Oct 21, 2008
Safest Investment Tips and Risks
by Bi3ard / General
These are not great times for comfortable investing. Especially not for small investors. Recent market clash has shown how it’s easy to lose everything in just one day.
It’s natural that we all want to increase our investments while minimizing our risk. These two goals are opposed each other, so the right course of action should be taken in order to fulfill the goal. Here are a few of the safer investment strategies with their pros and cons.
Technically this is an investment, because banks do pay interest on savings and most checking accounts.
But, unless you have a significant amount of cash in your account, you might not even see any growth other than a few cents each quarter.
Why Banks offer such a low APY (Annual Percentage Yield)? Well, they have a number of costs: construction costs or leases if they don't own, electricity bills, and the employees like managers and tellers don't work for free, of course.
But, nowadays there is a number of banks which don't have or have a very minimal physical presence. These banks conduct virtually all of their business online.
Individuals can open accounts online and link the account to their physical bank. They can go online or use the telephone and initiate deposits or withdrawals between their e-bank and their account at their physical bank.
Because e-banks have no building costs and have much less personnel costs, they are able to offer better APYs to their clients, which sometimes go between 3.0% and 3.5%.
One important thing about these two options is that in the US these accounts are FDIC insured for all account balances up to $100,000. This means that even if the banks went out of business and lost all their money, the US Government would make sure the clients got their money up to the $100,000 limit.
Following options furthermore are different because they are not FDIC insured, meaning that it is possible that you could lose some or all of your investment.
Don't let this scare you though, these investment options are not highly risky.
First of all you must know that bonds are different from stocks. While bonds are debt, where the company owes you back your money plus interest, stocks are equity, which means that you've bought into the company.
This means that if things turn sour (like recent crisis) and the company falls apart, it is obligated to pay back its debt before it buys back any shares of stock from investors who want to get out. As has been said, neither bonds nor stock have that FDIC insurance.
Bonds come in different types and have varying grades of risk and return. Apparently, the safest bonds are those issued by the government of a stable country. US savings bonds can be bought at half of face value and the government promises that they can be redeemed for at least full face value after 20 years.
For example, if you bought a $100 US savings bond on January 1, 2000, you would have paid $50 and on January 1, 2020, you could go to a bank and get $100 in cash for it. If you hold on to that savings bond for longer, it can increase further in value, but after 30 years from the time of purchase the savings bond's growth is capped.
Besides government bonds, you can also buy bonds issued by companies. There are so many types of bonds, each with different rules and growth mechanisms.
The simple description is that you buy a bond at a given issue price and by the maturity date, which is specified at the time of purchase. The issuer of the bond (the company) pays you the nominal amount and interest earned.
With respect to maturity date, the three general categories of bonds are:
- Short Term (matures in up to one year)
- Medium Term (matures in one to ten years)
- Long Term (matures in over ten years)
These were some of the investment options that aren’t too much risky. Some, of course will look at the investment options with higher risk and higher potential returns, but that’s the individual choice. These options are mutual funds.
In a mutual fund, lots of small investors pool their money together and a professional money manager usually invests the funds in a diversified portfolio of stocks. Investing this way, the risk is spread out, so if one or a small number of the companies where funds have been invested fails, the value of the fund will not suffer significantly.
The expectation of this strategy is based on the probability that all companies where funds have been invested, will fail together is very small.
The least safe method of investment is investing in an individual company's stocks. If the company does very well, so does the individual investor. But, it only takes some bad news or a bad earnings report of one company and your investment's value could drop significantly in short period of time.
However, recent crisis has shown that anything is possible. Companies can crash in one day causing global economy crisis and leaving people without their life investments.
Advice is – be cautious and always listen to more than one opinion in order to make safe investment for your future.
Readers posted 2 comments for this article
The following content represents the opinions of Health.com users. It is not editorially reviewed for medical or factual accuracy. It does not constitute medical advice. See your doctor for medical advice.
I agree with choi. Very useful information especially to newbies in the precious metal investment (PMs).
I enjoyed reading this article. I need to learn more on this subject.. Thanks for writing this nice post.