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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KC
KC
12 years ago

If the FDIC fails (and anything is conceivable) then we are all in a heep of trouble and our money might be the least of our concerns. But the more likely scenario is that a particular bank would fail and the FDIC would bail you out – it might take up to 5 years to get the full 100% of what you had in the failed bank from the FDIC. They tend to pay in increments, rather than a lump sum payment – you might get 60% the first year and so on. So keep that in mind. Your best… Read more »

Tim
Tim
12 years ago

Along these same lines – I was just in the Caymans for a couple weeks and started thinking. The USD to KYD exchange rate is pretty static. With all of the nightmare scenarios and prognostications on the possible collapse of our economy and our currency, would it be prudent to put some “emergency” (six month living expenses for loss of job, etc) in a Cayman account converted to KYD? Assuming that the USD fails, the exchange rate would only swing to my advantage. Assuming the USD doesn’t fail, the exchange rate seems to have been fairly static over the last… Read more »

Ross Williams
Ross Williams
12 years ago

Warning, bond funds and bonds are not the same thing. Depending on what happens with interest rates the value of the bonds in a bond fund can go up or down. If you buy a bond and hold it to maturity you know exactly what your return will be. If you buy US Treasury bonds you have the full faith of the US Government behind them. You can buy treasury bonds directly from the US government so there are no fees. That said, whatever you invest in the interest rate needs to be high enough to keep up with inflation.… Read more »

Wesley
Wesley
12 years ago

An excellent article. I consider myself bearish, and have been curious about Vanguard since JD mentioned something about their founder (John Bogle?) a few posts back. I watched an interview with the guy and saw him on CNBC a few times, and he does indeed seem extremely conservative. Vanguard’s a non-profit, which is interesting to some degree.

Again, great article…you read my mind 🙂

JerichoHill
JerichoHill
12 years ago

The safest investments lose money because they dont keep up with inflation. Doesn’t seem very safe.

fortune favors the bold

JACK
JACK
12 years ago

Of course the FDIC will fail if the system is hit bad. It doesn’t have the assets to truly cover massive claims. But that’s the nature of our banking system these days. When demand deposits are permitted to be loaned out despite the supposed right of the depositor to demand all those funds at anytime, you have an inherently unstable system. (And of course profitable one for banks as they get to pretend like they have more assets than they do.) Now if you think for a second that the risk inherent in the advantages banks gain under a fractional… Read more »

Rick Francis
Rick Francis
12 years ago

I can understand your caution about the stock markets right now. It’s not easy to see big drops in a few months. That’s part of the nature of the stock market though. You can limit your volatility by putting some money in bonds and some in stocks. When buying stocks you can use a strategy called dollar cost averaging. When you buy small amounts of stock at a time say each month, your risks of paying too much for stocks are greatly diminished. Also, do you believe all businesses in the world are going to do diminish and eventually fail… Read more »

Kym
Kym
12 years ago

Just wanted to point out something that the answer on AskMetafilter mentioned: “Bonds are safe, but you have to know which ones to buy, what to watch for, etc.” Bonds are not safe, you’re buying the debt of a company that *could* fail. If it did, it would default on your bond (meaning they would not pay you the interest *or* your principal). You rank higher than stockholders when liquidation time comes for the company, but the likelihood of getting back all your principal is slim.

Greg
Greg
12 years ago

Uhm, JD, I’m a little worried about you exposing yourself to copyright problems like this… to be honest, I know nothing about what is and isn’t OK in terms of copy-and-paste blog posts, but that’s an awfully long quote. I suspect you should be just posting portions of the quotes and discussing your thoughts on it, and including a link to the original if someone wants to read more. I really like your blog and have been subscribing for almost a year now, I’d hate to see you get in trouble for posting entire quotes like this. I appreciate the… Read more »

Jesse
Jesse
12 years ago

Im surprised at the amount of risk aversion around these days: I cant believe confidence is really that low. Im not talking all money in stocks, but people all over the place pulling out for bonds…unless you are near retirement, it seems to be a waste of potential to me.

