No investment is a sure thing, guaranteed to succeed and never lose money. But, there are ways to improve your chances of success and reduce your risk of loss. In this article we look at how to invest without losing any money.
How to Invest without Losing Any Money
- Bank deposits with Federal Deposit Insurance
- US Treasury Bills, Notes, and Bonds
- Investment Grade AAA and AA Bonds
- Long term value investing, intrinsic value
How to Invest without Losing Any Money: Federal Deposit Insurance
The ultimate in investment safety is a bank deposit insured by the FDIC (Federal Deposit Insurance Corporation).
The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.
An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.
In a period of low interest rates, such as now, bank deposits do not look all that attractive. However, within the $250,000 limit, per depositor, per bank, per account ownership category, this is how to invest without losing any money.
How to Invest without Losing Any Money: US Treasury Bills, Notes, and Bonds
US Treasury bills have maturities of a year or less. US Treasury notes have maturities from two to ten years. And, US Treasury bonds have maturities of ten to 30 years. Each of these investment vehicles is backed by the “full faith and credit” of the US government. The risk of loss of any of these if held to maturity is nil.
How to invest without losing any money in US Treasuries is to hold them to maturity or only sell them at a profit. Investors lose money in treasuries if they buy when interest rates are low and sell when rates are high. If you buy treasuries when rates are really high you have the choice of holding to maturity and enjoying the return on investment or selling for a short term profit.
How to Invest without Losing Any Money: Investment Grade AAA and AA Bonds
Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings are credit rating agencies. Their ratings on bonds are a good guide to how safe an investment is. How to invest without losing any money in non-government bonds is to limit your purchases to investment grade AAA and AA bonds. In each case these are bonds issued by companies with exceptionally good finances and negligible risk of default.
The only two US companies with AAA bond ratings today are Johnson & Johnson and Microsoft.
How to Invest without Losing Any Money: Long Term Investing and Intrinsic Value
There is a drawback to very secure investments like bank deposits, treasuries, and high grade bonds. They do not produce a very high rate of return. When you think about this fact, remember what Warren Buffett said about rules one and two of investing. Rule number one is never to lose money and rule two is to never forget rule number one!
Having said that, how can you get a better return on investment and still have a low risk of loss? An approach that has worked well for many investors is first to learn how to assess the intrinsic value of an investment. The second part of this approach is to invest for the long term.
Years back we wrote about intrinsic value analysis for stocks.
Successful long term investors consider the intrinsic value of stock before buying and when deciding to sell. This approach to stock investing goes back to the black days following the 1929 stock market crash which ushered in the Great Depression. Benjamin Graham taught investors that they did not need to play the market as though they were picking numbers on the roulette wheel. Rather he taught investors to do fundamental analysis of stocks in search of forward looking earnings. At the same time investors learned to consider what features of a stock provided a safety net in times of trouble. This was the margin of safety that some stocks have in the form of money in the bank, unencumbered property, or products that are unassailable in their market niche.
Read the article for the details, but the idea is that you should have a clear idea of how a company makes its money. And you should be assured that their business model will continue to generate profits for the long term.
Then the issue is how long to invest to increase the likelihood of profits and to reduce the risk of loss. The point of long term investing is that you do not need to time the market. Rather, you invest money every month, quarter, or year in investments likely to grow over time. Just last year we asked a question. How many years are required to make an investment long term?
The long term for investing is longer than you might think. You need to stay in the market for longer than 5 years and perhaps even longer than 10 years to reliably see the benefits of long term investing.
The other part of how to invest without losing any money was noted in that same article. You need to pay attention to your portfolio. And you need to recognize when a company’s business model no longer makes any sense. In our article we noted that Kodak had a great business plan until digital photography came along and then their plan did not work. There are always low risk investments but you need to do your homework in order to take advantage of them!