No investment is completely risk-free, though some are certainly safer than others. When looking at the risk/return ratio in investing, the general rule of thumb is the higher the risk, the higher the potential return, which generally has greater fluctuations and uncertainties. Therefore, looking at safe investments with the best returns means considering just how much risk you are willing to take to get an extra percent or two.
Certificates of Deposit
Certificates of deposit (CDs) are bank investment instruments that provide a fixed rate of return over the course of the certificate's term. Because CDs are bank deposits, they fall under the protection of the Federal Deposit Insurance Corporation (FDIC), which insures consumer assets up to $250,000 per tax ID number per banking institution. CDs come in various terms, with the longer-term CDs offering higher rates than shorter-term CDs. The fixed rates are higher than savings or money market accounts and are often used as a retirement income source. The primary risk with CDs is liquidity risk, where a CD owner will pay a penalty for breaking the CD terms early. The only other risk of losing money is if the bank fails and the federal government defaults on FDIC coverage.
Government Treasury Bonds
Government treasury bonds are federally issued and guaranteed financial instruments. Treasuries include short-term Treasury bills with durations under one year, as well as long bonds that go as far as 10, 20 and 30 years out. At the time of purchase, longer-duration bonds have a higher yield than shorter bonds. However, the risk with these instruments is the change in the bond yield curve over time. As interest rates drop, the higher bond yield becomes worth more to present-time investors. However, as rates increase, the long-term bond becomes worth less in present-time values because the extended term makes them illiquid and they sell at a discount (less than the bond face value).
Fixed annuities are a tax-deferred savings account sold by insurance companies. These are considered conservative investments with assets guaranteed by the full strength of the insurance company selling them. A fixed rate of return is given, usually with rates adjusting annually. Fixed annuities are longer-term investments with average annuity lengths of five to seven years. Annuity owners can take distributions after age 59.5, adding the earnings to income. A 10-percent penalty is paid on earnings distributed prior to the threshold age. Annuity owners should select insurance companies that are highly rated, indicating great financial strength and solvency. In general terms, if you trust your homeowner's insurance company to pay your benefits if the event of a house fire, you should feel confident that your fixed annuity assets are secure in a similarly rated company. All insurance companies receive ratings from third-party research companies such as Moody's, AM Best and Standard and Poor's. Ratings of an A- or higher suggest safer investments.
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