5/3/12

In today's uncertain market, it's important to devote a portion of your portfolio to safe investments.

This is an obvious statement for most of you. Some have different opinions regarding how much of a portfolio should be devoted to risk mitigation, but most agree that safe investments are necessary to hedge against economic downturns.

We have so many options, but what exactly is the ideal "safe" investment? This question was explored in a recent article in The Atlantic, which can be read here.

For the second straight year, an annual Gallup poll has found that a plurality of Americans believe gold is the single safest long term investment option. Safer than savings accounts. Safer than real estate. Safer than stocks. A full 28 percent of adults ranked gold as their top choice, down from 34 percent last year, a drop just outside the five point margin of error. It was most popular among older Americans, those without a college a degree, and individuals who earned between $30,000 and $75,000 a year.

So what's the safest type of investment? Below I'll lay out a case for each of the most common answers, and I'll leave you to decide:

Stocks/Mutual funds:

  • Blue chip stocks are less risky than other stocks and often have an established record of stable earnings performance over several decades.
  • Defensive stocks with strong balance sheets, high credit ratings and diversified product lines can be safe-havens during a recession.

Corporate bonds:

  • Usually offer higher yields than comparable-maturity government bonds.
  • Bondholders get paid by companies before stockholders.

Savings accounts:

  • Liquidity. Savings accounts allow you to withdraw your money at any time, which is rarely an option with CDs or long-term investment options.
  • It might not offer huge returns, but your money is insured by the federal government even if the bank folds.

Real Estate:

  • Real estate is a tangible asset, so an investor can do things to a property to increase its value or improve its performance.
  • Not subject to extreme market fluctuations (usually) due to low correlation with other asset classes like stocks, bonds and REITs.
  • Private real estate has historically delivered high and steady annual income returns, with 6.9% average annual income returns from 2000-2010 and 7.7% from 1978-2010.

Gold:

  • Gold is believed to be a hedge against inflation.
  • Gold is actually used to make things, and as countries get richer, demand for gold will grow.
  • If you had bought gold in 2000, you would have earned a 495% return.

U.S. Treasury bonds:

  • Backed by full faith and credit of U.S. government.
  • Interest earned on these bonds is exempt from state or local tax laws.
  • Technically an I-bond, which offers 0% interest but keeps up with inflation, would offer the safest form of investment. Boring, but safe.

I've only listed the benefits of each form of investment since I could write half a book discussing the pros and cons of each. Also, keep in mind this poll was taken last August, just as gold was peaking.

Gold may be past its peak. When the price of gold spiked last summer, many warned a bubble was forming. That doesn't sound very safe to me. Then again, if the Fed keeps interest rates low, which it has indicated it will do until 2014, gold may not be a bad investment. But is it the safest?

Can you think of a better investment? In this uncertain market, which of these strategies offers the best way to protect your wealth?

Comments (17)

5/3/12

Safest is treasuries. While gold has had a huge run-up, I wouldn't say it's a safe investment. I sit on a metals options desk and have seen it drop 4-5% in 30 minutes. Also remember it reached all-time highs last year, and now is $300 lower. Just my thoughts though.

5/3/12

Well treasuries are still probably the 'safest' of assets, paper wise. I think that having hard, tangible assets is probably the way to go in the US. Land is definitely a pretty solid and safe investment over the long run. Same with real estate over the long run. Gold, I personally tend to agree with Buffet that it is pretty useless and a greater fool's theory but then again it has been used forever as a store of wealth.

5/3/12

If gold never falls then inflation will have gotten so bad that the dollar-denominated value of the commodity will be meaningless.

5/3/12

Gold is not an investment, gold is money. Over the next 5-10 you should be more worried about return of capital rather than return on capital. Holding on to sound money is more important than ever.

In reply to greekdebt
5/3/12

greekdebt:
Safest is treasuries.

5/3/12
In reply to Hfhopeful
5/3/12

Hfhopeful:
If gold never falls then inflation will have gotten so bad that the dollar-denominated value of the commodity will be meaningless.

lolwut?

