Safest Types of Investments
According to Warren Buffet, the first rule for investing is to never lose your capital. The second rule is to go back to rule number one, but investing can be complicated for the uninitiated. If you happen to receive a huge inheritance or come to a point when you’re looking at your finances for the long term, investing deserves some serious consideration.
Saving vs. Investing
But how is investing different from saving? You’re probably already saving. If you’re setting aside a portion of your income to pay for holidays, your new car or down payment for your new home, you’re actually saving. Saving also occurs when you’re setting aside a portion of your income towards some form of a savings account, like a bank account, which you could tap into anytime you want. In many cases, savings are used for most short-term financial goals.
When you invest, you’re actually making your savings grow long-term. Are you looking five years or more from now and want to start financially preparing for your future? Then you need to invest instead of save.
Investing is great especially if you start early and you’re willing to let those savings go untouched for a long period of time until they reach maturity. With the power of time and compounding on your side, your investments grow month to month, year after year. When they mature and you’re ready to capitalize on them, they would be worth more than the principal.
Therefore, saving is like parking your money in a place where you can easily touch it with no huge expectations for it to grow, while investing is parking your money in a place you cannot touch as easily and where you expect it to grow.
A well-rounded financial strategy is to not choose only saving or investing, but to have both in your financial portfolio. In this set-up, you will have some liquid savings you can tap into quickly in times of financial need. Meanwhile, your investments allow for money to grow somewhere untouched. In some cases, your investments could even provide you with passive income.
Why Should You Save for Both Long-term and Short-term?
Life is unpredictable and having a robust savings and investment portfolio will go a long way to get you through financial challenges. You might be stable right now, but you could lose your job or get ill. With some savings, you can stay afloat while looking for another job or recovering from an illness. You might also want to contribute to your investment funds so that your future is more secured and comfortable even if you’re already out of the workforce.
Investing also helps secure the financial lives of your loved ones. If you start investing today and your funds mature in 10 years, your return is something that or your children can use for big-ticket expenses like college education, a vehicle, or a healthy down payment on a new home.
Savings and investments also provide freedom and flexibility. You can choose to go out tonight and splurge for a fancy dinner, take a vacation the next day, or buy something expensive on a whim – all because you know you have the funds to pay for them. Of course, you have to give these things deeper thought as building your savings and establishing your investments weren’t as easy as making impulse decisions.
Without savings or investments, you will be forced to contend with what you can afford and sometimes go into debt for unexpected expenses. You have no current financial cushion and future financial security and you live in a rocky situation where you’re always just one step or mistake away from a financial disaster.
Types of Safe Investments
Bank accounts are one of the easiest to understand saving/investing venues and probably also the most familiar to a lot of people. In general, bank accounts are safe because you can remove money from most of these accounts easily and most banks are insured by the FDIC. Banks offer different types of accounts which generally fall under the following:
Rewards Checking Account
A checking account allows you to perform basic banking functions like saving and withdrawing, but with the added perk of being able to issue checks. This type of account has a low interest rate and comes with a maintaining balance that’s higher than most savings accounts. Checking accounts are often used to park and distribute money in the form of checks, and are most popular among businesses and corporations.
A savings account is a basic bank account where you can deposit into your account and withdraw money easily. These accounts may come with a passbook or an ATM, a low interest rate, and is very liquid. A savings account is a very popular place to park emergency money since it is very accessible.
Money Market Accounts
In money market accounts, the bank can use your balance and invest it into other safe investment vehicles where it is expected to grow. As a result, you enjoy a slightly higher interest than you would with the basic savings and checking account. However, you will have to maintain at least $5,000 of balance in your account and you can only make certain number of withdrawals each month.
Credit Card Rewards
Credit card rewards are typically issued by credit card companies to gather the accumulated points when using your credit card. These points can either be used as cash or to pay for items in certain stores. This is a strategy to breed loyalty among credit holders as well as entice them to use the card more often with the credit issuer’s partner establishments.
