Low Risk Investment Vehicles Offer Safety and Peace of Mind
Having a highly cautious spirit when approaching investing is appropriate behavior for a variety of reasons. If you feel that investing is too much like gambling or that you are ill equipped to deal with the stress and risks involved, then safety and peace of mind are of high value for you. Loosing sleep at night over your investments is generally a sign that your portfolio may be too risk laden for your own good. Your personal investing strategy needs to fit your personality type. An old maxim of investing is that the closer you are to retirement, the more conservative and income focused your portfolio should be.
Investing has become a necessity in life if you wish to retire with financial security under your belt. Social Security will only cover 40% of your projected retirement needs, based on recent studies, and since we are also living longer, the need for additional earnings from investments is critical. If dealing with forex brokers or other alternative investment strategies does not suit your tastes, then simple interest compounding may be all you need. Even low risk investments can provide long-term benefits over time.
On the risk pyramid of investment vehicles, the “Base” items will be the focus of our discussion to follow:
All of these securities, with the exception of pure cash, tend to be debt instruments of some form that pay interest at a specified rate, frequency and term unique to each form of investment. Risk profiles are low, which justifies their lower return rates.
- Cash and Cash Equivalents: Every asset allocation strategy for an investment portfolio should include liquid cash as a separate element. These funds provide for emergencies, such as car repairs, medical needs, or employment related cutbacks or layoffs. You never want to be forced to sell any securities for an emergency. There may be severe penalties or the timing in the market may not be beneficial for obtaining your best return. Typically, cash and cash equivalents pertain to Treasury Bills, Money Market fund shares and savings accounts.
- Bank Accounts: Cash may reside in a bank checking or savings account. Although generally safe and protected by the FDIC up to a specified limit, there is always the risk of a bank failing to meet its obligations. Your funds could be tied up for a while waiting to settle with the FDIC. It is prudent to review the financial health of your banking institution from public sources of information.
- CDs: Certificates of Deposit, also known as “time deposits”, are issued by banks and savings and loans for terms of typically three months to six years. They pay a higher rate of return than similar instruments, are FDIC protected, but charge penalties for early withdrawals. The higher rate of return is given for tying up your money for a longer period of time.
- Notes: Notes are written contracts that promise to pay a specified amount at a future date at a stated interest rate. The risk of this instrument is dependent on the credit worthiness of the Payer in the contract, and can be high if not secured by collateral.
- Bills: A Bill is a negotiable debt obligation issued by the U.S. government and backed by its full faith and credit. A Bill may typically have a maturity of one year or less and is exempt from state and local taxes.
- Bankers Acceptances: These are short-term credit instruments that are created by a non-financial firm and whose payments are guaranteed by a bank. Bankers acceptances are effectively used in financing the import, export, transfer or storage of goods, and qualify as liquid assets when held by money market funds.
- Money Market Funds: This is an open-end mutual fund that invests in debt obligations of one year or less, such as Treasury bills, certificates of deposit, and commercial paper. The primary goal is the preservation of capital, together with modest income distributions. Unlike bank accounts and money market accounts, most deposits are not FDIC insured unless administered by banks. The risk is extremely low, but returns on these funds may be less than inflation, thereby causing erosion of the investor’s purchasing power.
- Government Bonds and Debt: These instruments are guaranteed by a government entity, whether federal, state or municipality, and represent a promise to pay principal and interest at a specified rate and at future dates. Federal securities are the safest, but in rare cases, other entities have defaulted on their obligations. Exemptions from taxes may also apply for certain issues.
Safety first is always a prudent investment strategy. Review your options with your broker to determine which ones are right for your individual financial situation.