Where Is The Safest Place To Save Or Invest Your Money?
Published 10/3/08 (Modified 3/8/11)
Whether we want to acknowledge the grim reality or not, the vast majority of the American public is undergoing a mental crisis at the moment during this difficult period of economic recession and housing depression. Indeed, this economic slowdown is causing many Americans to struggle financially, and the series of collapses of major commercial banks and investment brokers have led to a domino effect of pink slip closures and layoffs. With the bailout of major global insurance conglomerate AIG and the takeover of mortgage loan giants Fannie Mae and Freddie Mac by the spend-happy federal government using taxpayer money, significant numbers of shareholders and stakeholders have been financially wiped out in the process. Collapsing under the weight of bad mortgage debts and the loss of value in their subprime mortgage loans, major mortgage lenders like Countrywide and investment brokerage banks like Merrill Lynch and Lehman Brothers have had to engage in significant write offs and ultimately put themselves up for sale at bargain basement discounts.
With the FDIC shutdown of major thrifts and banks like IndyMac and Washington Mutual, as well as the shakeup at Wachovia, even historically secure commercial banks are starting to feel the credit crunch squeeze. With the recent bank safety scares hitting Wall Street and now Main Street, bank deposit customers have been sent reeling and scrambling to check FDIC insurance coverage limits - calling their banks to arrange their affairs for sufficient coverage. When FDIC insured bank consumers are feeling uncertain and fearful, you know the confidence of the American people in their banking and credit systems have been significantly shaken. Many people have been left unable to sleep soundly at night, as lingering concerns of bank safety and security have paralyzed the American economy and investment psyche. So what's a savvy investor and account depositor to do in this brave new world of financial bailouts and bank closures?
To Survive The Credit Crunch, Financial Crisis, and Housing Market Collapse - Seek Out Security, Stay Optimistic, and Look For Opportunities
Without a doubt, the financial, stock, and housing markets remain volatile as the subprime mess has paralyzed lenders, halting the once liquid credit markets. However, whatever you do, it's best to avoid the "irrational exuberance" (quoting former Federal Reserve Board Chairman Alan Greenspan's catch phrase) and stay clear of the overly extreme sentiments of certain doom and gloom naysayers. Remember, the economy will survive and the financial system will be repaired in due time - have a little faith.
Take our current energy crisis and oil supply depletion situation for example. Yes, it's true the world's supply of crude oil is steadily dwindling and gas prices have skyrocketed recently - however this doesn't mean the world is going to come to a screaming halt as supply of our beloved dinosaur juice runs low. Even now, the American and world governments are actively advocating and promoting the advancement of new alternative fuels and alternative power sources such as nuclear, clean coal technology, solar, wind, and all types of clean, green energy. Society is infinitely resilient in the long haul and will adapt to changing times and life will go on as usual. Whatever you do, don't resort to taking up ridiculous survivalist activities such as building a bunker, withdrawing all of your money from banks, giving up credit card usage, or stocking up on food, guns, toilet paper, and supplies to ride out some silly apocalyptic fantasy future that you irrationally conjure up. Unless you are already doing so, there is no need to start making plans to live off the land, move onto homesteads, and start milking your own cows because you anticipate the need to defend your community from the hordes of starving crowds who did not prepare for the supposed eventuality. The world as we know it will not disappear, so discard those wacky conspiracy theories and economic Armageddon notions immediately. Don't be a nut. Instead, starting planning for a brighter financial future today for yourself and your family by making smart banking and wealth investment decisions for the long haul. When this economic malaise blows over in a few years or even in a decade, your smart financial steps today will reap dividends in spades. It's during tough economic times that counter-intuitive minded investors profit in the long run, and it's how future millionaires get made.
