Safe Investments are Largely Subjective
I quite often get asked about safe investments and I always reply with the question.....
What do you mean by 'safe investments'?
The reason for asking this is because the term is purely subjective. What appears to be low risk for one person is high risk for another.
A person investing in a property may be devastated to realise that his investment has gone down 30% one year after purchase. He may think that property investing is high risk. Another person may think, well, I still have the property and the property market will recover over the next few years and I'm in it for the long term anyway....
The same scenario but two different perspectives.
(It is perhaps worth mentioning that in reality you should not be buying property at market value. The discounted price you purchase for will act as a buffer if property prices go down. In other words you make your profit when you buy and should not be relying on a rising market. The above example was just to illustrate perceptions from two different people and that risk is purely subjective)
Having said all that there are generally recognised safe investments. The primary goal with safe investments is to protect what you have already got...
If your total net worth was one million euros you would be very foolish to put all of it into high risk investments. It would be better to put most of it into safe investments to preserve capital. Although with a substantially lower return, even at say 8-10% per annum that still equates to 80-100,000 euros gross income per year.
On the other hand if you are starting out - with no or very little money - you will need to build capital as quickly as possible. You will therefore need to put a substantial amount into medium risk investments. Perhaps with a small proportion invested in a high risk investment. It all depends on your goals and risk tolerance.
Let's look at some safe investments:
High Interest Savings Account
These are generally accepted as very safe investments. It is useful to have cash that is readily accessible with very little or no notice period if you want to withdraw it. Unfortunately interest rates at the moment (2008-10) are pityful and with the added problem of inflation and the serious devaluation of your currency it is quite possible you will actually lose money in real terms if cash is held long term in this type of investment eg. think US dollar.
However there is a very good alternative and that is to open an offshore multi currency account where interest rates are much higher and your deposit can be held in different currencies to reduce the risk of devaluation of one particular currency. You can get all the information you need at QWealth. Most savings accounts are insured.
I think bank accounts are useful to make regular savings into and once a certain amount of cash is reached, let's say 1-2 thousand euros then this money should be invested elsewhere.
Certificates of deposit are very similar to savings accounts because they are insured. However they are different in as much as they have a fixed interest rate over a predetermined period of time, quite often three and six months or one to five years. In exchange for agreeing to keep your money deposited for a fixed period of time you get a better interst rate than you would with a straight forward savings account. Some lending institutions offer variable rates too.
A bond is a debt security and as such is more risky than having a savings account or certificate of deposit. The debt is a loan that an investor makes to either a company or government, the former to finance long term investments and the latter to finance current expenditure. Bonds are repaid at fixed intervals over time and have a defined term or maturity. Government bonds are safer than corporate bonds as it is unlikely that governments will default on payments. However, please note that you are not guaranteed to get all your capital back under all circumstances.
Annuities differ slightly depending whether you are in Europe or the USA. All annuity contracts however have an option for a guaranteed distribution of income until the death of the person or persons named in the contract or set to run for a specified period.
An annuity contract is created when a person gives a life insurance company money which may grow on a tax-deferred basis and then can be distributed back to the owner in several ways....
i) Immediate Annuity - very often used to provide a pension. You give the insurance company a lump sum and they agree to provide you with an income till you die;
ii) Annuity Certain - the policy will pay the annuitant for a specified number of years only, therefore it is not suitable as a pension since you may out live the term;
iii) Life Annuity - similar to an Immediate annuity in as much as it can be used as a pension since the term is until the policy holder dies. However it is different to the extent that you are 'lending your money' to an insurance company and they are paying back 'capital plus interest.'
iv) Deferred Annuity - this just means payments are delayed until the investor wants them. It has two phases, a savings phase where the investor pays money in and an income phase where he receives an income.
v) Fixed and Variable Annuities - Income can be fixed where the insurance company make an agreed fixed payment back to the annuitant. Income can also be variable in as much as the insurance company guarantees a minimum payment but you may receive more depending on how well the managed portfolio performs.
There are important advantages having an offshore annuity....
i) You have more investment options since your overseas advisor is not limited to using certain contracts that an advisor at home would be. The result is much greater potential for growth.
ii) Wealth Preservation. Overseas annuities provide a secure way of hiding your assets from your government, especially if you are from the USA. Providing that the offshore provider has no affiliation with your country then your government has no jurisdiction over them and therefore your annuity.
It must be noted however that increasing pressure from western governments may force some countries into releasing information. However if the annuity is owned by a trust or some other entity then it's very difficult or impossible for anyone to associate your name with the annuity.
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