Filed Under Beginner Investing |
In my travels I get this question a LOT: What is the safest place to invest money? Surprisingly you may already know the answer to that question. We all want a safe place to invest money, but the truth is that no such place exists. I’ll explain further.
First Let’s look at the most common ways you can invest before we get to the safest place to invest money. Typically we tend to see the stock market, real estate, CDs, savings accounts, and the mattress as the safest places to invest money. But how safe are they really?
The stock market is a never ending ebb and flow of ups and downs. A roller coaster of potential. The reason the stock market may not be the safest place to invest money is because the market is literally a place to buy symbolic pieces of papers that can represent anything from goods to currency to shares in a company. Anything that those pieces of paper represent can suffer from incidents that will lower their value. For example, a company goes belly up and all your shares drop in value. You buy several ’shares’ of potatoes just when some mad scientist discovers how to grow potatoes overnight with a single drop of water. And so on. Most of these risks are typically rather minimal and vary depending on the type market investment you make. But the point is that the market is not the safest place to invest money because it will ALWAYS have the risk of lowering the value of your money due to potentially unforeseen circumstance.
What about real estate? This happens to be my personal favorite. The upside of real estate compared to the risk is amazing. However, is real estate the safest place to invest money? No, of course not. Why? Because real estate is unpredictable and fraught with similar unforeseen risks. You could buy a house and discover later that it was built on landfill and watch as your property value falls to almost nothing before your very eyes. Or it could burn to the ground or collapse in on itself from an earthquake. Or a local gang could move in and turn your rental into a meth house. All of these could lower your investment faster than you can believe. All of these unpredictabilities make real estate definitely not appear to be the safest place to invest money.
Well what about CDs? Certificates of Deposit are often thought to be one of the safest places to invest money. The reason being that CDs are really just like giving a loan to a bank. Typically we all think of banks as being very stable. But the truth is that banks are just like businesses. And like businesses, banks can go belly up. This means that should the bank collapse while you have your cash buried in a CD you can kiss your money, let alone the 3% ROI, goodbye. Though CDs can be insured which makes them about the safest place to invest money. But we aren’t completely done yet.
What about savings accounts? Savings accounts are just like CDs in that you are basically just handing your money to a bank with a promise that the account will not fall below a certain level. If the bank goes away, so does your money. The only reason a savings account is a bit safer is because the account is rather liquid.
This leaves us with storing your money under the mattress. The problem here is that you’er susceptible to theft, fire, etc. But what is more, is that now inflation slowly eats away your stash. With an average inflation of 3% your money will reduce in buying power by 3% every year. Meaning in 33 years your money will be worthless. That’s almost guaranteed.
What does all this mean? This means that there is no safest place to invest money. Every avenue carries with it an inherent risk. What this risk means to you is something only you can decide. Is watching your money erode at 3% a year every year less risky to you than letting a bank borrow it? Is the threat of natural disaster too great to risk investing your money in real estate and watching it double every 5 years? Only you can answer these questions.
So what is the safest place to invest money? That question is something you will have to answer. And so, I ask YOU, what IS the safest place to invest money, for YOU?
9 Responses to “What Is The Safest Place To Invest Money?”
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Allen Taylor
Glad to hear it
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Keep up the good work!
The safest place to invest is in something that is purchased at a very steep discount, e.g. under 50% of Fair Market Value.
This eliminates stocks, bonds, CD’s, etc.
This could include certain real estate, which is one of the few things that can be purchased at firesale prices and resold at retail.
The point is that you must make your profit going into the transaction.
A diamond can be purchased at a seemingly low price, 25% of value, but you will have a hard time selling because a dealer can purchase a new diamond at 10% of FMV. You lose.
I deal in the tax delinquent real estate business. Properties are regularly at well below market pricing. I would like to be in contact with the blog writer.
i definitely agree that investment profits are made upon purchase. speculating is NOT the way to make a consistent and predictable return.
you can get a hold of me at this address: korprit at gmail.com
also, i have a couple posts regarding tax liens so i am familiar with the industry
I have read your posts regarding tax liens. They show that you are well grounded and can think clearly. That is why I have taken the time to make a comment.
The idea that certain investing is “speculating” is an interesting one. Query: Is it speculating if the returns are always consistently very high and one can reliably predict that they will be? Why would this investing strategy NOT be considered consistent and predictable?
Technically speaking, speculation occurs anytime the outcome is not 100% guaranteed. All investment relies on speculation, however, it is counterbalanced with risk.
If a return is there 99.9% of the time, then my personal risk levels would tell me it is not speculation, however, technically the .1% failure would say it still qualifies as speculation.
So when i used the term ’speculation’ above i used it generally (which i should not have) to refer to high risk scenarios.
I like that answer.
When we hear the word “speculation” the conventional wisdom is that “risk” is inherent and significant. However, when we hear the word “invest” the conventional wisdom does not sound the same alarm bells. This is our cultural bias at work.
Many have faith in “the system.” Others feel “it’s risky,” putting monies into anything not in their control.
I suspect the difference is an outlook based upon input. If the main investing/speculation criteria is lack of work, then a low ROR is acceptable. If the main criteria is high ROR, then high risk is tolerated.
However, any high ROR with low risk entails a hands on approach. If we are willing to do more than open a daily newspaper and look at a stock number, then we often can make significant sums. Buffet said, “Pick your basket and put all your eggs into it.”
and buffet was very smart for saying as much. if you know enough about a ‘basket’, you substantially lower the risk and therefore are much safer placing more into it.