Despite the current market sentiment, I strongly advocate long term investors to not overlook continued portfolio diversification opportunities in the stock market through mutual funds and indexes, and to not neglect true long term bargains in real estate and housing. The age old truism and expression in the world of investing is true - that the greater the risk, the greater the return. This mantra is also strongly tempered by another financial axiom of billionaire investor Warren Buffet and his views on the interplay between investment fear and greed - that the smart investor should seek to be fearful when others are greedy and greedy when others are fearful. It's how savvy long term investors ultimately pay off in their steadfast investment decisions today. In fact, Warren Buffet, who has successfully made billions of dollars by taking advantage of opportunities during the worst of times, has been actively practicing what he preaches, buying up significant value minded investment positions in severely beat down companies like Wall Street investment giant Goldman Sachs for $5 billion and forking over $3 billion for positions in mega technology services provider General Electric. Of course, during these turbulent economic times and periods of extreme stock market volatility, it's best not to be overly emotional or make hasty decisions based on short term swings. The world is filled with chicken littles and emotional lemmings so it's all too easy too succumb to hysteria and Street panic. But those who want to survive this economic downturn and emerge from the recession and credit crisis in stronger financial positions than before must maintain their wits and stay focused for the long term, spreading their financial wealth around through diversified investments and continuing to seek out potential opportunities.
But there is a caveat for this long term sentiment. While I personally have 2-3 decades to go before I need to hatch my retirement nest egg, with plenty of time to build up long term investment positions, as well as continuous steady income coming in to continue dollar cost average investing and taking advantage of interest compounding, not everyone is in a similar position. For many millions of people, the money they have at this present time is all the significant amount of money they will ever have and at their age and current stage in life, they simply can't afford to risk further loss. These types of individuals are focused on asset preservation rather than opportunistic investing and thus for these investors, they need investment security and deposit safety today. For some, it's also the need to preserve their cash from loss due to the fact they are close to retirement, or saving up for a specific upcoming expense such as a down payment for a new home. Or perhaps they need to maintain a stash of cash to give them confidence and financial safety net courage to continue investing for the long term, while weathering financial emergencies.
For the asset preservation types who want to ensure their current deposits and investments are shielded from bank failures and investment loss, safety is the paramount concern when it comes to selecting the securest place to put their money. But for the conservative types, they also desire a certain degree of liquidity and convenient access to their money. But with the diminished risk of loss at safer places like bank savings and money market accounts comes substantially lower rates of return. Such deposit and investment sources as the ones listed below will offer you more security for your money, but they will not earn you a lot of interest, and oftentimes will just barely keep up with inflation. Keep that in mind as you evaluate your options and perform your due diligence. Furthermore, while being cautious and putting your money into safe and secure investments will preserve you from drops in the stock and financial markets, you run the very real risk of missing out on major market rebounds and valuable long term opportunities.
For those determined to ride out the volatile economic storm by seeking safety, the following options are the best choices when it comes to answering this question - "what is the safest investment for my money to avoid the risk of loss?"
List Of The Safest and Most Secure Places To Save and Invest Your Money During A Recession Or Economic Crisis:
1) Bank Savings and Checking Accounts - Of all the ideal places to store your money during the worst of times, other than in U.S. Treasuries, the best place is in a traditional bank account. While the rate of interest return on bank account deposits will never beat the long term rate of return on a properly diversified stock portfolio, depositing your cash in something like a high yield savings account is the easiest and most practical solution for those worried about the safety and security of their money. For those searching for the best high yield savings accounts offering the highest annual percentage yield (APY) interest rates, here are the best online savings banks out there (all of the following recommended high interest banks are fully FDIC insured, and all account deposits are protected under the FDIC insurance coverage limits):
- FNBO Direct - 3.50% APY
- WT Direct - 3.31% APY
- E-Trade Savings - 3.30% APY
- HSBC Direct - 3.25% APY
- ING Direct - 3.00% APY
In terms of safety, reliability, and liquidity, putting your money in a bank account is the easiest and most straight forward savings option. Not only is your bank deposit earning interest, it's FDIC insured and easily accessible. The Federal Deposit Insurance Corporation (FDIC) is a federal government run enterprise that provides insurance coverage and protection for the deposit accounts of participating member banks, guaranteeing their insured accounts from unexpected loss. While FDIC insurance coverage limits vary depending on the number and type of account ownership categories you have at each bank, the rule of thumb to remember is that for each individual, the FDIC protects up to $100,000 in deposits at each banking institution for each ownership category. This means that at each FDIC member banking institution such as Citibank or Bank of America for example, each individual may be insured up to $100,000 for a single account and get additional coverage - like a separate $100,000 coverage limit for a joint account with his or her spouse. Furthermore, for retirement accounts like IRA's, Roth's, SEP's, and Keogh's held in a member bank in the form of a bank deposit (as opposed to something like a mutual fund), there is also an extra but separate $250,000 FDIC insurance coverage limit.
