Learn something new every day
More Info... by email
Many investors, particularly those who plan to retire in the near future and cannot afford to take risks with their money, attempt to search out safe investments. There are no perfectly safe investments, as even a pile of gold under a mattress can lose value if the commodity value of gold drops and even an insured savings account can see its real value collapse in the face of hyperinflation. A balanced portfolio, however, can combine investments that protect initial equity, often through guarantees that protect against inflation.
Safe investments that seek to preserve initial value will generally focus on assets with protection against the risk of institutional collapse or failure. Ordinary savings accounts and certificates of deposit are among the simplest and most secure investments in this category. The Federal Deposit Insurance Corporation, or FDIC, collects fees from banks and, in return, guarantees most forms of ordinary bank account and CDs, up to a certain, fairly high, ceiling. Individual banks may fail, but the deposits in those banks are protected.
There are other safe investment options to protect initial equity. United States treasury bills are generally held to be a safe investment, and offer another haven for cautious capital. A slightly better rate of return, along with greater flexibility, can be obtained by placing money into a money market account. These accounts are managed in such a fashion as to generate modest but very safe returns, and generally lose value only under extraordinary circumstances. Even during the financial crisis of 2008, money market funds typically only lost a penny or two on the dollar.
Loss of principle is not the only investing hazard, however. Inflation can wipe out asset value as surely as default on a corporate bond issue. Bank accounts and bonds are poor hedges against inflation, as the rate of interest that they pay does not normally keep up with the drop in the value of the currency during periods of severe inflation. The best safe investments to hedge against inflation are those that are tied to concrete assets, as these asset prices will tend to keep pace with inflation.
Commodity investments, such as precious metals, can fit into this category of safe investments. Certain equities can be used to fill this role as well. As a general rule, investments in corporations with a proven record of aiming for slow, steady growth and stability, particularly when held through a mutual fund to add an additional layer of diversification, can hedge against inflation. A conservative portfolio should contain a mix of different assets that will vary depending on whether inflation seems likely in the near to medium term.
One of our editors will review your suggestion and make changes if warranted. Note that depending on the number of suggestions we receive, this can take anywhere from a few hours to a few days. Thank you for helping to improve wiseGEEK!