Are there any safe investments?

Woman seated on a hill above the city

Do safe investments exist?

The short answer is no because every investment involves some level of risk, which means it can lose value. But the relative risk of investments varies widely. Some investments are inherently more risky than others, like betting an individual stock on a certain day will go up or down — risky. Compare that to FDIC-insured (and NCUA-insured, the National Credit Union Administration) deposit accounts like money-market accounts, savings accounts and certificates of deposit. You would be insured against a loss of principal up to $250,000. Of course, in exchange for all that safety, you get lower returns, often less than 1%.

Given that inflation will eat up that 1% over time, most people want to find the sweet spot between risk and reward. So how can you get your money to grow (hopefully more than the cost of inflation) without exposing yourself to a level of risk you are not comfortable with?

Related >> What is the level of inflation in the U.S.?

Safe Investment Options

A friend recently told me she was about to receive an unexpected inheritance. Naturally, I asked if she was going to invest it. Her surprising response: “No, I don't want to lose it all.”

She's not the only one to react like that to the word “investing.” Many shy away from investing because they're afraid of “losing it.”

Asked why they think they'll “lose it,” some say investing is too complicated or tricky. Others say Wall Street is a rigged casino; individuals don't stand a chance.

Don't misunderstand, caution is a good thing. Warren Buffett's first rule of investing is: don't lose it. His second rule? See rule No. 1. Avoiding undue risk, therefore, is good.

This may come as a surprise to some, but the stock market is not the only thing to invest in. In fact, stocks are not even the most popular investments.

Here's a list of some lower-risk investments:

  • High-yield savings accounts and money market accounts
  • CDs (certificates of deposit)
  • Treasury securities such as “t-bills” which are backed by the U.S. government (Learn more at TreasuryDirect, the government website)
  • Money market funds — not the same as a money market account and not a mutual fund. It's a fund that invests in government and other short-term securities. It is considered lower risk but it's not entirely without risk.

Safe Investments With High Returns

Again, there are no truly risk-free investments with high returns, but if you are willing to exchange some risk for higher returns, one answer is to invest in an index fund, a type of mutual fund. Index funds are a hands-off type of investment designed to track the market as a whole, such as the Standard & Poor's 500 index.

You may also hear index funds called “passive” investments. You don't need a financial adviser or a stock broker to manage your money once its in an index fund. Index funds are also low-fee.

Other avenues of investment (not low-risk)

  • Bonds
  • Real estate
  • Stocks (equities)
  • Commodities
  • Futures
  • Options
  • Precious metals
  • ETFs (Exchange Traded Funds)
  • Mutual funds investing in any or all of the above
  • Private businesses

Related >> How to start investing in stocks

So… what's the most popular investment worldwide?

The answer, which might surprise you, is bonds. And it's not even close. Far and away more money is invested in bonds than in any other investment category.

Who invests in bonds? Insurance companies, pension funds and university endowments, as well as foreign governments, like Japan and China. In other words, the elephants of the investment world prefer bonds.

Also, the investment portfolios of the uber-rich are dominated not by stocks but by bonds. If you're seriously rich, it would appear, you invest in bonds. (So that's why I've never owned bonds! Now I know.)

Why Bonds?

What's so special about bonds? Two things:

  • the return never changes (predictability)
  • the principal always gets repaid (safety)

Hard to find fault with that.

What are bonds? Simply put, bonds are IOUs, typically for $1,000, carrying a fixed interest amount, and a set maturity date at which the full $1,000 gets repaid.

Who issues these bonds? National and local governments, for starters, but large corporations also issue bonds.

The reason bonds work is because so many big investors crave the safety and predictability they offer.

Why Not Bonds?

If bonds are so perfect, why aren't you and I fully invested in them? One reason might be their absence from media headlines because, well, they're boring (and we know how the media feels about boring). Many individuals therefore have simply never considered bonds.

Then there's the return: 2 percent annually on a 10-year U.S. Treasury bond these days. Does that excite you? It may beat a savings account, but your money's tied up for 10 years.

