How Safe Is Your Investment?
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You’ve worked
hard all your life, lived within your means, and saved as much as you could set aside for your retirement. Your children are grown and you qualify for senior citizen’s discounts at many restaurants. A burning question for you and many retirees is how to invest your money safely in an environment of low interest rates.
What Is Safe?
Business schools teach finance students that every use of money is risky. If you save money in a bank account, you risk missing out on higher income from other investments when interest rates drop as low as they have in recent years. If you ride the stock market roller coaster, you may hit bottom like many stock market victims of the “Great Recession.” Ultimately, no investment is “safe” from all risks and a balanced investment strategy remains the correct standard for smart investment.
Limit Three Main Risks
Three major sources of risk exist in all investments: capital risk, rate of return risk, and liquidity risk. You can reduce capital risk; the risk of losing the original amount of your investment, by investing in FDIC-insured bank accounts, U.S. government bonds or other traditionally secure investments. Long-term, diversified investment planning is the best cure for return on investment risk; the risk that your investment with not earn enough income or wealth. You can limit liquidity risk; the risk that you may not be able to get your money when you need it; by keeping adequate funds in cash, checking accounts, passbook savings accounts, and money market accounts.
Investment Pyramid
Many people have seen the Food and Drug Administration’s food pyramid in elementary school. You know – the chart that shows the relative amount of fruits, vegetables, breads, meats, and dairy products that everyone should eat. The investment community also has a pyramid that promotes smart investment strategy. The pyramid deals mostly with capital risk.
The largest portion of investment in the bottom of the pyramid should include FDIC-insured savings accounts, government savings bonds, certificates of deposit, money market funds, and government securities. The next level of the pyramid would contain medium risk with investments in excellent quality stocks and bonds issued by solid companies like, and highly rated mutual funds. Higher levels of the pyramid should contain the smallest portions of investment, including real estate (other than your home), lesser quality stocks, and aggressive mutual funds, collectibles and other extremely volatile investments.
Capital risk tends to oppose liquidity risk and return on investment risk. An investment that risks capital often promises a higher interest rate or return on investment than investments that don’t risk capital as much. Those kinds of investments may offer higher interest rates and more lucrative earning potential, but high interest rates and lucrative earnings always signal the presence high risk.
More information is available in a wonderful series of articles and materials published on the website of the Financial Industry Regulatory Authority (FINRA). Investors should study the financial industry carefully and choose investments wisely. Remember, if something sounds too good to be true, it probably can’t be that good! Always work with experienced financial representatives, whose credentials are verifiably sound.
Find more information about mediation, estate and business planning, wills, trusts, and Medicaid issues for nursing home residents at www.hawkinselderlaw.com, like our Facebook page, or follow Jeff R. Hawkins on Twitter for the latest information. Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers. Jeff is a Fellow of the American College of Trust and Estate Counsel and the 2014-15 Indiana State Bar Association President.
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