How to invest with low risk?

Question

My sister's kid is geting around 25,000 from his grandfather's life insurance policy. She wants to invest it in something low risk but with a decent return. Are CD's good for this or are there other things that would be better? And also, what is a CD anyway?

Answer 1

A CD is a certificate of deposit and can be purchased at any bank or brokerage company. They are usually FDIC insured and the longer the contracted investment term, and the deposit, the higher the interest rate is. The interest rate is guaranteed for the term of the contract, and there are penalties to withdrawing the money early.

As to risk versus potential return, there are different factors to consider.

#1 time frame - over the short term (1-2 years or less) safety of the principal (amount invested) is the most important factor to control and something like a CD or a money market is a great choice. Odds that you will lose your original investment are slim to none. But in the long run, these investments will be eroded by taxes and inflation and you may actually lose purchasing power (meaning that $25K even with interest may buy less down the road than it does now).

FYI a money market account can also be had via the bank or brokerage account though a brokerage account will usually pay a higher interest rate. A money market account doesn't have a contracted term and usually has only a small minimum deposit. The advantage a money market offers in the current market conditions is that the interest rate will change with the market which is currently rising.

So under today's market conditions, a money market account is probably a better choice than a CD.

#2 - inflation is another real risk and for longer term investments, something that offers full safety of principal is not likely to return enough to outpace inflation. One of the reasons interest rates are rising now is because inflation is too. So for middle-range plans, a medium risk investment is a better choice.

Bonds (there are many kinds of bonds and some are safer than others) or bond mutual funds are one option. A mutual fund invests in a pool of investments which make them lower risk than owning bonds outright. Or if the investment time frame is long enough, a conservative stock mutual fund, or a blended fund that invests in some of each may be the best option. Yes, there is some risk that your investment will lose money, but in most cases these types of investments will outpace inflation better so you experience real growth.

#3 longer term investments are usually invested in stock mutual funds or funds that mix stocks and bonds, or can be invested in a portfolio of different funds to provide a nice balance of risk versus potential return. Over the long run, this type of investment usually results in the biggest return.

In addition to considering what kind of investment to choose, if this is for a child, it may be worth thinking about what kind of account to put it in. Money put aside for college can be invested in an account that will grow tax deferred until college age, and will be tax free if used for that purpose. They call these accounts a 529 account and every state has its own plan, plus most plans are open to residents of any state. If the child doesn't go on to college, they can still get to the money but it will be taxable and there will be a 10% penalty. Still $25K is a nice start to a college fund and tax free growth will give a bigger end result.

You can also put a minor's money into a UTMA account. The advantage to this kind of account is two-fold. First of all, profits are taxed differently and will be lower than a regular account, plus an adult must be named as custodian and who has full control over withdrawals until age 18 or 21 (depending on the state). Thus mom or dad can prevent the abuse of the cash. (the 529 plans also have a custodian)

Now that I've confused the heck out of you, it would probably be best for you to go into a brokerage company, even a discount firm like Charles Schwab or Fidelity will work just fine, and sit down with a broker who can determine the time frame and help you pick both the right kind of account and the right investment.

There's nothing a bank has that a brokerage firm won't and the brokerage firm will have a much broader selection of products so they can better suit your needs.

Answer 2

A CD is a very safe way to save. CD stands for Certificicate of Deposit. It means you give the bank the $25,000 and the banlk promises to give you back the $25,000 plus interest at some date in the future (called the maturity date). The term (length of time) can vary from as little as a month to 5 years or more. Rates are historically pretty low right now so you might want to get a short-term CD and renew it at a higher rate when it matures. The CD will be FDIC insured.

You might consider putting the money in a Coverdell (eductional) IRA so you do not have to pay taxes on the earnings. But you can only put in so much each year and the money must be used for education. It can still be in a CD even though it is an IRA.

Talk to your banker.

Good luck.

Answer 3

In general the more risk you take the better the performance *might* be.

That said the best you can do is a mix.
Suppose you have 1000 dollars.
Put 800 into CDs. One can get about 4%/year on those. So in five years the 800 dollars will grow to 1000 dollars. This guarantees your capital.
Put the other 200 dollars into a stock index fund, or better buy an index tracker. After five years this investment will have made *on average* 7%/year. It could be much less, or much more, this is the joker part of your investment. In practice you will have something between 150 and 350 dollars.

