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What are Safe Investments?

After being burned in the recent market crash many investors are wondering what are safe investments? As a general rule investors expect a greater rate of return for taking risks and are willing to accept a lower return for a safe investment. Thus the question what are safe investments also can mean what are low paying investments? Holding onto cash in a bank account or by buying treasury bills and holding them to maturity is safe so far as the absolute dollar amount goes. However, investors still recall the 1970’s when inflation ate up the value of cash in the bank, in treasury bills, and corporate bonds. Even with the higher interest rates of the time investors often lost purchasing power by holding on to what they believed were safe investments. Thus the question what are safe investments needs to be asked in relation to inflation and purchasing power. Attractive investments in this regard are TIPS. These are treasury bills whose coupon payments and principle rise in conjunction with the consumer price index. If you are asking what is the best investment for my money TIPS should be on the short list.

Successful long term investors typically ask the question what are safe investments. The concepts of margin of safety when buying a stock or intrinsic stock value were developed after the 1929 stock market crash. This concepts guide investors to sound investments. The margin of safety is typically a collection of assets of a company that may well be worth the price of the stock if the company were to go out of business. Investing in stocks with high margins of safety protects the investor during tough economic times and do not necessarily relate to a low return on investment. When asking what is a good investment, a stock with a high margin of safety should be on the list. Is a good investment a safe investment? If it keeps ahead of inflation and do not let the earning power of your money erode it is.

Diversifying a stock portfolio is a means of gaining safety. A well balanced portfolio will include dividend stocks for steady income and growth stocks for staying ahead of inflation. It will typically include stocks with the potential for substantial appreciation and be balanced so that one group benefits from economic changes that adversely affect the rest. So, what are safe investments in a well balanced portfolio?

Fundamental analysis is the key to successful long term investing. Investing in stocks with strong balance sheets, good price to earnings ratios, cash in the bank, and growing markets makes money. These same sorts of stocks tend to be safe investments and will typically outperform bank accounts, corporate bonds, and treasuries over the years. As regards TIPS the investor needs to remember that the returns are taxed. Interest rates on these investments are current in the 1% range. Because bond values go down as interest rates go up the buyer of TIPS needs to be ready to hold these investment to maturity as a jump in interest rates will substantially decrease their value.

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