With the recent unprecedented turbulence in the stock market, many are wondering if “it’s safe to go back into the water” and many people who thought they were pretty comfortable taking on some amount of risk with their investments by investing in small-cap and mid-cap mutual funds are finding that they aren’t nearly as risk-tolerant as they thought.
Insurance companies and some investment companies are taking advantage of consumers who have seen significant declines in their investment portfolio in the last year and pitching them “can’t lose” financial products that will guarantee a reasonable rate of return. The idea sounds rather appealing when considering how the stock market has performed in the last six months, but the devil lies in the details.
The types of investments that these insurance companies are pushing, such as some of the variations of annuities, are extremely high in fees and commissions. The reason these companies are so excited to sell these products is because they make much more on them than they would by putting you in a less-exciting no-frills mutual fund. If you were to look at the contract, you would find that the guarantee doesn’t apply in a lot of different situations, and that you could still lose your money.
Fortunately, there is a way to invest in the stock market without the possibility of losing any money. If you were to have $10,000 and invested 3/4ths of it in a 10 year certificate of deposit and the other 1/4th in mutual funds, you would always have at least your original amount, because the $7,500 that you put in a 10-year CD would be worth over $10,000. Any investment revenue that you had from the mutual fund would simply be gravy.
By following this strategy, you are avoiding the high-fees and commissions associated with the products, such as variable annuities, that are being pushed by insurance companies. If the stock market goes up, you’ll benefit from 1/3rd the up-side, but if the stock market continues to decline, you still have your principal balance. It’s a very conservative way to invest your money, but if you’re looking for a “can’t lose” investing strategy, it’s a much better way to go than volunteering yourself to be ripped-off by high-fees and commissions.
If you’re not ready for the risk of the stock market, but are willing to accept some more moderate risk, you could consider tax-free municipal bonds. They have typically been very safe investments that will yield 4-8% depending on which funds you invest in. If you’re not willing to take any risk at all and don’t want to mess with the stock market at all, you can always do a flat ten year certificate of deposit, but the amount of money that you earn will likely be much less than if you were to use the stock-CD mix discussed above.
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2 users resposed " A Comparison of No-Risk Investment Options "
March 11 2009
That is a very unique investment strategy. Basically using the the interest on the CD to hedge your stock bets. A 10-year CD may not be the best option at this time though. It may be wise to do the same thing, but have a laddered CD portfolio with varying maturities.
March 16 2009
You have a 10 year strategy and you want to use CDs?
Good God, man, why?
If principal protection is what you want, you’re still better off with that money in a fixed deferred annuity than in a CD kicking off taxable interest. You still get the downside protection. You don’t have surrender charges after 10 years (with most products anyway). It’s a better deal even with the fees and commissions associated with an annuity.
At any rate, you don’t think mutual funds have fees and commissions? Are you even comparing apples to apples?
I think you’re being penny wise and pound foolish. With a 10 year strategy, an annuity backed by a AAA rated company is going to give you much more in your pocket, after taxes, and a AAA-rated company is going to be on a sounder footing than the woefully under-capitalized FDIC, which is currently begging congress to increase their line of credit.
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