After the recent financial crisis, many people begin to think that no investment is safe. Luckily, this is not quite true. Let us review the lowest risk options available to an individual investor.
At the top of the list are US bank accounts. The cash in your bank account is insured by FDIC, and FDIC itself is backed by full faith and credit of the US federal government. The chance of the US government defaulting on its obligations is really tiny. Remember, however, that FDIC does not insure the full balance in your account. Normally the insurance limit is $100,000 per bank, so if you have $300,000, you should spread it over 3 accounts at 3 different banks. Right now, this limit is temporarily raised to $250,000.
The second place is taken by money market funds. Money market funds are not insured by the government, but they are very carefully monitored by regulators and they invest in an extremely conservative way. As a result, in their nearly 40-year history, there have been only a couple cases where investors lost their principal. Even then, the losses didn’t exceed 3 cents on the dollar. You can freely withdraw money from a money market fund at any time.
The third place is taken by US Treasury bonds. This security is also backed by the US federal government. There is some risk, however. If you buy a 10-year bond today for $1000, you may find that its price falls to $800 a year from now. Sure, after 10 years, you will get the full $1000 from the government. But the market price of the bond depends on many factors that change quite quickly. Therefore, if you may need your money soon, this investment isn’t as safe as it might look. The shorter-duration Treasury securities (such as Treasury bills) are as safe as bank accounts, since their price doesn’t change much.
Now one might ask, how safe is gold? Many people think gold is safer than anything else. If the unthinkable happens, such as the US government collapses and the country descends into anarchy, neither bank accounts nor cash currency would hold much value. But gold is likely to still be valuable; in fact, its value might even go up, since no other convenient method of payment would be available.
However, think about a different scenario. You buy some gold in 1980 for about $650 an ounce. Then you watch your savings evaporate, as its price falls to $300 just two years later. Referring to the data below from goldprice.org, you can see the volatility of the past 36 years. How safe is that? After all, if you only think about the “end of the world” scenario, gold is great. But if you consider the more realistic future, it turns out gold is as risky as stocks.
So, the final answer is that the safest investment available today is an FDIC-insured bank account. Just remember to watch the insurance limit, and spread your funds across several banks if needed.
