Safer Investments

[jimmyjeffers]

I got hosed on the stock market in 2008 and lost a lot of money because I panicked and sold everything while I was down. I'm getting older now and need to rebuild my nest egg but I'm a bit gun shy now, to say the least. I want an investment that will give me a good return but without all the risk. All I could think of are CDs, but my bank doesn't give much of an interest rate.

Are there some investments out there that I don't know about that are guaranteed in some way but also offer returns in the 5-10% range?

[jpg7n16]

Are there some investments out there that I don't know about that are guaranteed in some way but also offer returns in the 5-10% range?

No. You will have to take risk to get those type of returns today.

You're looking for the mythical perfect investment - great returns with no risk. It's a myth. You need to take SOME risk for your future. That doesn't mean "jump off a cliff" risk, or "bet it all on red" risk - just that you need to accept the fact that decent investments will have volatility and will go down some years on their path upward.


Historically, stocks have gone up on average about 4 out of every 5 years. But people freak out so much about that 1 year, they miss out on the other 4. (For example, see yourself - sold to avoid the 1 bad year 2008, and missed out on all the good years 2009-2013)

Find an asset allocation strategy that matches your risk tolerance and stick with it.

Asset Allocation Calculator

While you're at it, focus on forming a sensible retirement plan. This link can help.

AARP Retirement Calculator - How to Retire, Plan for Retirement

[thekid]

No, none.

Anybody offers that, turn around and run away as it's a scam.

You need to determine your investment horizon (how long you have until you will need the money), and then set an asset allocation that fits your risk tolerence / need for yield and stick to it.

If you are prone to panic and can't stomach price fluctuations, cds/short term bonds may be appropriate. Just don't expect yields much above inflation, if that. That said, you may not need to take on more risk. Do you have a defined benefit pension plan? How much yield do you reasonably need to reach your goal? Less yield (less risk) = higher savings rate to reach same amount in fixed timeframe. Can you reach your goals by saving more and investing in safe cds/short term bonds? If not, you likely need some exposure to higher yielding (and riskier) asset classes. You can maybe set an asset allocation heavy on bonds/low on equities.

[thekid]

How old are you? If you are not very old, there are a few concepts that are important for you to understand.

1. You need to take your "human capital" into account in determining your total "assets". That is, take into consideration your future earning power. If you were still young in 2008, chances are you didn't actually lose that much if you look at your assets as the sum of your (present day value of) your future earnings (or, more precicely, future savings) and whatever assets you had saved at that point. Moral of the story, it is hardly possible for a young investor to be too heavily invested in equities as whatever amount he has invested in equities will be dwarfed by his future earnings (which themselves grow at a pace of roughly inflation). What i'm saying, is that if you are young, it's not that bad a goof and you can afford to take on more risk.

2. Need to understand what we are talking about when we are talking risk. Is it chance of short term capital loss or chance long term loss of purchasing power (capital adjusted for inflation) or chance of faling short of your long term needs (retirement). Depending on the definition, different assets will be more risky. Stocks are by far riskier than bonds and cds by the first definition, but not really by the second and certainly not by the third in most cases.

[scfr]

Are there some investments out there that I don't know about that are guaranteed in some way but also offer returns in the 5-10% range?

Currently, no. My husband & I have a couple CDs that are still paying 5% but those ships have long since sailed. If you want absolutely safety you have to be willing to settle for lower rates. A good place to look for higher-than-average rates at banks or credit unions is: Bank CD Rates If you are a US citizen, also consider US Treasuries which you can purchase directly from Treasury Direct. Don't expect anywhere near the rate you mentioned tho.

[disneysteve]

If you want absolutely safety you have to be willing to settle for lower rates.

OP, keep in mind that there is more than one type of risk. When most people say "risk" they are referring to principal risk, the risk that they could lose money - invest $1,000 and have the value drop to $900.

There is also interest rate risk. You could buy a bond for $1,000, have rates climb and find your bond is now only worth $900 even though the interest rate hasn't changed. That won't matter if you hold the bond until it matures but if you have to sell it early, you'd lose money.

There is also inflation risk. You could have a "safe" investment paying 2% but if inflation is 3%, you will actually be losing 1%/year in buying power on your money and end up with less than you started with.

If you want your money to grow at a rate that outpaces inflation, you need to invest in stocks.

[violet80907]

If you want your money to grow at a rate that outpaces inflation, you need to invest in stocks.

Or bonds...