While skeptical investors and chicken little depositors might cite the recent failures of major commercial banks and thrifts like IndyMac and Washington Mutual as reasons to be wary of the safety of commercial banks, the reality is that in all of the recent bank failure scenarios, all of the FDIC insured deposit accounts that fell within the coverage limits were fully protected from loss. Even amidst the current mortgage crisis and credit crunch, the great majority of commercial banks are considered well capitalized. The possibility of a bank failure and the probability of a sudden FDIC takeover is extremely remote. However, even in the event that a bank does happen to fail, consumers would continue to enjoy uninterrupted and easy access to their FDIC insured bank money.
It is also interesting to note that since the FDIC was established three quarters of a century ago after the Great Depression, no banking customer has ever lost a single penny of their FDIC insured deposit at any failed bank. Your commercial bank may go out of business or suddenly be unable to continue operating as a viable banking institution, but Uncle Sam, bolstered by the virtually unlimited financial resources of the federal government will back up your money in full, up to the guaranteed FDIC insurance coverage limit. Even in the event that allotted FDIC funds become tapped out, the federal government can always authorize itself and the U.S. Mint to print emergency money. It is almost inconceivable to me to even fathom the possibility of the FDIC failing or the FDIC funds to somehow go bankrupt. Such a dire failure would probably require that the United States federal government suddenly cease to exist or be in such horrible shape that losing your checking or savings account deposit would probably be the least of your concerns. At that point of Armageddon, you'd probably be better off investing your remaining money in guns, canned food, and a nuclear fallout bunker. There is a reason why the whole world turns to the U.S. for economic, political, and militarial stability and guidance - we have the most powerful, tried and true system in the world. It's not perfect, but it's extremely resilient and will ultimately overcome struggles in the long run.
2) Laddered Bank CD's - While putting your money in a high interest savings account is your best bet in terms of account safety and liquidity, those who seek a slightly higher APY rate of return may want to consider dabbling in bank certificate of deposits (CD's). CD's can be found and purchased through commercial banks and certain deposit brokers (view my list of the best online brokers), and along with regular bank deposits, are both considered very safe investments. Like checking and savings accounts, certificate of deposits are also insured up to $100,000. However, do keep in mind that for each individual customer at each banking institution, checkings, savings, and CD's are lumped into a single FDIC insurance category for coverage purposes.
While CD's tend to offer fixed interest rates that exceed that offered by checking and savings accounts, the catch is that unlike the variable interest earning bank deposits, your CD deposit is locked into a fixed interest rate at the time of investment. When purchased, the CD account has a set maturity date such that if withdrawn too early, the CD funds will incur an expensive penalty. When you buy a CD via your bank, you invest a fixed sum of money for a fixed period of time ��' anywhere from six months, one year, five years, or longer. In exchange for your agreement to keep the money invested and locked for the pre-arranged period of time, the issuing bank pays you a high interest rate, typically at regular intervals throughout the year. When you cash in or redeem your CD, you receive the money you originally invested plus any accumulated interest. But if you withdraw prematurely, an early withdrawal penalty may cause you to forfeit a chunk of your original investment.
While CD's enjoy higher interest rates than traditional savings accounts, the potential hassle with CD's is that once locked in, their rates of return have a potential to lag behind and become surpassed by variable high yield savings accounts if those interest rates rise. The best way to get around this problem is to ladder your CD investments by purchasing CD's with staggered maturity dates. For example, for those buying CD's for a period of just a year, one could purchase multiple CD's, maturing at dates of 1 month, 3 months, 5 months, 7 months, and so forth, thus ensuring that you will always have money coming in and cash on hand at set intervals. CD ladders are a good idea for those wary about locking up their money for long periods of time, but you have to choose the lengths and maturity dates you're comfortable with, otherwise you'll toss and turn at night and stress about your lack of liquidity in case of a financial emergency.