There's another reason some investors avoid bonds. Unless you hold your bonds to maturity, you can lose money. Bonds, you see, are freely traded, just like stocks. Open your newspaper to the pages where they list stocks. You'll probably find a listing for the most commonly traded bonds as well. It's a long lesson to explain, but bond prices on the open market go up and down, depending on interest rate movements. So it's possible for you to buy a bond for $1,000 and only get $900 when you sell it on the open market. (You also could get $1,100 for it.) If you keep it till maturity you'll get your $1,000 back intact, but the volatility in open market bond prices adds an element of risk if you sell earlier.

The biggest reason people avoid bonds, though, is the low yield. Yes, we like safety — who doesn't? But 2 percent? Come on, man!

Are higher returns possible? Yes, but those come with higher risks.

Reducing Risk

Yes, there is a chance the sky will fall tomorrow. There's also a chance you'll get fired, get killed by a runaway truck or eat contaminated food. “There's a chance” doesn't stop you from working, driving or eating, though.

Why? Because there's a world of difference between a chance (risk) and a certainty. You assess your risks daily and find ways to reduce or avoid them.

Same with investing. You can get higher returns than on super-safe bonds, and many people do. The key, as with the food you buy or your driving, is understanding the risks and doing something to reduce them.

How do you reduce your investing risk? The same as with your other risks: you start with knowledge. The more you know, the more comfortable you get making good decisions.

The important thing to know is you have a wide choice of investment types. On one end of the spectrum are super-safe investments with low returns. On the other end are riskier but higher-yielding alternatives. Somewhere on that spectrum there's a good fit for you.

The secret to success as you creep up the risk/reward scale is knowledge. The more you know, the better you can discern which risks to take and which to avoid.

Investing is not rocket science. If it was, millions wouldn't be doing it successfully every day. Granted, it's not picking up trash either, so there is some knowledge to be learned.

Learning is the key. It's the best remedy for the fear of the unknown.

The good news is the Internet is full of free knowledge on just about any topic. Furthermore, you can learn now, even if you don't have money ready to invest. In fact, learning before you invest is best.

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Erin @ Politely Vegan
Erin @ Politely Vegan
7 years ago

We like large cap stocks that have at least a 10-year history of paying consistently increasing dividends. It’s our way of getting exposure to the potentially higher returns that stocks offer, while also enjoying the consistent drip of divident income, even when stock values decline. We’re still exposed to risk, but dividends mitigate some of that risk for us.

Jarrod
Jarrod
7 years ago

I would think that the main reason that “the rich” invest heavily in bonds is that they have such a large investment that the low rate of return (as a percentage of investment) still provides a high absolute return (in number of dollars). They don’t need to grow so much in order to live off of investments – the little guy does. A 2% annual return won’t cut it, no matter how safe it is (and with an increasing number of cities declaring bankruptcy, who knows how long the safety will last?). But with that said, there’s certainly a place… Read more »

Stephen
Stephen
7 years ago

Bonds are *NOT* risk free and aren’t always repaid. Especially true with corporate bonds. Many well known events where investors have gotten cents in the dollar back.

Malcom
Malcom
7 years ago
Reply to  Stephen

Government bonds especially from smaller cities are municipalities are not safe. Cities and municipalties can are are going bankrupt. Bond holders don’t get paid when this happens.

Marsha
Marsha
7 years ago
Reply to  Stephen

When my husband and I started to invest some years ago, he (a low-risk person) wanted to invest most of our savings in a highly-rated bond. I convinced him that since we were young and had time on our side, we should put our money in stock funds where it had more potential to grow. A year later, we heard that the bond issuer defaulted, and investors only got a portion of their investment back. We were glad that we had chosen the higher-risk investment.

scoche
scoche
7 years ago
Reply to  Stephen

Individual Bonds Fixed Return Yes… Bond Funds NO!

