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4 Low-Risk Investments Paying More Than A High-Yield Savings Account | Fidelity Investments
Fidelity Investments
Overview
This video explores four low-risk investment options that can potentially offer higher returns than a typical high-yield savings account. It details Certificates of Deposit (CDs), U.S. Treasurys, investment-grade corporate bonds, and municipal bonds. For each, it explains what they are, their current approximate yields, key benefits like principal preservation or tax advantages, and associated risks such as inflation or liquidity. The discussion emphasizes aligning investment choices with personal financial goals and risk tolerance, suggesting these fixed-income options can be valuable components of a diversified portfolio.
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Chapters
- High-yield savings accounts currently offer around 3% interest.
- Excess cash beyond an emergency fund can be invested in vehicles offering potentially higher returns.
- Four low-risk fixed-income options will be discussed: CDs, Treasurys, corporate bonds, and municipal bonds.
- Investment yields are dynamic; Fidelity.com/YieldSearch can be a resource for current rates.
Understanding that savings accounts may not offer the best returns for non-emergency funds is the first step toward growing your wealth through more effective investment strategies.
Leanna mentions that high-yield savings accounts are currently around 3%.
- CDs are bank products, FDIC-insured, where you lock money for a set term in exchange for a guaranteed interest rate.
- Current yields for 2-5 year CDs are around 4%, offering principal preservation.
- CDs are suitable for conservative investors and goals like a down payment, but carry inflation and liquidity risks.
- CD laddering involves buying CDs with staggered maturity dates to increase access to funds over time.
CDs offer a guaranteed return and principal protection, making them a safe option for specific savings goals, but understanding their limitations like locked-in funds is crucial.
A CD laddering strategy involves purchasing individual CDs with different maturity dates, such as one maturing in 6 months, another in 1 year, and a third in 18 months.
- Treasurys are government bonds backed by the full faith and credit of the U.S. government, considered very low risk.
- Current yields for T-bills and 5-year Treasurys range from 3.5% to nearly 4%.
- They are highly liquid and exempt from state and local taxes, making them attractive for conservative investors.
- Inflation risk exists; Treasury Inflation-Protected Securities (TIPS) adjust principal for inflation but typically offer lower yields.
Treasurys provide a secure way to invest government-backed funds, offering liquidity and tax advantages, though protection against inflation requires considering specific products like TIPS.
Treasury bills (T-bills) and 5-year Treasury notes are currently offering yields between 3.5% and 4%.
- These bonds represent loans to companies rated AAA to BBB, offering median yields from 4% to 5%.
- They function like IOUs, where investors lend money to a company and receive principal back with interest.
- Strategies include bond laddering or investing in bond funds/ETFs for diversification and regular income.
- Corporate bonds do not offer tax advantages and can have significant tax impacts for high earners.
Corporate bonds can provide higher yields than government bonds by taking on slightly more risk, but understanding their tax implications is important for maximizing net returns.
An investment-grade corporate bond is like a loan you give to a company, which promises to pay you back the original amount plus interest over time.
- Municipal bonds are issued by state and local governments and offer a triple tax advantage: federal, state, and local tax exemption.
- Recently, 5-year municipal bonds offered yields around 3.5%, which can be equivalent to higher yields on corporate bonds after taxes.
- For a high-income earner, a 3% yield on a municipal bond can be tax-equivalent to a 4.75% yield on a corporate bond.
- The primary risk is liquidity, as finding a buyer to sell the bond back to might be difficult.
Municipal bonds are particularly beneficial for high-income earners due to their significant tax advantages, potentially offering competitive after-tax returns compared to other fixed-income investments.
If you are a high-income earner and buy a municipal bond yielding 3%, it could be as beneficial after taxes as a corporate bond yielding 4.75%.
- Investment choices should align with personal financial goals, risk tolerance, and overall financial situation.
- It's not just about chasing the highest rate, but finding the right fit for your objectives.
- Fixed-income investments are often a crucial part of a well-diversified investment portfolio.
- Resources like Fidelity.com/YieldSearch can help with further research.
Ultimately, successful investing requires a personalized approach that balances potential returns with individual circumstances and integrates various asset classes for a robust financial plan.
The speaker advises that it's important to match your investment choices to your specific financial goals, such as saving for a house or retirement.
Key takeaways
- Low-risk investments like CDs, Treasurys, corporate bonds, and municipal bonds can offer higher yields than standard savings accounts.
- Each investment type has a unique risk-reward profile, with considerations for principal preservation, liquidity, inflation, and taxes.
- CDs offer guaranteed returns and principal protection but lock up your money; laddering can mitigate liquidity risk.
- Treasurys are government-backed and highly liquid, with TIPS offering inflation protection at a potentially lower yield.
- Investment-grade corporate bonds can provide higher yields but lack tax advantages, making them potentially taxable for high earners.
- Municipal bonds offer significant tax advantages, especially for high-income individuals, but may have liquidity challenges.
- The best investment strategy involves aligning choices with personal financial goals, risk tolerance, and overall financial health, rather than solely focusing on interest rates.
Key terms
High-yield savings accountFixed incomeCertificate of Deposit (CD)CD ladderingTreasurysTreasury Inflation-Protected Securities (TIPS)Investment-grade corporate bondsMunicipal bondsPrincipal preservationLiquidity riskInflation riskTax-equivalent yieldDiversified portfolio
Test your understanding
- What are the four main types of low-risk investments discussed that may offer higher yields than savings accounts?
- How does CD laddering help mitigate the liquidity risk associated with Certificates of Deposit?
- Why might an investor choose Treasury Inflation-Protected Securities (TIPS) over standard Treasurys, and what is the trade-off?
- What is the primary tax advantage of municipal bonds, and for whom are they most beneficial?
- How should an investor's personal financial goals and risk tolerance influence their choice among these fixed-income investment options?