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How to Safely Invest Your Money

by Miranda Marquit

In increasingly uncertain market conditions, many investors look for safety. Safer investments provide peace of mind, since there is a greater likelihood that your principal will be preserved through tumultuous economic conditions, and you might even earn a little compound interest. However, the flip side is that you often have to deal with lower returns.

5 Ways to “Safely Invest” Your Money

"Safe" investments can help you keep your money, but also beware of inflation.

“Safe” investments can help you keep your money, but also beware of inflation.

For the most part, there are no completely “safe” investments. No matter what you invest in, there are almost always risks and potential losses. Here are some of the least risky investment options:

1. CDs and Other Cash Products

Keeping your money in a cash product is one of the safest things you can do when it comes to investing. Keep your money in a savings account or CD at a bank insured by the FDIC (or a credit union insured by the NCUA), and you don’t have to worry about losing your principal to a bank failure. If you are willing to lock your money in a CD for an extended period of time, you can see marginally better rates.

2. U.S. Treasuries

U.S. Treasury securities are backed by the world’s most stable taxpayer base. Many consider U.S. Treasuries among the safest investments in the world. While there is a chance that the United States will default on its obligations, leaving you with losses, most investors dismiss the idea of this actually happening.

3. Corporate Bonds

Some of the most respected companies in the world finance their operations with the help of bonds. If you invest in the right corporate bonds from financially strong companies, it’s possible to feel confident about your money. There are some companies that are considered almost as safe as the U.S. government. Again, though, you have to understand that there is still the possibility of default.

4. Money Market Mutual Funds

Don’t confuse money market mutual funds with money market bank accounts. Money market mutual funds represent a collection of cash and cash-like investments – and these mutual funds are not FDIC-insured. (A money market bank account is a different product, and it is insured.) Money market mutual funds, since they are related to safe investments, are often thought to be perfectly safe, but just following the financial crisis, some money market funds lost money. So it’s still possible that you could lose.

5. Certain Annuities

In some cases, an annuity can be a safe investment. You purchase an annuity, and you are guaranteed a certain payout. With annuities, though, you have to be careful about fees. Additionally, passing the annuity to a beneficiary can be difficult in some cases. Learn about the company offering the annuity as well, since you could sustain losses if the company folds. Many annuities are complex, so it’s best if you carefully research an annuity and make sure it is fairly simple and straightforward before you turn to this type of investment.

Interest Rate Risk

The biggest thing you have to worry about with most safe investments is the interest rate risk. When you invest with minimal risk, you pay the price in potential yield. In general, the greater risk you are willing to take on, the greater the potential reward – but you also have to face the fact that you could see bigger losses.

With safe investments, there are still risks, but they are mainly of a different nature. When you “safely invest” your money, you aren’t going to earn as much. Cash rates are exceptionally low right now, and they are likely to remain low for quite some time. This means that you run the risk of not earning enough interest to offset the effects of inflation.

Inflation erodes your purchasing power. If you have your money in a bank account earning 0.85% APY, and inflation is 2% per year, the value of your dollar is going to drop by 1.15%. That’s a loss in real terms, even if you still have the same amount of principal sitting in the account.

While safer investments can provide you with a safety net and a certain degree of capital preservation, it’s important to note that you won’t be able to effectively build wealth unless you are willing to take on a little more risk with some portion of your portfolio.

How do you plan to safely invest your money? Leave a comment!

Photo Credit: photosteve101


Published or updated April 26, 2013.
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{ 5 comments… read them below or add one }

1 Jake Erickson

These are all great spots to keep your money in order to be “safe”. I think the interest rate risk can be something that most people don’t think about. They don’t realize that their purchasing power may be decreasing by them being so conservative. I will probably just keep my emergency fund in a normal money market account and then invest the rest in actual mutual funds, even though they are not as safe.

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2 Roger @ The Chicago Financial Planner

Miranda great post as always. Your points about annuities are right on. While I have no issues with annuities as a product, they are far too often sold vs. bought. A registered rep or insurance agent isn’t likely to point you to a low expense, no surrender product like those offered by Vanguard and other providers. Caveat Emptor certainly applies to anyone considering an annuity.

The other comment is about safety. I’m assuming that you are referring to safety from loss of principal. There is certainly a component of anyone’s assets that should be in low risk, very liquid holdings for emergencies and the like. However I often tell folks planning for retirement or in retirement that their biggest risk is running out of money due to inflation. They often need a growth component in their portfolio to avoid this. I’m not advocating that these folks invest like someone your age, but I fear that too many folks will go overboard on the safety from loss part to their eternal detriment.

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3 Andras @ The Investor Club

The good old dollar-cost averaging formula is also an interesting investment option. It was also popularized by the NYSE itself as “monthly purchase plan”.
According to our research for the past 50 years in 10 year investment periods there was only a single 10 year period that resulted loss: 1998 to 2008 however if extended that period to 11 years it also returned to profitable.
This investing technique is really simple and can be followed by anyone not familiar with investing strategies. It historically proven to be profitable for any chosen period. The average return we found to be 7.1% annually based on the past 50 years. The latest examined period 2001 to 2011 resulted an annual 3.1% return on investment.
As a conclusion we highly recommend the DCA to all non-professional investors.

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4 KC @ genxfinance

We all want to invest, to let our money grow. The thing is, we also want the lowest risk as possible to get the most out of our money. These tips mentioned here give us options with safe investments. Good advice.

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5 Andrew Pohl @ FinanceCubed

If you are worried about inflation risk but want to sneak in a bit higher yield than short term treasury bills or corporate paper, TIPS (Treasury Inflation-Protected Securities) are another safe investment to consider.

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