Just how different are individual bonds from bond funds? “While the value of an individual bond may fluctuate based on changes in interest rates, the bond holder is guaranteed to receive the return of his principal if he holds the bond until maturity. Bond funds, on the other hand, cannot guarantee the return of the investor’s principal, as there is no ‘maturity’ as such and prices can fluctuate based on interest rates and other issues regarding the quality of the bond,’

simon
simon
5 years ago
Reply to  scoche

I agree

Ross Williams
Ross Williams
7 years ago

We do have some investments in bonds, but it is in bond index funds. Those are not really the same thing, since they neither provide a fixed interest rate nor promise a return of your principal. Most of our bond holdings are in a balanced index fund which has a 60-40 stock to bond split. “What’s so special about bonds? Two things: the return never changes (predictability) the principal always gets repaid (safety)” That is the promise but it isn’t the reality. Companies, even countries, can and do default on bonds. US Treasury Bonds are probably the most secure investment… Read more »

Wayne
Wayne
7 years ago
Reply to  Ross Williams

Reply was better advice than the original article.

Kerry
Kerry
6 years ago
Reply to  Ross Williams

A brilliant analysis, Ross – and so early in the morning! Thank you!

Tom L
Tom L
7 years ago

The article is missing at least three things, and comes across as pretty shallow without addressing them. First, as others mentioned, bonds are not 100% safe. If you “believe” the US government will never fail, you might consider government bonds to be safe, but empires have been known to fall, and some corporate empires may even be viewed as more secure… Second, it was fairly weak on the “high risk bonds” topic. Which types of bonds are high risk, and what makes them risky? Finally, 2% growth currently means an overall LOSS in value, at the current rate of inflation.… Read more »

Mark ferguson
Mark ferguson
7 years ago

My choice is real estate. I am getting 24% cash in cash return and my models are based on cash flow not appreciation. If you buy right real estate is a very low risk investment with incredible returns.

monsterzero
monsterzero
7 years ago

My portfolio (it feels weird having a “portfolio”) breaks down to 25% bonds, 36% stocks, 8% CDs, and 31% in savings. About $36K total.

Heidi Bushnel
Heidi Bushnel
7 years ago
Reply to  monsterzero

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William
William
7 years ago

Like Ross says, nothing is TOTALLY risk-free, not even crossing a street. Safe, therefore, is always a relative term. Why do millions invest trillions in bonds? They regard bonds as safer than stocks. Their view, not ours. Personally, I’m with Tom L, but that’s because stocks fit my risk tolerance. All I’m saying is there are investments out there with lower risk of principal loss for those with a lower risk tolerance. And if bonds are too unsafe, is there a safer investment? Tell us. Bottom line: anything to do with our future has some element of uncertainty. There is… Read more »

JB
JB
7 years ago

The author makes several good points. However, it is important to note the spectrum of bond ratings and the resulting implications on the probability of default (translation that you won’t get paid back). Higher rated bonds will typically pay lower returns but are generally safer. Junk bonds are more speculative but can see returns in line with or higher than stocks. Fundamental principles of diversification absolutely apply to the bond market as with any investment strategy. A good strategy will differ based on risk tolerance and investment time horizon, but generally speaking bonds make sense for most people to have… Read more »

mike
mike
7 years ago

There differences between funds and actual bonds. Obviously funds are diversified and the price fluctuates and you can lose money if interest rates go up, whereas with a coupon you get the interest IF you hold till maturity and get your principal but it doesn’t diversify you unless you have a lot of different individual bonds. Knowing that: I choose to go with funds and vanguard, due to the low fees. Keep them in retirement funds in order to minimize taxes. I currently hold: High Yield Fund TIPS FUND Short term fund Total Bond Market fund PA Muni Fund (in… Read more »

Matt Becker
Matt Becker
7 years ago
Reply to  mike

The concept of buying at the bottom of a bear market and selling at the top of a bull market sounds great, but it’s impossible to do with any consistency. There isn’t a single example of someone who has successfully built wealth on the back of market timing. And given that you can’t time the market, it’s important to remember that it’s worse to be out during a market rally than in during a decline (if you assume that it will give you positive returns in the long run). If you’re young, the most important thing you can do is… Read more »

rjack (Mr. Asset Allocation)
rjack (Mr. Asset Allocation)
7 years ago

If you want to invest wisely, then you need a solid asset allocation strategy. You can actually improve returns and reduce portfolio risk if you add say 10% in stock to a mostly bond portfolio.

