Uncertainty surrounding the economy and stock market is high as the world battles the novel coronavirus pandemic.
And investing during a recession can feel like a daunting task.
Taking on risk right now might sound like the worst idea in the world to many people.
But that doesn’t mean you should remain on the sidelines.
To most, the word “investing” likely conjures thoughts of the “stock market.”
But if you have cash on the sidelines, there are ways to put it to work that don’t involve as much risk as stocks — just don’t expect amazing returns.
Low-Risk Investing During a Recession
Having an emergency fund is key during a recession. You need to have cash available in case of unexpected job loss or other financial hardships.
So why not find a way to let that emergency fund grow a bit while it sits?
Here are a few ways to do just that.
High-Yield Savings Accounts
Opening a high-yield savings account gives your money a chance to grow without much risk at all.
The returns won’t wow you, but they’ll beat whatever your bank’s savings account interest rate is — which is likely next to nothing.
There are many options online for a high-yield savings account. Try to shoot for something that has an annual percentage yield (APY) of 1% or higher. Here are a few accounts to look at:
- Marcus by Goldman Sachs is a good option with no fees. It’s offering 1.05% APY as of June 30, 2020.
- Discover’s savings account also has no fees and offers 1.01% APY. If you already have a Discover credit card, it might make sense to add this to your account.
- American Express offers 1.00% APY right now, and also has no fees. Same goes here: If you have an American Express card, you can easily add a high-yield savings account.
One thing to keep in mind about your APY is it moves with the Federal Reserve’s benchmark interest rate, which is currently between 0% and 0.25%. When that rate goes up, your APY should go up, and vice versa.
Money Market Account
Money market accounts are another option that offer low risk and better-than-average returns compared to a normal savings account. Some yields can even reach 1.75%.
But do your research. Reading the fine print is key when it comes to money market accounts. Many have higher fees and limit the number of withdrawals you can make each month.
Money market accounts can be a great tool for investing during a recession, but you may be better off in the long run with a high-yield savings account.
Treasury Inflation-Protected Securities
If you want a fixed-income security that also serves up low risk, consider a Treasury inflation-protected security (TIPS).
This comes in last on the list because, while it’s a low-risk investment, it’s not the best option if you need to access your funds quickly.
These investment vehicles offer protection from inflation. But selling TIPS is a two-step process that can have you jumping through hoops with your bank or broker. On top of that, there’s a good chance you won’t get face value for the security if you sell it early.
Investing during a recession doesn’t have to mean taking on a lot of risk. Professional investors aren’t always “risk-on,” meaning they have cash-on-hand — just like you. Having cash on the sideline gives you liquidity for any situation.
Putting your money to work in a low-risk environment doesn’t add up to the best returns. But you’re growing your funds, and you’ll be in a better spot when the stock market returns to levels you feel safer investing in.