I'll offer support for that with an article from a well respected periodical, The Economist:

Buttonwood: Beware of the bias | The Economist

Summary - The idea of investing in US stocks during the 1900's was not obvious, or a foregone conclusion. So to use US equity returns as the basis for saying "equities will always perform better than bonds" is somewhat naive. This is "survivor bias". Anyone considering investing in the US in 1900 would have had many other options from which to chose, many of which are now gone. If you took the average equity return from all those other economies, your equity return would not look as good. Retrospectively picking the very best equity performer (the US), then comparing to bonds, is not a fair comparison.

P.S. I am not saying that bonds will perform better in the near term than stocks; I'm just pointing out that stocks are not always a sure thing compared to bonds.

[thekid]

Or bonds...

I'll offer support for that with an article from a well respected periodical, The Economist:

Buttonwood: Beware of the bias | The Economist

Summary - The idea of investing in US stocks during the 1900's was not obvious, or a foregone conclusion. So to use US equity returns as the basis for saying "equities will always perform better than bonds" is somewhat naive. This is "survivor bias". Anyone considering investing in the US in 1900 would have had many other options from which to chose, many of which are now gone. If you took the average equity return from all those other economies, your equity return would not look as good. Retrospectively picking the very best equity performer (the US), then comparing to bonds, is not a fair comparison.

P.S. I am not saying that bonds will perform better in the near term than stocks; I'm just pointing out that stocks are not always a sure thing compared to bonds.

Bonds can and have outperformed stocks. It's unlikely to happen in the next 10/20 years though. You have to look at valuations. Periods where bonds outperformed stocks (or the equity premium was negliable) follows periods where bond yields were quite high (5%+ for long bonds) and stock valuations were quite high (low yields). Today, we are many decades into a bond bull market that has left bonds yields at or near historic lows. We are at the bottom of the interest rate cycle. Current stock valuations don't make them out to be cheap either, but no were near as expensive as bonds. It is a near certainty that stocks will considerably outperform bonds over the next 10/20 years, albeit both stocks and bonds will underperform their historical averages. We are currently investing in a very low yield environment.

That said, there are a number of investments other than stocks in which you can achieve returns at least on par with inflation. Real return bonds being one (will shield you from both expected and unpexpected inflation). Long term bonds should shield you from expected inflation (plus a premium over real return bonds to compensation from lack of protection should inflation be higher) -beware they are likely a suckers bet at current yields. Short term bonds historically return inflation +1% or so. They don't currently, but that's the beauty of short term instruments, they are most flexible in a rising yield environment (which we will likely witness sometime in the future). Real estate and reits should also cover inflation and offer additional returns.

[disneysteve]

Or bonds...

P.S. I am not saying that bonds will perform better in the near term than stocks; I'm just pointing out that stocks are not always a sure thing compared to bonds.

Correct. I should have said that. Yes, bonds can also beat inflation and typically do.

[scfr]

jimmyjeffers - Another way to maximize your return on guaranteed savings is to seek out banks offering cash rewards. Be advised that this requires you to be proactive, looking for rewards offerings, making sure you can meet the requirements (read the fine print), moving your money around, and following up to make sure the bank actually posts the reward when they are supposed to (you'd be surprised how many don't). Any rewards you receive will be treated as interest income at tax time.

Some will say that it isn't worth the time and effort to do this. Personally, I say it's worth it. Last year my husband & I got $650 in bank rewards. (We also got credit card rewards, but that isn't what your question was about.)

[scfr]

Or bonds...

I'll offer support for that with an article from a well respected periodical, The Economist:

Buttonwood: Beware of the bias | The Economist



P.S. I am not saying that bonds will perform better in the near term than stocks; I'm just pointing out that stocks are not always a sure thing compared to bonds.

Thank you for sharing this link. It is always refreshing to see something written from an internationalist point of view, and REALLY refreshing to see something that doesn't try to shoehorn everyone in to a "one-size-fits-all-Money-magazine-advice" plan.

[The_Wiz]

The best investment one can make is being debt free and owing no one but the utility man once a month.

[greenskeeper]

silver

[violet80907]

Are there some investments out there that I don't know about that are guaranteed in some way but also offer returns in the 5-10% range?

Precious metals.

I had no idea there was any way to invest in precious metals with a guaranteed return; please explain.

[Nika]

Are there some investments out there that I don't know about that are guaranteed in some way but also offer returns in the 5-10% range?

After you find how to get 5-10% return without risk, could you also get on to finding a way to have a body like Jillian Michaels without exercising?