In any case, I wouldn’t recommend a 100% bond asset allocation. My current portfolio is 60% bonds and 40% stock, but I’m retired. I would have more of a stock allocation if I were younger.

Mario
Mario
7 years ago

@Tom, you mention that “some corporate empires are even more secure [than the US].” Which ones are these? More importantly, could I send you CDs from these corporations in exchange for similar yield/principal Treasury bonds?

Jenny @ Frugal Guru Guide
Jenny @ Frugal Guru Guide
7 years ago

There are no fully “safe” investments. Stuffing your money down a hole? Let’s pretend for a moment that nothing can physically happen to it, and it will still be devalued by interest even if things go well, and if they go badly, it’s possible for the entire government behind them to collapse, leaving them worthless. Gold? Sure, it’s up now, but gold was a terrible investment for most of the 20th century. Real estate? Yeah, tell that to homeowners in Detroit. Bonds paying about the same as inflation now aren’t “safe,” and neither are stocks, of course. The fact is… Read more »

My Financial Independence Journey
My Financial Independence Journey
7 years ago

There are no truly safe investments. Even cash gets wrecked by inflation. The more safety you are willing to give up, the more reward you can get. It’s up to you as an investor to determine how much of your portfolio you want in each style of investment.

Alex
Alex
7 years ago

I love bonds, especially municipal bonds since they are tax free. I think the safe investments are investing in things that are almost recession proof. Now the investments are not risk free, but they are more stable than just throwing money into other stocks. I think the best investments are into things that people will still buy even though prices go up. People might grumble at the price, but they will still but it. For example, if the price of toothpaste went up are people all of the sudden going to just stop brushing their teeth? Probably not. This is… Read more »

BrentABQ
BrentABQ
7 years ago
Reply to  Alex

Even these investments are not risk-free. Cities, utilities, and stable institutions have the possibility of failing. Its just less risky than many alternatives.

Peggy
Peggy
7 years ago

Well, as a Christian I also have the option of “putting treasure in heaven” by giving it to the needy, which in turn makes Providential and social resources available to me when I need them. See Luke 12 and Ecclesiastes 11.

Lincoln
Lincoln
7 years ago

This was a bad article. Bonds never default? Who proofread this article? Cyprus and Greece are on the phone — they would like to sell you some bonds.

Ely
Ely
7 years ago

I have a little money in bonds, but really, given my time frame and the crappy condition of the bond market, there’s no point in buying them now.
Yeah, they’re not 100% safe, nothing is 100% safe and no one gets out of life alive. Investing still remains the best way for people of middling means to look after their futures. I hope I have enough one day to stick all my money in bonds and not worry about returns.

BrentABQ
BrentABQ
7 years ago

When looking at risk we should look at it not from our starting point, but from our reasonable goal. What are the chances that I won’t reach my goal? If you invest all in 2% bonds and need an average of 5% return to reach your goal your odds are 100% failure. If you invest 100% in stocks aiming for 5% growth in 5 years you still have a pretty high chance of failure. If you have a mix of stocks and bonds your chances of reaching the goal are even higher than either combined. There is a sweet spot… Read more »

Kevin
Kevin
7 years ago

US Savings Bonds are an extremely safe place to place cash and beat inflation. Sure it won’t make as much money as the stock market in the long term but for the average person trying to save some money they are awesome. Way better than a savings account or a CD. The only way you’d lose money is if the US government basically dissolved and I think if that happened you’d have other things to worry about. Also, the article incorrectly states that the funds in savings bonds are not available for the first 10 years. This is incorrect information.… Read more »

Darnell Jackson
Darnell Jackson
7 years ago

Yes gold and silver.

There are no safe TRADES but gold and silver will always be safe investments.

People get fooled generation after the next by the oldest trick in the book.

There’s nothing new under the sun.

Gold and silver are up hundreds of percent in the last decade.

