As the prices of virtually everything around us increase, many of us are either actively investing or starting to consider the possibility of doing so. While it seems intimidating to navigate the world of investing by yourself, there are certain products and strategies that could be more appropriate for college students considering the risk and budget factors. An investing portfolio of less-risky assets can be more resilient to the volatility of the market.
First, it’s important to clarify what the terms “low-risk” and “conservative” mean. You should understand essentially all investment vehicles contain some level of risk. Additionally, lower-risk investments can mean lower returns compared to assets that come with higher risks. I consider these low-risk investments to be more suitable for college students because they are better short-term and therefore can be a great way of building and conserving an emergency fund since many students aren’t saving for retirement purposes.
So what types of investments are considered low-risk? And what exactly are they? Here are five potential options that are considered by many people to be lower-risk investments.
- Corporate Bonds
- U.S. Treasury Securities
- High-yield Savings Accounts
- Short-Term Certificate of Deposits
- Money-Market Funds
Corporate Bonds
Corporate bonds are a type of debt security issued by a company and sold to investors to raise capital. In other words, you are lending your money to a company that promises to pay you a series of fixed or variable interest rates. After these interests are paid over the pre-established period, the bond “matures” and you will get your initial money back, in addition to the interests you’ve been paid. Bonds are generally considered to be lower risk than stocks. There are two risks to be considered about corporate bonds:
- Interest rate risk: if the interest rate of the bond isn’t fixed, it can change and in turn affect the value of the bond. Bond values move up when rates fall and bond values move down when rates rise.
- Default risk: Usually, the bigger corporations tend to have a lower chance of defaulting on their bonds. Smaller companies, however, may offer bonds that seem to be higher-yield. These bonds are also known as junk bonds and are exposed to higher risk of defaulting (when the company fails to pay you back).
U.S. Treasury Securities
The U.S. Treasury issues three types of securities, which are considered by many to be the “safest” investments. The concept of these securities is similar to that of corporate bonds, except that you are lending your money to the U.S. government.
- Treasury bills (< 1 year)
- Treasury notes (< 10 years)
- Treasury bonds (<30 years)
Take a look at the comparison above and you would learn that treasury bills have the shortest maturity time.
High Yield Savings Account
Although savings accounts aren’t considered as investments, they do offer more return to you money than saving your money in a checking account or as cash. If you already have a checking account, you can most likely open a savings account easily at the same bank and manage both from the same APP. One tip is to shop around and compare the rate at different banks and find the one with the highest yield. But do keep in mind that these rates can change at times depending on inflation and other factors. The advantage of a savings account is that you will never lose the money because banks have insurance on them (usually up to $250,000 per account). The downside is that the return would likely be much less than what you could see with other kinds of investments.
Short-Term Certificates of Deposits
Certificates of deposits are very similar to a savings account except you can’t withdraw the money before the term ends without a penalty fee. However, if you have an amount of money you’d like to put aside and keep the CD till its maturity date, the bank agrees to pay you a fixed rate of interest for the duration of the term. Similar to a savings account, you won’t risk losing money because it is usually insured, except if you decide to withdraw the money early.
Money Market Funds
Money Market Funds are products that lower risks through diversifying investments. When you invest in money market funds, you are investing in a pool of different products like certificates of deposits, short-term bonds, etc. Banks invest money from MMAs in stable, short-term, low-risk, highly liquid assets. Money market funds invest in generally secure vehicles that mature quickly, often within 13 months. Unlike certificates of deposits, you can usually take out the money anytime you’d like.
Disclaimer: Nothing contained in this article should be construed as financial or investment advice.