Funny about Money
Funny about Money
12 years ago

Argh. Even at that length, those quotations constitute fair use. They’re fully acknowledged, no song lyrics or poems are involved (you can quote only a line or two of those), and the purpose of the quotation is to build a scholarly or creative work. So, exit that worry… And on to OMG, will the FDIC fail? There’s a thought to bring on hyperventilation! It surpasses worrying about: if that happens, we’ll all have lots bigger problems than figuring out where our savings went. And if you seriously believe it’s going to happen, then it would be wise to build an… Read more »

J.D.
J.D.
12 years ago

Greg wrote: Uhm, JD, I’m a little worried about you exposing yourself to copyright problems like this… to be honest, I know nothing about what is and isn’t OK in terms of copy-and-paste blog posts, but that’s an awfully long quote. I appreciate the concern. It’s a valid one! I’ve been doing my best to abide by copyright laws lately, and this is another instance of doing so. I cleared this usage both with Matt Haughey (who runs Metafilter, and who reads GRS), and with Pastabagel (who also reads GRS). They gave their approval. On another note: though the current… Read more »

JenK
JenK
12 years ago

Eric Tyson’s Investing for Dummies suggests low-fee short-term bond index funds, such as Vanguard’s, for money you need in the next 5 to 10 years – if you’re feeling risky. Or a low-fee Money Market account if you’re not. Our emergency fund is split between our credit union’s savings account (eg easiest place to transfer from checking), Vanguard’s Money Market, and Vanguard’s short-term bond index fund. We also use some more aggressive Vanguard funds for retirement: Balanced Index Fund (60% stocks, 40% bonds), a small-cap fund, an international fund, and a tax-managed large-cap fund. Note this is long-term investing: we… Read more »

Kellie
Kellie
12 years ago

Am I right in thinking that if the FDIC fails then paper money won’t be worth what it’s printed on anyways? That kind of leads to buying precious metals and waiting for the apocalypse to strike, but still….

elisabeth
elisabeth
12 years ago

I know that real wisdom says you need to be taking care of your investments, but I wonder if the “invest it and forget it” approach might not be useful for the anxious. My husband is VERY risk averse, so all of “his” money is in fully-insured CDs (when he hits 100,000 on one he goes to another bank…). BUT he’s also getting rich slowly because he has never really believed in the money in his retirement account — it’s taken out of his paycheck automatically and invested in a stock fund and an annuity (TIAA-Cref) that he signed up… Read more »

Debbie M
Debbie M
12 years ago

Here are some more ideas: 1) I-bonds – you are guaranteed a tiny percentage above inflation. Of course the guarantee is by the government. 2) Annuities – I hate these because the fees are so huge. But you might want to look into these, too. 3) 401K with company matching – all that extra free money can cover a lot of high fees and market plummeting. 4) Diversify – Get some government bonds, some municipal bonds, some company bonds, some CDs, some savings accounts, some money in your mattress/safety deposit box. Then if one bank fails or or one house… Read more »

The Weakonomist
The Weakonomist
12 years ago

Gold, plain and simple. Gold was currency before there was currency. For you to lose the money in a savings account, our entire economy would have to collapse, including the government. That being said, if our economy pulls an inverse flip and our money is worthless, your skills will be more valuable. Use your savings to gain some skills that would be valuable in a barter society. Given that option, I’ll take my chances in the stock market. If the world comes to an end, I’ve got my Eagle Scout skills to rely on. Bonus: Get some bow-and-arrow lessons. I’ll… Read more »

escapee
escapee
12 years ago

OK, you guys are scaring me!

rstlne
rstlne
12 years ago

Most people have the wrong idea about gold. You don’t buy gold to make 10% or 20% or whatever. You buy gold bullion as insurance against a total collapse of the financial system. In other words, it’s more like a concrete bunker and canned food type of investment than a stock type of investment. If you’re looking for short-term returns from gold, you’re likely to be disappointed because it is a volatile commodity. Its long-term trend, however, is clear. That said, I did expect a correction in gold. I suspected that would happen since late January when all the ducks… Read more »

Stevelle
Stevelle
12 years ago

ACK!

TIPS is terribly tax INEFFICIENT. You pay tax on inflation as well as your yield premium (if any). Ouchies.

I am all for the general advice, but note that TIPS and TIPS Funds (like VIPSX) should be held in a tax-advantaged account like an IRA, 401k, etc.

Maria @ WAHM Blog
Maria @ WAHM Blog
12 years ago

We invested in silver as a hedge against inflation, and so far it’s held steady. As the dollar decreases, silver retains the buying power lost by cash. Fiat currency is doomed, so I would advise against keeping money in the bank long term. Put much of it into silver (gold is very high), which is at historic lows compared to gold, and will soon be driven up in price by huge demands.