So after five years the 1000 dollar will have grown into something between 1150 and 1350 dollars.

If you want more risk, change the 80-20 mix to 60-40 or 50-50.
Your capital is no longer guaranteed, but your chances to gain more increase.

Answer 4

How long will the money be invested? If only for a few years a CD or money market account would be the safest investment.

A CD is a certificate of deposit. They are available at any bank. They are savings for a specific period of time (for example: 1 year, or 2 years or 5 years, etc). The longer the term of the CD the higher the interest the money will earn. The 'down-side' to a CD is you can not take the money 'out' before the term is up without paying a 'penalty'.

A better option may be a money market account. This is like a savings/checking account that pays interest and usually does not charge for 'early withdrawels' but requires several thousand dollars to be deposited (your 25K is plenty to qualify). Most companies that sell mutual funds (e.g. Vanguard, Fidelity, American Century, Oakmark, etc.) offer these accounts. You can find these accounts by going online to Vanguard, Fidelity, etc. websites.

Hope this was helpful. Best wishes.

Answer 5

You have a choice -- you can have low risk or you can have a decent expected return. You can't have both. If you have a well diversified portfolio, then reward will be proportional to the amount of risk that you want.

CDs are certificates of deposit. They are -- essentially -- bank deposits, except that you are required to keep the money in the bank for a set period of time. Because of this requirement, they pay a slightly better return than a normal savings account.

If this is a long term investment, a no-load mutual fund might be a better idea. She can probably get one through her bank. They have a variety of them ranging from low risk to speculative. The advantage is that they are well diversified -- so only have market risk. I might suggest putting part of it in a short term bond fund or money market mutual fund (similar returns to CDs) and put part of it in a stock fund that tracks high quality stocks.

Of course, she should make sure that she is comfortable with those risks.

Answer 6

Low risk goes hand in hand with low return. Only investments that are at least somewhat risky will yield high returns. How old is your sister's kid? Frugernity was right about a Coverdale IRA. An alternative to this is a 529 plan, which can only be used for college. When you say "low risk" I assume you mean market risk. Another type of risk would be inflation risk. Currently inflation is low (when compared with historical rates.) But there's also the possibility that it could get higher. A good way to safeguard against this would be with I-bonds or TIPS. I-bonds are U.S. savings bonds that are indexed to the CPI, the Consumer Price Index. The only problems are that if you redeem them sooner than 5 years after buying them, you forfeit 3 months worth of interest, and that for their added safety you sacrifice the higher yields of T-notes or CDs.
Another relatively safe investment would be short term corporate bonds rated AA or higher.

Answer 7

I do not think CD is considered an investment at all. You are lucky if you can keep the same level of your capital after inflation. I assume that kid is pretty young and should be able to afford more risk and time for better return. Buy some blue-chip stocks such as banks. Think about it. Instead of putting your money in the banks to let them make their own money, why not using your money to buy their shares and make money together with them?

Answer 8

Get educated, e.g. reading investment books.

Then apply that education.

Keep in mind that low risk usually implies low return.

A CD is a 'certificate of deposit'; merely you guaranteeing to a bank that you will keep a certain amount of funds on deposit with them for a certain amount of time, therefore they will pay you a slightly higher amount of interest.
Safe but not very good returns.

Answer 9

With a PORTION of the money, buy a few shares of something related to kids - Disney stock, Netflix, Electronic Arts and have the brokerage firm deliver the shares. You will get a certificate suitable for framing.

Answer 10

low risk investments--

the lowest risk-- bank savings account...very low rate of return, but you can withdraw at any time

next lowest---CD, certificate of Deposit, sold by banks, higher interest return than savings acct, but you cannot withdraw your money for a given period of time(actually, you can, but you will pay penalty), CD's usually in round amounts like $5000, $10,000. terms for CD's 1 yr-3 yrs or more., CD rates are pretty good right now.

low risk stocks--utilities like electric companies, return higher than CD's, they pay dividends, they usually hold their value in times of falling stock prices.

there are many more kinds of low risk investments. 25K is a pretty good size amount. i would suggest talk to someone at a place like merril lynch, to talk is free. they can advise.

its a good idea to to diversify. split your investments up into several different things.