Certificate of Deposits (CDs)
Certificate of deposits are also called time deposits. This type of account allows you to park some of your money into a bank or other financial institution for an agreed period of time, usually from six months to a few years. CDs are safe investments because they are left untouched for the agreed period and you can only withdraw them penalty-free on the maturity date. If you withdraw your deposit earlier than the maturity date, the penalties can be substantial.
CDs may have fixed or variable interest rates, but in most cases, the interests are higher than in savings and checking account. This type of investment is very ideal to people who would like to save short-term and make sure they won’t be able to touch the money unnecessarily. It is also great to use CDs to diversify your investment portfolio since it is also insured by the FDIC.
However, you must remember that CDs aren’t as liquid as bank accounts, unless you’re willing to pay the early withdrawal penalty. If you’re investing in CDs, it’s important to keep some liquid funds tucked in somewhere so your time deposit doesn’t get compromised in times of an emergency.
If you’d like to spread out your time deposit investments, consider laddering. Laddering is when you spread out your CDs into different accounts. When they reach their maturity dates, you can reinvest the amount into a CD with a longer maturity date and repeat the process each time an account has matured. This is a good way to keep some of the amount in your CD liquid while enjoying a better interest rate.
Treasury securities are government-backed investments that are considered by many as safe and low-risk. Basically, treasury securities allow you to purchase bonds from the US government which grows over time. Treasury securities are effective in holding your principal and are relatively liquid if you want to trade your bonds to the open and secondary market.
These are known as effective inflation hedges and you have the assurance of the United States’ full faith and credit that your principal and the interest it has earned will be returned to you as long as you keep them until full maturity. On the downside, treasury securities are subject to inflation and changing interest rates, so you can never fully predict how much your investment is worth by maturity.
You can easily find treasury securities in auction where they are available in $100 increments. There are three main types of treasury securities – bills, notes and bonds—and they vary mostly in maturity dates and other features.
Treasury bills have maturity dates of 91, 182 and 364 days. Treasury bills are purchased with the interest off from the face value and are sold and traded with full value.
Treasury notes have maturity dates between 2 to 10 years. They may be purchased at full or discounted value with interest rates that pay every six months.
This is the type of treasury security with the longest maturity date, ranging from 10 to 30 years. Like treasury notes, treasury bonds also pay interest rates semi-annually.
Treasury securities can be purchased in both competitive and non-competitive bidding as well as in secondary markets. One good way to get started in treasury securities is to deal directly with the government-managed www.treasurydirect.gov. You can purchase securities online and decide what you want to happen when your investments reach their maturity dates.
Money Market Funds
Money market funds are short term investment vehicles wherein the money you put into this account is likewise invested by the handler into other safe and low-risk investments. These are safe investments because you can expect the principal to be returned to you, plus the interest that the investment has made over the course of its life span. Money market funds typically mature in one year.
Money market funds generally cost $1 per share and come with variable interests. Therefore, it is impossible to predict how much you earn from your investment when it expires. If the interest rate goes up, you will earn more, but when it goes down, you might suffer a loss. Still, if you’d like to park and diversify your funds that you know you wouldn’t need within 12 months, money market funds are great options.
Money market funds have better interest rates than traditional savings account and are just as liquid. Depending on the firm or bank that handles your account, you may be entitled to a debit or an ATM card to make instant transactions, as well as make limited withdrawals each month.
You should know though that money market funds are not protected by the FDIC, so if this is something that bothers you, consider other investment vehicles.
Bond Funds / Bonds
Bond funds or bonds are conservative, low risk, and highly liquid investments that are ideal for investors who wish to enjoy government-backed funds and higher returns than savings and money market funds. Bonds work by protecting your capital and yielding some interest, which is then payable every month through dividends.
It is therefore a great investment option for people looking for passive income. Some forms of bonds are also tax-exempted, especially government grade bonds. Bonds are also very liquid and you can sell or purchase bonds easily on a daily basis.