Hildy Richelson
Hildy Richelson
12 years ago

The old saw is that if you don’t take risks then you will not have enough for retirement. Everyone is risk adverse when the market is going down and risk immune if all you can see is the upside. If you don’t loose your money, then you don’t have to take as much risk. In fact, what is often overlooked is the power of compound interest. You can get some idea of the magnificance of this idea if you divide an interest rate into the number 72. If you could make 7 percent interest, then your money would double in… Read more »

trb
trb
12 years ago

I think everyone here has missed the best hedge against financial collapse, which is arable land with clean water. If Afroblanco can picture the sky falling, he should scout out a few acres of land that has a well, a woodlot, and soil to till. Invest future gains in fruit trees, berry bushes, and solar panels for the house, then into chickens and a cow. Eventually the lifestyle will be completely self sustaining and impervious to financial markets, good or bad. There are a ton of people out there who are doing this as a hedge against $200/barrel oil, which… Read more »

Shirley
Shirley
12 years ago

Oh, boy, we would have a tiny fraction of our savings and retirement funds if we had kept all of our money in savings accounts over the years. There’s a psychology of fear thing going on there. You manage your funds among different levels of risk throughout your life and change them as needed. We recently moved some of our money to lower risk areas, but certainly not all of it. While we certainly need to heed concerns regarding the U.S. economy, we don’t need to let ourselves become terrified and start acting hastily out of fear. If you have… Read more »

Greg
Greg
12 years ago

I just started reading this blog this weekend and greatly enjoy it. This article does a great job of laying out the risk of such a conservative investment approach: http://www.efficientmarket.ca/article/Stocks-Or-Bonds Because I am a very cautious investor and like most people worried about the market, I conducted a bunch of research lately (the same thing I do every time I fly to convince myself it is safe). And, from my research it seems that the safest portfolio falls somewhere around 50/50 stocks and bonds – with 60/40 maybe being the ideal (which interestingly enough – is the mix in the… Read more »

Walter
Walter
12 years ago

Precious metals are always a good hedge against inflation, as rstlne stated so well. It’s for the long haul as the dollar loses value. Just remember that once upon a time, a $20 gold piece was equal to $20 bill. Now that $20 gold piece is worth in excess of $900. How much is that $20 bill worth? In the past few years, we’ve seen it’s buying power diminish. Look to invest 5-10% of your assets in precious metals. If you invest in paper, just get a good diversification. Set a percentage value on each asset type (stocks, bonds, cash… Read more »

Mira
Mira
12 years ago

This post has gone completely over my head 🙁 I think I’ll keep my money under my mattress.

GBlogger
GBlogger
12 years ago

I love it — you’re a tease: “As an upcoming post will demonstrate, I’m willing to take unnecessary risks.” Looking forward to the post.

Hildy Richelson
Hildy Richelson
12 years ago

The old saw is that if you don’t take risks then you will not have enough for retirement. Everyone is risk adverse when the market is going down and risk immune if all you can see is the upside. If you don’t loose your money, then you don’t have to take as much risk. In fact, what is often overlooked is the power of compound interest. You can get some idea of the magnificance of this idea if you divide an interest rate into the number 72. If you could make 7 percent interest, then your money would double in… Read more »

Daniel
Daniel
12 years ago

@Tim (#2): The Cayman Dollar has a fixed exchange rate to the US Dollar: 1 KY$ = 1.2 USD. See the WIkipedia page on the Cayman dollar. @rstlne (#19): Gold isn’t necessarily useful. You can look at what happened in New Orleans in the aftermath of Katrina to see what happens in a failed economy: barter and basic supplies go far, and gold isn’t very useful. @Afroblanco: It really depends on your definition of “safe.” A CD might be considered “safe” from the perspective that it won’t lose principal, but it can be extremely “unsafe” from the perspective that it… Read more »

Tim
Tim
12 years ago

So Daniel and others – help me out here – in the fixed exchange relationship between KYD/USD – what happens if the USD completely tanks? I would assume if the rate changed, in that case, it would change for the better (assuming you had KYD). Right?

AJC @ 7million7years
AJC @ 7million7years
12 years ago

I am like our friend … very risk-averse; yet I have become rich by understanding that it is actually SAFER to invest than not.

