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
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!