Jamie writes in:
I’m twenty eight years old and am now debt free. I’d like to start investing, but I have almost no tolerance for risk. I don’t mind not earning a great return because of this, but the thought of losing any of my investment makes me feel very uncomfortable. Any suggestions?
Before I begin, it’s worth noting that if you look only at extremely low-risk investments, you’re going to forego very nice returns in other investments. Most investments that include a significant amount of risk – like stocks, real estate, precious metals, and so on – are intended as long term investments. Yes, they lose significantly over short periods, but over longer periods (more than ten years), most of these investments do quite well, significantly better than investments with low risk. Low risk, low reward, after all.
It should also be noted that all of these investments – any investment that you might make – does have a number of risks. Even holding cash in your hand has risks. Inflation is a risk – over time, dollars become worth less than they used to be. Economic disaster is a small risk – look at what’s happened in Iceland and Zimbabwe in the last year. Investment house failure is another small risk, though virtually all of your investments will be insured.
That’s not the question that was asked, however. The big question here is how to invest with minimal risk. I see four distinct avenues for this that are available for most people.
Treasury notes These are basically direct investments in the United States federal government. You can buy these directly from the government at TreasuryDirect.
When you purchase a treasury note (or treasury bond, as they’re called for terms longer than ten years), you pay a certain price (set at auction) for a note that has a face value and a coupon rate. Each year (it’s actually split into two payments, paid every six months), you’re paid out a percentage of the face value (the percentage is the “coupon rate”). At the end of the time frame of the note, the government will pay you that amount.
So, let’s say there’s a ten year treasury note for $10,000 available with a 2% coupon rate, and you can buy this note for $9,800. Every six months, the government would pay you $100 during that ten year period, totaling $2,000 in payments, and at the end, you’ll get the $10,000 back.
These are about as safe an investment as you can get – if these start to fail, there’s going to be a global economic meltdown beyond comprehension. However, they typically don’t earn a great return – it’s usually something just a bit higher than whatever inflation is at the moment.
Alternately, you can invest in TIPS, which are much the same, except (in effect) the coupon rate is recalculated regularly to take inflation into account. These generally just barely match inflation, but often sell for rates higher than their face value (you’ll have to pay more than $10,000 to get one with a $10,000 face value).
Cash Another safe thing to do with your money is to simply keep it as cash. Put it in a high-yield savings account (below the amount insured by the FDIC – currently $250,000) and just simply let it earn interest over time. Online savings accounts tend to vary their rates based roughly on the actions of the Federal Reserve, and since the Reserve has their rates very low right now, online accounts aren’t earning particularly well – 2% to 3.5% is pretty expected. However, if the Fed begins raising rates, many of those banks will begin raising their interest rates, too, up to the 5 to 6% that was once reasonable to expect back in 2006 or so.
Efficiency and self-sufficiency Many people who are concerned about the long-term safety of financial investments are trending towards investing in long-term self sufficiency and efficiency. This would basically involve improvements to your living situation so that you’re not reliant on basic services provided by others: electrical self-sufficiency, food self-sufficiency, and so on.
Some examples of this include buying a home in a rural area, installing a well or a sand point for a renewable water source, installing solar panels or a wind turbine for renewable energy for yourself, setting up a greenhouse and perhaps some micro-farming facilities for self-sustaining food sources, and so on.
If this has appeal to you, many people who are adopting this mode of operation are currently selling their surplus production at farmer’s markets or directly to grocery stores or selling excess energy back to the electrical grid. This creates something of a profit on the effort in the short term, subsidizing the capital investments. Plus, with such self-sustaining materials around you, you won’t be spending much at all on regular bills.
Yourself A final route to consider for investment is investing in yourself. What sorts of self-improvement (that would help your career or earning potential) could you make? Perhaps it’s worth investing in dental work. Perhaps some continuing education might be worth your while. Perhaps you need to update your wardrobe a bit.
All of these areas lead directly to some sort of financial return without much risk.
However, there is something else worth considering. It won’t lead directly to financial return, but it is a worthwhile use of your money. Charitable giving. You always have the ability with your money to help bring about profound positive changes in the lives of others.
Hopefully, you’ve now got some things to chew on. Good luck!