If you hate the thought of losing money, you probably want to invest conservatively.
But what are some safe investments that can help you reach your long-term goals while avoiding big losses? Avoiding “losses” is easy enough: bury your money in the yard or keep it in the bank. You can sleep well knowing that it doesn’t matter what the markets do. Most people, however, want to invest their money for at least some growth over the years in order to fend off inflation. So let’s discuss how you might do that.
Why Use a Safe Investment Strategy?
First, it’s a good idea to figure out if it really makes sense for you to use safe investments. These strategies are best for people who just can’t afford to lose money. Perhaps you intend to spend the money (most of it, at least) within the next few years, so you might not have time to recover if the stock markets crash. Or, you might simply prefer not to lose money: it’ll make you uncomfortable, upset, and unpredictable. It doesn’t matter what your reasons are – the point is to do what fits you and live with the trade-offs (for example, a safe investment strategy won’t see as much growth, so you might need to save a little more or live on less).
What are Safe Investment Options?
If you want to keep your money safe (while going for minimal growth), there are several options out there. This list covers them in order – more or less – of risk and complexity: the safest investments are at the beginning of the list, and things get riskier from there.
Cash is the safest investment out there, and it’s safest when it’s in the bank. Nobody can steal it, it’s insured (you should only use FDIC insured banks – don’t reach for higher returns by going elsewhere), it won’t catch on fire, and the worms won’t eat it in your back yard. Savings accounts and certificates of deposit (CDs) typically pay a small amount of interest on your cash, so your account will grow at least minimally over time.
US Government Savings Bonds are also extremely safe investments. As the name suggests, they are guaranteed by the US Government. Due to their safety, these bonds can pay a low rate of interest, but they might offer some inflation protection (if you use Series I Bonds). A drawback of savings bonds is that there’s a limit to how much you can invest in savings bonds each year. If you’re building wealth they might work well, but if you’ve already accumulated substantial savings, you might hit the limit quickly.
Cash equivalents are accounts that look and feel like bank accounts, but they are not guaranteed by the FDIC. The most common example is a money market fund. Although it is potentially possible to lose money, these are still very safe investments, and losses are quite rare. Money market funds pay a small dividend, but they sometimes pay more than savings accounts (and sometimes they don’t – be sure to compare).
Fixed annuities are insurance contracts that might also look more or less like a CD. They typically pay more than savings accounts, but you generally have to lock your money up for at least a few years to use these investments. Fixed annuities are not guaranteed by the government, so you’ll want to research any insurance company before handing money over. There can also be tax complications when you want to spend your money. Be sure to understand exactly how fixed annuities work before getting into one. If you want to include other, less-safe investment options, there are several different types of annuities out there that might even protect your principal, but there are fees to pay and strings attached.
Bonds are considered safe investments, but now we’re really getting into investments that trade in the markets and can fluctuate in value. If you’re like most people (not a billionaire) you’ll probably invest in bonds through mutual funds or exchange traded funds (ETFs). Depending on the type of fund you use, you can invest safely or more aggressively. In general, the safest bonds funds are made of highly rated bonds. However, even high quality bonds can lose money when interest rates rise, so you might also want to stick to short term bonds (or short “duration”) to stay safe. Of course, safer bonds with shorter terms tend to pay less, but that’s the price of safety.
Investment CDs also probably fit in here somewhere. These are certificates of deposit (that might even be FDIC insured) with exposure to the markets. If the market does well, you might earn more than a standard CD pays. However, if certain things happen (or don’t happen), you might only get a minimal return or no return at all – you’d just get your original investment back with zero interest. Unlike most of the investments above, investment CDs (and annuities) are not easy to get out of, so you risk being unable to access your cash if you need it before the CD matures.
Conservative mutual funds are mutual funds that diversify your money across numerous investments. Some of them are very conservative, and some are less conservative than you might want. These funds typically have some exposure to the stock markets (which isn’t necessarily a bad thing, depending on your goals and your ability to take risk), so you need to look at more than the name: find out what percentage of assets are in stocks and higher-risk bonds before investing. The nice thing about
How to Invest Conservatively
Given the options above, how can you create a safe investment strategy? First, you’ll have to decide how much, if anything you’re willing to risk. If you want to be ultra-conservative, then you’ll stick to banks and government bonds. If you want to try for a little more growth (and are able to afford any risks), you can start mixing in different types of investments.
The optimal mix of investments will depend on your personality, your needs, and your goals. If you’re planning for a long term goal such as retirement, be sure to see how a safe investment strategy (that is, lower returns) will affect how much you need to save and when you can retire. You should also be aware that inflation can cause problems over long periods of time, so you’re always taking some kind of risk – you just have to pick your poison.
If you’re willing to put some money in the stock markets, the easiest way to do this is to use a conservative mutual fund. “Asset allocation” funds that diversify your money (such as target date funds or funds with “Conservative” investment strategies) can accomplish this with just one fund, but you really need to see how the money is invested. If there’s more than 30% or so in stocks, it’s probably less of a conservative fund and more of a moderately-conservative fund.
Some people say that index funds or “blue chip” funds are conservative, but that’s not true – if those funds invest the majority of assets in the stock market they are risky investments. There are some stocks – or better yet, mutual funds – that are more conservative than others (such as preferred stock funds and those investing in utility companies), but you’re adding risk when you add stocks. Again, that’s not necessarily a bad thing, but you need to know that stocks, in general, are risky. What’s more, those “safe” stocks sometimes get a little too popular (which makes them relatively more expensive and increases their risk) when investors decide to get “defensive.” This might happen when people think the market is high and about to turn around. They’re usually disappointed in their ability to predict the future.