You don’t have to flip through many channels on cable TV or click on more than a few Internet pages to find ads touting safe investments with high returns.
It’s investment nirvana, really. The idea that you can get a high return on your money while taking limited or no risk is the siren song of many a late-night TV huckster.
If you want truly safe investments with high returns the first, crucial step is to define both “safe” and “high.”
Let’s start with safe. For many people, that means never losing a cent. If that’s your goal, well, give up.
By far the safest investment you could possibly make is buying more education for yourself or starting a business. Even then, you could be jobless and the business could fail.
But if by “safe” you mean very little risk of loss, then you probably want an FDIC-insured bank account. The returns won’t be great by any means, but your risk of loss is minimal.
Moving up a bit from there, the next step is the bond world.
Government bonds right now are the safest market investment you could make, but the risks remain real enough. For instance, if you buy a long bond now and hold it, inflation could (and likely will) rise in time and overwhelm your potential gain.
Moreover, once rates rise it will be harder to sell your bond. So, you’ll be locked into a safe but money-losing position.
What about stocks? Well, here the risks are well known, buts so are the rewards. Many stocks pay a steady dividend. If you manage to pick an undervalued share, then you get the dividend income plus potential appreciation.
Perhaps less understood is the risk you take in buying a single stock.
There’s no reason, really, for it to rise in value over time. Dividends can be cut. You might see a blue-chip stock trading at an all-time low and think, “I can’t lose!”
Then that blue chip goes bankrupt (GM anyone?) or cuts its dividend to zero. Yes, you can lose.
Many investors recently took a shine to gold on the presumption that the metal was a “safe” alternative to traditional investments. And gold promptly made fools of them all, falling like the proverbial rock as stocks have climbed to new heights.
If you seek safe investments with high returns, the answer is to own stocks for their inflation-beating qualities, but not to own single shares.
Instead, buy index funds that own whole markets, including foreign markets. That way, you get all of those dividends and any appreciation that results at far less risk.
You also should own some bonds, since they too will pay a return, but own them via index funds as well.
Finally, own gold. But just enough to counterbalance your holdings in stocks, bonds and real estate. Periodic rebalancing will ensure that you cash out gains in a timely fashion, creating the compounding, wealth-building return you seek while constantly pruning back unnecessary risk.