He is better off BUYING the bank [stocks] than putting his money in the bank … and the risk is about the same – when was the last time the Feds let a major bank fail?!

Don
Don
12 years ago

Along the lines of Kellie’s comment, if the FDIC could fail the currency is shot and it would be valuable to own metals. I happen to think the most useful form would be bullets though. A US without its fiat currency sounds like a dangerous place.

Personally, I have very little fear of the currency failing.

Seth
Seth
12 years ago

It’s not a good idea to bet on the FDIC to back you up even if banks fail. Reason being that the fed legally has a total of 100 (ONE HUNDRED YEARS!!!) years to reimburse you for lost funds deposited in FDIC banks. FDIC is literally meaningless. Most of us will be dead before we ever see a dime of reimbursement from the FDIC. Translation… if you have more than $100k and don’t want to mess with stocks/investments or money market stuff in the US, then I’d suggest putting your money off shore or buying a whole lot of gold… Read more »

Daniel
Daniel
12 years ago

@Tim, that’s a good question. Wikipedia’s article on fixed exchange rates does not cover that topic.

@AJC, my understanding is that banks actually fail rather frequently… it’s just not publicized. The Feds will go in, doing enough to keep things running while they search for a buyer.

@Don, same here – little fear of it happening. Similarly, I see little point in worrying about it since there’s not much we can do to: 1- plan for it, and 2- survive it. But yeah, I agree that bullets are a good investment for TSHTF or TEOTWAWKI situations.

Rondondo
Rondondo
12 years ago

What is the advantage to bonds/bond funds? I have retirement funds in 401K accounts that are about 50/50 stocks and bonds, but I’m a REALLY conservative investor with my normal “savings”. I keep my regular savings in jumbo CD’s and a Money Market at my credit union and getting 4-5% returns. When looking at returns on bonds/bond funds, I don’t see them doing any better than that, so why are some recommmending the funds as opposed to just sticking the money in a CD? Am I missing something?

Hildy Richelson
Hildy Richelson
12 years ago

Rondondo, The person recommending the funds may feel that you could earn more without taking on significantly more risk due to portfolio diversification in credit quality, issuers and maturity range offered by the funds. CDs are usually short-term. You are doing yourself a disservice if you keep all your money short-term. That may look conservative, but when the Fed drops short-term interest rates then the rate at which you can reinvest also drops. It is much more conservative to have a bond ladder that would give you some reinvestment protection. How would you like to reinvest at 1% like Japan… Read more »

wealthkick
wealthkick
12 years ago

I’ve met Jack Bogle in person in Philadelphia at the Union League. This man is a living legend and a master investing and protecting money for the long haul. I would highly recommend reading “The Little Book of Common Sense Investing The Only Way to Guarantee Your Fair Share of Stock Market Returns” by John C Bogle. If you’re risk tolerance is low (like mine), you’ll appreciate what Jack has to say about Vanguard as a company and Index Funds in general. After reading this book, I could not see how everyone wouldn’t want to invest in Vanguard. They are… Read more »

Dividend growth investor
Dividend growth investor
12 years ago

I think that even if you are risk-averse, you have to have at least some exposure to the stock market. If you have 10% of your portfolio in stocks the most that you can lose is 10% if the market goes to zero ( very unlikely to happen). Even if that happens, you will recoup the losses in 2years assuming that you earn at least 5% interest. Actually earning 5% interest these days is not impossible. There are several rewards checking programs out there which have certain limitation, but are a good alternative for severely risk averse investors. Yet another… Read more »

Jerry Dill
Jerry Dill
12 years ago

Just remember that every investment is a risk. Even when the only thing you are trying to beat is inflation.

Choose an investment that will provide you with the best options available to you. Some risks are worth taking weighing your options are always a good thing to do. This is a great article I found it very interesting.

Hildy Richelson
Hildy Richelson
12 years ago

If you want to understand different investment strategies using bonds, bond funds and other fixed income investments, read my book BONDS: The Unbeaten Path to Secure Investment Growth. There is also a chapter on how to incorporate bonds in your financial plan, and another chapter with case studies of how bonds and bond funds can be used to advantage. A decision to invest solely in bonds can enable you to sleep better and thrive financially. This is how we invest our own funds. If you read our explanation in BONDS: the Unbeaten Path to Secure Investment Growth, you will understand… Read more »

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