What’s the safest thing I can do with my money?

What's the safest possible thing that I can do with my money?” wonders Afroblanco over at Ask Metafilter:

I take bearishness to an extreme. Having witnessed the 2000 tech crash, I have no faith in the stock market or the US economy. I keep all of my money (USD) in a savings account. However, with the recent financial turmoil, I have a few questions:

  1. Is it conceivable for the FDIC to fail?
  2. If so, is there a place where I can put my money that will be safer than a savings account?
  3. What's the safest, most risk-free way for me to save money and not get killed by inflation and the tanking US dollar?
  4. If there is a safe way for me to save money and not be punished by inflation and the depreciating dollar, is there a way that I can do this without having to stress out and micromanage my finances? I don't want to be checking the finance page and making adjustments every day.

Even though I follow finance news, I've never done any investing or money management other than socking money away in my savings account. I'm a n00b, I admit it.

Afroblanco is willing to forego potential market gains so long as he does not lose money. He is risk-averse. He's not alone. A rocky economy makes many people nervous. You can assess your risk tolerance with one of several online tools:

If your risk tolerance is low, then the stock market may not be right for you. You should consider less volatile investments until you've researched the market's historical performance. In response to Afroblanco's question, AskMetafilter member Pastabagel wrote:

The best thing you can do with your money is invest it in yourself of your children, if you have any. Go to school, get new training, start a business, etc. After that, the next best thing to do with it is to eliminate your debt (excluding mortgage). Typically people have formulae for determining how much savings you should spend to pay down debt, but I think you'd be a happier person if you just eliminated all credit card debt, car payments, etc. you have outstanding.

Barring those things, here's the basic story:

Your money in a savings account is insured up to $100,000, but earns little interest and may actually result in your losing money to inflation. Certificates of Deposit pay more, but you can't touch your money for the duration of the CD.

Bonds are safe, but you have to know which ones to buy, what to watch for, etc. And bonds fluctuate in price.

The rule-of-thumb is that the more interest, or yield, something offers, the more risk is involved. Interest is essentially what is exchanged for you risking your money. Also, low-risk equals low-reward. But you sound like you want something extremely safe, so I'm not going to preach to you about the S&P 500's long-term performance.

Gold and commodities are not so good, because while a two-year chart looks great now, a two-year chart two years from now might look like a nightmare. Gold lost $100/ounce since Monday — about 10%. Did anybody call that? So not exactly a rock solid investment.

You want safe, here is safe:

What you really want is some kind of short-term bond mutual fund (the “short-term” refers to the kind of bonds it holds). Mutual funds are great because you can put in and take out your money whenever you want, unlike bonds and CDs. I would recommend VFSTX from Vanguard. It has a decent yield (which is sort of like interest) and also can appreciate in value. This particular fund has had one down year in the last 24 years, and that year it was only down 0.08%.

In the alternative, you can get a fund that invests in inflation-protected treasuries (TIPS), like VIPSX from Vanguard.

These two funds are very much buy-and-forget. You talk about the economic turmoil, VFSTX fluctuated less than 1% from October to January (when the shit really hit the fan) and VIPSX fluctuated by no more than about 4%. They are very very safe, but won't appreciate much, but it sounds like that would be okay for you. Keep in mind that these funds also pay you interest along the way, which is typically reinvested, so the charts you see on Yahoo!, which track price only, don't show you the full story.

When you pick a mutual fund, however, you need to be very careful because different fund companies fund often charge expenses, loads and fees, which are basically ways for the fund company to take your money out of your investment. Vanguard has built its entire company and every one of the hundreds of funds they manage on the principle of no-load, and rock-bottom expense ratios. All of the money I cannot afford to lose for the rest of my life I keep there. This is not a slick Wall Street operation — Vanguard will collapse when the world ends, not a moment sooner.

The people who started and who ran that company are very old-school personalities — they personally live frugally, invest very conservatively, and their business model is based on lifetime relationships with their investors, not on clever financial wizardry. You don't see Vanguard people on TV as much as Warren Buffet because these people aren't the type to have publicists. This is the place where your crusty great-grandfather who grew up in the Depression would keep his money. Slow and temperate. They also offer very low-cost financial advisory services, which you might need if/when you ever get married, have kids, etc and don't feel like trying to figure out how to buy life insurance.

On a psychological note, though, I would encourage you to read The Millionaire Next Door. The book is not really about personal finance, though it does discuss it a little. What the book will do is reset your social attitudes about money and wealth, and how wealth is accumulated.

These recommendations are appropriate for somebody who is very conservative and risk-averse. If you're more worried about losing money than eager to gain it, then consider these tips. Via e-mail, Pastabagel suggested that those with slightly more risk tolerance should consider a total-market index fund (such as VTSMX) as part of an IRA.

Pastabagel also notes — correctly — that it's difficult to answer a question like, “How should I invest?” The answer depends more on psychology than finance. “The only answer,” he writes, “is to take as much risk as you can stand before you start losing sleep over it.”

More about...Psychology, Investing

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