In reply to JeffSkilling
5/3/12

JeffSkilling:
Gold is not an investment, gold is money. Over the next 5-10 you should be more worried about return of capital rather than return on capital. Holding on to sound money is more important than ever.

^^^smart

gold and silver are real money point blank period. All the big bosses have gold in there portfolio no matter how much it declines. its a hedge against inflation/ hyperinflation, bank holiday, basically your run of the mill dooms day senario.

In reply to JeffSkilling
5/4/12

JeffSkilling:
Hfhopeful:
If gold never falls then inflation will have gotten so bad that the dollar-denominated value of the commodity will be meaningless.

lolwut?

I'm not sure why this is confusing?

In reply to Hfhopeful
5/4/12

Hfhopeful:
JeffSkilling:
Hfhopeful:
If gold never falls then inflation will have gotten so bad that the dollar-denominated value of the commodity will be meaningless.

lolwut?

I'm not sure why this is confusing?

You think if the dollar collapses gold becomes worthless?

In reply to JeffSkilling
5/4/12

JeffSkilling:
Hfhopeful:
JeffSkilling:
Hfhopeful:
If gold never falls then inflation will have gotten so bad that the dollar-denominated value of the commodity will be meaningless.

lolwut?

I'm not sure why this is confusing?

You think if the dollar collapses gold becomes worthless?

No I just meant that the "dollar-denominated" value would be meaningless thereby causing issues in assessing value to gold or any commodity. But honestly, if the reserve currency of the world collapses and we are left with a situation where we trade gold bullion for goods and services then its likely we've reached a point where this very forum would be unable to exist for long periods of time as price and wage volatility would have exploded...

In reply to Hfhopeful
5/4/12

Hfhopeful:
JeffSkilling:
Hfhopeful:
JeffSkilling:
Hfhopeful:
If gold never falls then inflation will have gotten so bad that the dollar-denominated value of the commodity will be meaningless.

lolwut?

I'm not sure why this is confusing?

You think if the dollar collapses gold becomes worthless?

No I just meant that the "dollar-denominated" value would be meaningless thereby causing issues in assessing value to gold or any commodity. But honestly, if the reserve currency of the world collapses and we are left with a situation where we trade gold bullion for goods and services then its likely we've reached a point where this very forum would be unable to exist for long periods of time as price and wage volatility would have exploded...

I don't follow. Even though $ is the world's reserve currency (which is changing), if the dollar were to collapse and you owned gold, you could still change it for Euros/GBPs/Yens/.... The gold would keep it's value, which is exactly the point...

BTW, Jeff, in the videos you posted how did they measure the fact that USD has lost 97% of it's value? Just inflation?

5/4/12

Obama, election year.

QuantativeEasing2.xls already exists, please change the name and try again.

CTRL A
CTRL C
CTRL V

= gold dropping short term as printed dollars prop up the equiities market. Just my thoughts anyway.

In reply to Maximus Decimus Meridius
5/4/12

Maximus Decimus Meridius:
Hfhopeful:
JeffSkilling:
Hfhopeful:
JeffSkilling:
Hfhopeful:
If gold never falls then inflation will have gotten so bad that the dollar-denominated value of the commodity will be meaningless.

lolwut?

I'm not sure why this is confusing?

You think if the dollar collapses gold becomes worthless?

No I just meant that the "dollar-denominated" value would be meaningless thereby causing issues in assessing value to gold or any commodity. But honestly, if the reserve currency of the world collapses and we are left with a situation where we trade gold bullion for goods and services then its likely we've reached a point where this very forum would be unable to exist for long periods of time as price and wage volatility would have exploded...

BTW, Jeff, in the videos you posted how did they measure the fact that USD has lost 97% of it's value? Just inflation?

I believe that's measuring the purchasing power of the 1913 dollar today.

5/4/12

Interesting article that relates to this discussion: http://www.cnbc.com/id/47298734

See my WSO blog

    "The only thing that interferes with my learning is my education." Albert Einstein
In reply to chabo11
5/5/12

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