To fully understand the concept of safe investing, one needs to understand what investing is and the purpose of investing. Investing is defined as putting money or capital to work in order to earn a profit or return so that the total amount of those funds is more than when you began.
Investing safely implies that none of the original money or capital is lost as a result of the investing activities. However, no discussion of investing is complete without mentioning risk. There can be no profit or return without taking a measure of risk, no matter how small. No risk, no return is one of the inviolable rules of investing.
In fact, there is even risk in not investing. Putting cash in a safety deposit box or a mattress is subject to inflation risk – that is, inflation takes away purchasing power of the cash over time and robs it of value.
So how does one invest safely if there is risk inherent in all investing or not investing?
The safest investments are those with a guarantee or are ones that are insured. Deposits at Federal Deposit Insurance Corp. (FDIC) backed financial institutions are insured up to $250,000 per depositor, per bank for each ownership category. Currently, the inflation rate of 2% is higher than the interest rate offered at most financial institutions of .5% to 1.5% before taxes. Insured accounts include checking, savings, money market deposit accounts and CDs. The investment is insured and safe, but it loses value over time because of inflation.
Treasury Inflation Protected Securities (TIPS) are another vehicle often employed for safe investing. US Treasuries are believed to be one of the safest havens during difficult financial periods as their risk level is perceived to be very low. TIPS are indexed to the consumer price index (CPI) and provide for a fixed interest rate above inflation. They are, however, taxable and these taxes may reduce the overall return realized.
For many investors, safe investing where there is little or no return after inflation and taxes is not an option in any market. Diversifying investments to mitigate risks is their safe investing strategy. These investors diversify by choosing short and long term investments, investing in different industries and different asset classes to reduce their overall risk and exposure to any one investment. The objective is to reduce risk to a point where capital is as “safe” as possible while still realizing a positive rate of return.
Anecdotally, investment icon Warren Buffet believes that investing in companies and vehicles with a history of producing consistent profits and returns over long periods of time is the best way to invest safely and earn the best returns.