Debt Consolidation

The Facts About Debt

Safe Investments in a Recession

Filed under: Investments
Written by: UWSA Staff
October 21, 2008

While the Federal Reserve is being tight lipped about whether the US is currently in a recession or will be average folks are certainly feeling a bit different about their wallet. A lot of people are wondering exactly what to do with their retirement savings, or what’s left of it, in the midst of what certainly seems like economic hard times. So what investments are safe in a recession?

What is a Safe Investment?

Some people are of the opinion that with any possibility of loss no investment is safe. Even in that sense though, there’s certainly safer and less safe. Most investors aren’t looking to be billionaires they’re looking to have a normal standard of living in retirement which means making enough money that will continue accumulating throughout retirement to afford that it. That means choosing investments aggressive enough to attain that goal but, especially depending on one’s age, not choosing ones that put your retirement at excessive risk.

Kinds of Risk

To accomplish the above we have to look at the different kinds of risk. Most people worry about what is called market risk; that’s risk that your investment might lose money for a period of time or permanently. While that’s certainly a concern it’s not the only concern, another kind of risk is called inflation risk. That is the risk that no matter what the return on your investment inflation may make the cost of living so much greater that your gains will amount to nothing at all or in fact a lost when compared to the cost of living in retirement,

The True meaning of Diversification

Most investors have heard of the idea of diversification. Essentially don’t put all your eggs in one basket. The problem is a lot of folks don’t really think about what one basket means. A truly diverse investment portfolio should contain both foreign and domestic investments, and those investments should not just be mutual funds but also things like cash, bonds, and potentially even investments such as real estate. Further they should be in diverse industries which are unlikely to experience economic troubles together. The reason behind this is generally if one of these areas is down some of the others are likely up. This reduces the chance for major loses in either category to wipe out one’s savings.

Examples of Safe Investments

There’s a few types on investments which are generally considered safe, even in times of economic strife. Treasury Inflation Protected Securities (TIPS) are issued by the US Treasury, and offer both appreciation as well as protection against inflation. Certificates of Deposit (CDs) are issued by banks but are protected by the FDIC up to 250,000 dollars. Money Market accounts invest in very short term investments, generally ones with very low risk. They are not guaranteed by the Federal Government however they
are usually insured by the SPIC up to 100,000 dollars.

Summary

In general what makes an investment safe is the likely-hood of return on investment. Even with safe investments however one much always diversify. Many regarded municipal bonds as a safe investment before the mortgage crisis. Also, though it’s unlikely, if the US Treasury were to default most of the safe investments backed by it would be in question. For that reason one should always be diverse not only in terms of kinds of risk, but aware of risk in a global market.

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