Investments with low risk offer relatively low returns, while investments with higher risk can yield larger returns, creating a trade-off between risk and reward. Certain low-risk investments like treasuries and certificates of deposit can offer respectable returns, but investments with more risk like stocks and mutual funds offer more growth potential.
Treasury securities are bonds that the U.S. government sells to raise the funds it needs to pay its expenses. When you buy a government bond, you typically receive interest payments every six months until a maturity date. The government pays back the face value of the bond at the maturity date. Short-term treasuries called T-Bills don't pay interest, but sell at a discount from their face value, allowing you to make a return when they mature. Treasuries are considered one of the safest investments you can make because they are backed by the credit of the U.S. government. Treasuries that take longer to mature typically offer higher returns than those that mature in a few months or years.
Certificates of Deposit
A certificate of deposit is a type of deposit account you can open at a bank where you commit to saving your money for a predetermined period of time. The bank pays a fixed interest on your deposit until the maturity date. If you take money out of a CD before the maturity date, you may forfeit interest or face other penalties. CDs typically offer higher returns than traditional savings accounts and the Federal Deposit Insurance Corporation insures CD deposits of up to $250,000 at participating banks.
While treasuries and CDs offer modest returns with little risk, stocks have historically outperformed other types of investments despite the risk of losing money. According to CNN, stocks have historically generated returns of around 10 percent, while long-term federal treasuries have produced returns around 5 percent. The prices of individual stocks can fluctuate up and down on a daily basis regardless of long-term trends, which makes short-term stock investing especially risky.
A mutual fund is a professionally managed investment that uses investor funds to buy a variety of underlying assets like stocks and bonds. Mutual funds can help investors avoid the danger of putting too much money into a single investment: a single mutual fund can own hundreds of stocks, so you won't lose all your money if one company a fund invests in performs poorly. Risk and returns can vary greatly from one mutual fund to another. Funds that only invest in stocks tend to be more risky and offer greater potential returns than funds that invest in short-term, low-risk bonds.
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- U.S. Department of the Treasury: Treasury Securities & Programs
- Bankrate.com: U. S. Treasury Securities:
- Federal Deposit Insurance Corporation: Certificates of Deposit - Tips for Savers
- CNN Money: Investing your Money Basics
- CNN Money: What are the Advantages of Mutual Funds?
- NYU Stern School of Business: Annual Returns on Stock, T.Bonds and T.Bills: 1928 - Current
- U.S. Securities and Exchange Commission: Invest Wisely - An Introduction to Mutual Funds