Government Bonds Funds
Government bonds or US bonds are considered as the safest form of bonds because they are backed with the government’s full faith and credit. These funds are invested primarily to support the expenditures of the government and support both treasury securities and TIPS. Since it is backed by the government, defaulting on this investment is less likely. Government bonds typically do not provide the highest yield, but is one of the safest investment vehicles out there.
Municipal Bond Funds
Municipal bonds are appealing because they are mostly tax-free. These bonds are invested in municipal and state projects and also backed by the government. These bonds aim to protect your capital and give you some return when the bond reaches it maturity date. It is also important to note that municipal bonds generally carry fixed interest rate. Therefore, you will receive the agreed proceeds by maturity despite the movements in the market. You may not be able to enjoy a higher yield if the market conditions improve and rates increase.
Short Term Corporate Bonds Funds
Corporate bonds are issued by private corporations and are not backed by the US government; hence it is riskier than government and municipal bonds. These investments are often used by the corporation to cover business operation expenses, expansion, and modernization. But while the risks are higher in corporate bonds, they also provide better and higher gains. Corporate bonds are sold and purchased in $1,000 increments and the bond owner receives dividends regularly from the issuer or corporation. When the bond reaches its maturity, the bond owner may opt to reclaim his principal or reinvest. The biggest risk about corporate bonds is defaulting and bankruptcy which may result to losing your principal altogether.
TIPS (Treasury Inflation Protected Securities)
TIPS are forms of government bonds which are great investments if you’re looking for both growth and diversification. It is considered as a sound inflation hedge since the value of TIPS can rise and fall according to inflation and deflation. The principal on TIPS is influenced by consumer price index (CPI) while the interest is affected by current principal amount. TIPS earns you interest twice a year and CPI is applied year after year of your investment.
For instance, if you have $1,000 in TIPS investment with a fixed interest rate of 3%, you will receive two $30 payments within the first year. If CPI inflates to 4% the following year, you will have $1040 in principal and the interest is computed still at 3% but using this current principal. Therefore, if inflation increases year after year, you will also gain more in your TIPS investment annually.
Upon maturity, the investor will either receive the current principal or the original value, depending which one has the highest value.
TIPS are great options for investors looking for passive income. However, some considerations come into play. First, you need to understand that your principal as well as semi-annual payment can fall in periods of deflation. Also, it is a sensitive investment in a volatile market and employs federal taxes. On the other hand, TIPS are highly liquid and can easily be grasped even by beginner investors.
Real estate is a popular form of investment which includes buying and trading the physical property or simply trading with real estate stocks, dividend paying stocks, preferred stocks and mutual funds. If your plan is to generate profit from a physical real estate, you might want to consider rentals and real estate trading. However, if you’d like to take the complications out of owning a physical asset, consider investing in the following.
Acquiring stocks in real estate means buying the entirety or a portion of the stocks of the property in order generate ownership. With stocks, you get some control over how the property is managed along with other investors and you basically become a co-owner.
Dividend paying stocks
Dividend paying stocks provide regular dividend payouts which can be done monthly or quarterly. These investments compound a lot faster, so you are able to use your money right away or reinvest in other vehicles.
This type of real estate investments hovers between bonds and stocks. Preferred stocks basically pay fixed interests to investors which usually take the form of a dividend, but the interests are usually higher than that of bonds and stocks. Preferred stocks yield better than ordinary stocks and are highly reliable streams of income. However, the downside to preferred stocks is that they don’t appreciate as much.
Mutual funds work by trading real estate securities from a real estate company with investors. Mutual funds are a good way to enter the real estate market without the requirements of physical properties and high degree of risk from property ownership. These are highly liquid investments that you can sell at any point, but expect to have no or little influence over how the real estate is run and managed.
Futures are standardized contracts wherein you purchase commodities and other forms of financial instruments in today’s price, to be traded in a specific time in the future. One of the classic examples for investments catered with futures contract is oil. If you invest in oil futures, you’re basically buying oil from a supplier in a pre-determined price and the oil supply shall be delivered to you at the agreed dates regardless of the rise and fall of fuel prices in the market.