Invest for the long term don’t be a sucker.
buy now why it’s down.

Kate P
Kate P
4 years ago

Well, I hope you didn’t follow your own advice! Gold has floated more or less steadily downward since 2001/ 2012. We are just now seeing it back at late 2009/ early 2010 levels.

Gold is a commodity and like other commodities, the market for it is speculative.

Ross Williams
Ross Williams
7 years ago

“Gold and silver are up hundreds of percent in the last decade.”

Unfortunately not over the last three decades. The price of gold was $850 in 1980, it was at $264 in 2001. Gold has never again reached its early 1980’s levels adjusted for inflation, despite the current speculative bubble. Which appears to be in the process of popping right now.

Robert Jacobs
Robert Jacobs
7 years ago

I use to be a big fan of bonds (or bond funds). However, interest rates are so low and they have only one way to go and that’s up. Currently, most decent yielding bonds funds are no less volatile then growth stock mutual funds. Since I still have a long term investment horizon (20 to 25 years), I will avoid bonds for now.

Zach @ Dividend Ladder
Zach @ Dividend Ladder
7 years ago

I’m a pure dividend investor so naturally I prefer dividend stocks. Bonds have their advantages but its hard to argue against the liquidity of stocks that pay higher yields than treasury rates. I focus on companies that have 10-20+ years of consecutive dividend increases. These kinds of investments drive total return way above bond returns.

Investoroff
Investoroff
6 years ago

On my opinion you could afford to invest some part of your money in more profitable instruments such Forex (pamm account) or binary options. I’ve started from Forex? and could share some results.

Stephen in Florida
Stephen in Florida
6 years ago

Hello, I just wanted to say thanks for sharing this thought provoking article. I would also like to say that this would support formulating a concrete exit strategy prior to closing on any new investment deal. It’s something that I am sure most overlook, and it could really be helpful in tight situations.

Peggy in Vermont
Peggy in Vermont
6 years ago

Long term treasuries (Vanguard Long-Term Treasury Fund Admiral Shares)are the worst investment I ever made. Lost $25K last year. Wish I’d stuck to Money Market or stock.

TinMan
TinMan
6 years ago

Thereby demonstrating the CRITICAL difference between bonds and bond funds.

Cowpoke
Cowpoke
3 years ago

Are you still in that fund? Looks like it went back up and back down over the last 3 years

Real Estate Investing System
Real Estate Investing System
5 years ago

Offcourse, there are a lot of safe ways avaialble for investing in the real estate. Like, You could get trained by real estate experts and they will suggest you, Where and when you should invest in and get profit from real estate?

Good Luck!!!

wayne
wayne
5 years ago

one thing you should never do when investing is put all your money in all at once, so you can change things in your investment down the road because you have money left over.another thing i hear about is someone taking all there money including savings and investing it.all your money should never go towards investments because if you lose most or all of your money it’s part your fault even if you blame everyone else.One example is one guy that won the lottery he didn’t want to be like the other lottery winners that are broke in 5 years.so… Read more »

Vasile
Vasile
4 years ago

How does one invest in private Real Estate Partnerships/Management firms?

Looking for a “guaranteed” annual returns of 5%, on investments of $120,000 and with a time frame of 3 to 5 year, if such beast exists.

Thank you.

Kate P
Kate P
4 years ago
Reply to  Vasile

Yes, there are real estate investments that pay 7-10% annually per year (with monthly payments), some with additional upside potential (for accredited investors). These investments are contracted, not speculative and range from one-year contracts to private equity funds with a 5-year time frame. You’ll never hear about these from a typical broker or financial advisor.

Kate P
Kate P
4 years ago

In an article about “safe” investments, its curious to me that high cash value participating (dividend-paying) whole life insurance was snubbed. Held long-term (more than 10 years), the cash value portion alone starts to outperform the returns of savings accounts and CDs. And insurance companies are not leveraged like banks are, which makes them safer!

Policies are not classified as “investments,” but when you consider that the growth is not taxed and that there is an additional death benefit, they easily beat any other non-speculative safe money investment over time.

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