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