With this arrangement, one party is protecting its business by making sure to purchase the commodity at a certain price before it has the chance to increase, while another party makes a bulk sale at a set price before it has the chance to decrease. And in markets as volatile as oil, entering a futures contract is often the best bet in protecting your investment.
Futures provide protection to both parties by selling at a set price and in big batches. However, futures carry a bigger degree of risk than TIPS, treasury securities, bonds, real estate, and savings account. It is also important for participants of a futures contract to be more attentive on the rise and fall of the cost of their investments.
Commodity investment can be an essential part of your portfolio simply because we need commodities to survive day after day. And beyond the traditional investments on bonds and stocks, investing in commodity can promise you high returns along with possibly high losses. Still, many experts believe that one should invest in commodities prudently for diversification.
One of the most popular forms of commodity investment is through a futures market. Like in the example outlined above, investing in a futures contract means you’re buying commodity products for a set price to be supplied for a set period in the future.
One of the best advantages in investing in commodities and similarly in futures contract is that you only need to pay the minimum deposit to get the ball rolling. For instance, if you ordered X number of oil barrels for the next six months, instead of paying $XX,XXX, you only need to pay $X,XXX to be able to start the trade. With this setup, you will be able to start a commodity investment without paying the full price of the commodity upfront.
Investing in commodities can certainly provide lucrative returns, but it can also be risky for a new investor. This type of investment is also an excellent option to hedge against inflation as well as in diversifying your investment portfolio and if you’re on the right side of the trade, you can actually make significant profit from it.
Gold, silver, and platinum are the top precious metals that are often traded and invested in. They have diverse applications from jewelry, automotives and batteries to medicine that these are even treated as commodities. In fact, many people rely on gold on its stability against inflation and market volatility.
There are several ways to start investing in precious metals. You could begin with investing on stocks from a mining company or trade with ETFs (exchange traded funds) and ETNS (exchange traded notes). You may also trade precious metals with futures contracts, bullions, and certificates or even as a form of jewelry.
Precious metals can help diversify your investment portfolio because they are different from the conventional stocks and bonds. These are limited physical commodities and their value, especially gold, ramps up when the economy weakens.
However, trading and investing precious metals is not for everyone. Precious metals have become volatile over the years and it is not recommended to start your investment portfolio with them. Putting in precious metals into the mix if you already have a huge and diverse portfolio will help stabilize their volatility. In any case, it is important to study the market for precious metals deeply before jumping in.
Annuities are investment items offered by an insurance company. There are four kinds of annuities – immediate, fixed, variable and equity indexed. Generally speaking, annuities allow you to invest money then regain money on a specified time. You may be able to regain your investment from annuities with one lump sum or opt to be paid into smaller portions monthly. Annuities are common investments for retirement although you need to extensively research your options since annuities are generally tied with higher expense.
Investing is never risk-proof and all investment vehicles come with some degree of risks. However, if you can’t tolerate high amounts of risks or still learning the ropes of investing, you can pick one or some of the safe investment types mentioned here. Diversifying your investment portfolio is also a good way to produce multiple streams of passive income and protect your finances in turbulent market conditions.
For instance, your TIPS investments may not be performing as well as you’d hope because of deflation, but your CDs can still provide you with liquid assets that grows, albeit nominally yet steadily. In the classic comparison of not putting your eggs in just one basket, it is indeed important to diversify whenever you can..
Frugal people also know that any excess from their finances should be invested to keep the ball rolling. Time and compounding interest may help your investment grow, but contributing to them regularly simply quickens the growth process.
The most important thing when it comes to your finances is to empower yourself with knowledge by doing your due diligence. This way, you will understand how your money moves in the investment vehicle, how it is affected by the prevailing market conditions and how you can mitigate risks in order to acquire more security.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.