Safe, Slow-Growth Investments
Keep in mind, there is no thing as “no risk.” Consider that if you put a $10 bill in a safe in 1980, it would still be $10 … but thanks to inflation, that cash actually has lost some of its value. Capital preservation is important, but growing your money is important, too. So remember that these methods do little to grow.
High-yield savings or CDs: While it’s true that conventional bank accounts don’t yield anything right now, that’s no excuse to just park your cash in checking until you need it. “High-yield” savings accounts are out there from American Express (NYSE:AMX) and others that deliver about 0.85% in annual interest, with no minimum balance and the ability to withdraw your cash if you need it. Some CDs yield north of 1% but are inflexible and don’t give you ready access to cash or demand minimum balances. Of course, “high yield” is relative, since that rate may not keep up with inflation … but something is better than nothing. Sites like Bankrate.com allow you to compare rates and characteristics among savings vehicles.
Treasuries: The best low-risk alternative to cash is highly rated bonds. The safest of all safe havens is a U.S. Treasury bond. Interest rates are only slightly better than those savings accounts, at about 1.7% right now for a 10-year Treasury bond — but it’s a step up. You can buy Treasuries right from the U.S. government at TreasuryDirect.gov, but there are also mutual funds that do the bond investing for you. For instance, the Vanguard Intermediate-Term Treasury Fund Investor Shares (MUFT:VFITX) invests in Treasury bonds that are mostly three to 10 years in duration.
Other top-rated government bonds: Almost as safe as the federal government are local municipal bonds, or bonds from other top-rated nations like Germany or Canada. There is a little bit higher risk here, especially after the recent trouble in the eurozone and a few rare municipal bankruptcies in the wake of the Great Recession. But top-rated government debt remains almost as bulletproof as Treasuries, and can yield a bit more — 2% or higher.
Top-rated corporate bonds: Other alternatives are investment-grade corporate bonds from reliable companies. Bonds are really just debt, where you are the lender and you get paid interest as the corporation repays your loan to them. Companies like Johnson & Johnson (NYSE:JNJ), Microsoft (NASDAQ:MSFT) and ExxonMobil (NYSE:XOM) get top marks from credit ratings agencies because they have borrowed regularly for decades and always pay their bills. The safest corporate bonds yield between 2% and 4% right now. You can buy corporates directly through a broker — but if you’re really concerned with risk, a better option is to invest in a diversified corporate bond fund that spreads your money across a host of debt. Some bond funds like the Fidelity Investment Grade Bond Fund (MUTF:FBNDX) even add in some high-rated government debt to keep risk down and diversify your investment.