it better, if the 2% return is guaranteed, such as through a US Treasury, but the way to the 20% return carries the chance of losing 40% of what was put in that investment, the high returns become very risky. In this context, that consistent 2% return may be a superior value over time, based on its low risks – particularly for a risk-averse investor.
Of course, everyone wants to find the high return with a low risk of loosing money. However, this combination tends to be rare. Usually, it goes as higher the stakes, higher the returns. Hopefully, there are some investment options that do offer significant low risk and high returns is compared to other safe investments.
Taking into consideration that the following investments involve very low risk for the investor, the returns, that can go higher than 10% yield, are great. However, keep in mind that there is no such thing as zero risk investment. Every single investment carries some level of risk, even if this is losing money to inflation. Still, the following are safe investment that offer high returns to investors:
High-yield savings accounts offer considerable high returns if you take into consideration that there is practically no risk involved. This type of account pays higher interest rates than regular savings accounts, while being equally insured by the Federal Deposit Insurance Corporation (FDIC). This means that the government will back you up in loses of up to $250,000.
One of the few drawbacks of high-yield savings accounts is that the interest rate might fluctuate in reaction to market conditions. When interest rates are declining, as they have been in recent years, the returns might be less attractive. The problem with that, besides lower gains, is that the interest rate can go below inflation. If that is the case, the investor would be losing money instead of earning it.
This scenario is currently the reality. Top high-yield savings accounts currently provide interest rates ranging from 0.45 percent to 0.61 percent, a far cry from the 2 percent-plus interest rates of only a few years ago. However, with the national average savings rate lingering around 0.06 percent, high-yield savings accounts remain a highlight safe investment. In addition, high-yield savings accounts are very liquid, allowing investor to easily access their funds.
If you are not in a rush to access your money, a certificate of deposits (CDs) can be a good investment. The risks are close to zero and the returns are higher than even high-yield savings accounts. In this type of saving, the longer you are willing to leave your money locked, the higher the interest rate you can get. One-year and two-year certificates of deposits, for example, offer higher returns than traditional savings accounts. The average of a one-year CD’s interest rate is 0.21%, while a two-year CD’s rate can go as high as 0.95%. Unfortunately, this is lower than US inflation in 2021. However, it is better than most options with such low risks.
The catch of CDs is that your money will be locked for the fixed duration of the CD, which can go from a few months to a few years. That is because if you touch this money in the CD before the agreed term, you may be subject to fees and even penalties. If you do choose this option, a way to create more liquidity is to spread your money through CDs with a variety of term lengths. Terms of certificates of deposits vary a lot between each other. Interest rates and early withdrawal penalties can be extremely different from one CD to another. Therefore, it is interesting to shop around and check all the available information before you choose the CD that better fits your needs. Among these issues, CDs are also FDIC insured, which guarantees customers a cover in case of loses.
Surprisingly, there are high-yield checking accounts that offer considerably high returns for how safe they are. Some can offer up to a 2% annual percentage yield. However, to have access to this type of return, consumers will almost always have to meet some restricted requirements. One of the rules to have access to high-yield checking accounts’ returns is to keep a minimum balance. Some banks may require you to establish direct deposit or bill pay. Another common condition is that you conduct a minimum number of monthly debit card transactions. If you don’t meet these requirements, rarely a bank will penalize you. However, you will probably not receive the higher interest rate, but instead the lower rate of a regular savings account.
Online savings accounts usually offer the same security of other savings accounts, but with way higher returns. This type of account is very similar to standard savings accounts, including that it is also FDIC insured, with the obvious difference that it only operates online. The other very attractive difference in an online savings account is the higher interest rates it can offer you. In a traditional brick-and-mortar bank, the interest rate you can earn with your savings account will be around 1% to 1.25% annually. In comparison, a digital savings account can offer rates from 1.80% to 2.25%, which is, on average, 10x higher. These accounts manage offer much higher interest rates because they don't have all expenses that come with a physical location and its employees.
The lower expenses of online savings accounts also allow them to charge you low to no fees, regardless of your account balance. In addition, many digital savings accounts have no minimum amount to open your account. Besides the financial advantages, online savings accounts offer easy access through your phone, tablet, or computer with user-friendly platforms.
Bonds are considerably safe, especially if compared to stock market, and offer good returns. A bond is a loan taken by the government or a company. Instead of going to a bank, the business or the government gets the money from investors who bought their bonds. The investors in exchange receive an interest rate for lending money to the company or government. Different from stocks, bonds are considered a low-risk type of investment, especially if they are government bonds. That is because the US treasury backs them up. When it comes to corporate bonds, the risk can be slightly higher, but still quite low.
The interest rates of bonds don’t climb as high as the return of stocks. Historically, US treasury bonds returned 3% to 5% on investments, which is a pretty good interest rate. Unfortunately, these bonds have suffered from a decline in yields along with the long decline in government bond yields. Corporate bonds tend to offer higher interest rates sided to a higher level of risk.
Cryptocurrencies, such as Bitcoin and Ethereum, are part of a new and still in developing market. The cryptocurrency market offers a lot of opportunities with very high returns on investment. But this comes with a high risk, since it is an extremely volatile and speculative market. With the advancements of decentralized finance, new services based on cryptos surged, offering a way to tap into this promising market with lower risks. One of these services is crypto-based savings accounts.
They work quite similar to online high-yielding savings accounts. The difference is that the lending side of the business is focused on the crypto market. The returns are not as high as the rest of the crypto market but are still higher than any other option available nowadays. For example, crypto saving accounts can pay interest rates as high as 12%. This option is safer than most crypto investments due to a network of overcollateralized lending partners. However, it still has some risks, since most of these accounts are not FDIC or NCUA insured.
There are safe investment options with good returns available. You should always consider how much money you want – and can – loose before investing in anything. Also, make sure you do your own due diligence. Having a diversified portfolio of investment is also a wise move if you wish to invest safely. Ultimately, you will need to take into consideration your financial goals and needs, so the investment is both safe enough and worth it enough.