3) U.S. Treasury Bills and Bonds - U.S. Treasury Bills, or T-Bills as they are often called, are extremely secure debt instruments issued by the U.S. federal government. They are mostly notably used by large institutional investors and individuals with substantial assets during times of economic crisis and societal instability when there is an instinctual flight to quality. However, I tend to stay away from these bond instruments and rarely invest in them. Their fixed rates of return are terrible and simply too low for my liking. While they offer rock solid protection backed by the full faith and credit of the federal government, the interest rate yields for U.S. Treasuries are often low and based on auction driven demand. Because Treasury rates of return are based on bidding demand that's heavily influenced by societal factors, during times of economic crisis or political instability, rates of return on U.S. Treasury Bills and Bonds can plummet. During major economic depressions and recessions, U.S. Treasury yields can sometimes even go negative, that is, investors are willing to accept a small destruction of their investment to guarantee no larger destruction.
While U.S. Treasuries generally provide almost laughingly low rates of return on investment, they provide near iron clad safety and protection for your money. Treasury Bills are essentially "IOU" debt instruments issued by the United States federal government to any consumer, business, or institutional investor willing to buy them, and they are used to pay off the U.S. government's own maturing debt paper and to pay off its own bills. By issuing short term U.S. Treasury Bills, mid term Treasury Bonds, and long term Treasury Notes to consumers, buyers essentially lend the government money in exchange for a fixed rate of return and a solid promise by the U.S. government that the debt investment will be repaid back in full upon maturity due date. Along with FDIC protected banking assets, the world also regards U.S. Treasuries as credit risk proof - the perfect place to store money for the extremely risk adverse.
U.S. Treasuries range in maturation from a few weeks for the short term T-Bills to as long as 30 years for the Treasury Notes. Of course, the longer the maturation date, the higher the fixed interest rate the U.S. debt instrument pays out, same as the case with ordinary bank CD's. Same as with CD's, for those who want to inject greater liquidity into their Treasury investments, they may want to consider laddering their Treasuries as well, by purchasing multiple U.S. Treasuries simultaneously offering different maturity dates. The recommended way is to purchase multiple Treasury bills and notes that will expire at regular set intervals and have them automatically rolled over into newly issued Treasuries for continuous interest earning effect, but still maintain a semblance of liquidity.
The simplest way to purchase U.S. Treasuries is to go through the federal government's Treasury Direct website. There you can follow the instructions to open a new account for individual investors by providing your personal and financial information such as name, mailing address, Social Security Number, bank deposit account, and bank routing number. You can purchase as little as $100 worth of U.S. Treasury "IOU's" (the current minimum investment) or you can purchase millions of dollars worth. While there is a competitive bidding process of yield prices, most ordinary non-expert individual investors can opt for the non competitive process and simply agree to the current spot offering rate. As such, the service is probably more beneficial to extremely wealthy investors unable to find full protection under the FDIC limits and needing to preserve their millions of dollars in extremely safe lock box type of accounts. There is currently no limit to the amount of U.S. Treasuries that may be purchased and interest income derived are exempt from state and local taxes.
4) Money Market Funds - Money market funds are conservative mutual funds that invest in short term, stable debt instruments, high quality securities, and other forms of top rated short term commercial paper that can be easily sold, making the likelihood of any loss of principal extremely rare. Unlike traditional mutual funds and index funds, asset preservation minded money market mutual funds do not invest in stocks, which while lends itself to greater stability, also results in a much lower rate of return compared to their growth oriented counterparts. While most mutual funds, particularly those that invest in riskier stocks and investments are not all that safe and secure from investment loss as they ebb and flow with the economic cycle and the plight of underlying corporations, money market mutual funds tend to substantially more stable.
However, while money market mutual funds have been traditionally regarded as solid and reliable investments, they are not without a tinge of risk, depending on the composition of the money market fund's portfolio. While the great majority of these funds have never lost money or failed, recent money market fund events in the news have sent a chill through the financial world. Recently, the Reserve Primary Fund, a giant money market mutual fund, announced its investors would lose money. Instead of each money market fund share being worth the customary $1, each would now be worth 97 cents, essentially "breaking the buck" in the process, forcing investors to eat a 3% loss. The loss was triggered by the fund's purchase of debt securities issued by Lehman Brothers with a face value of $785 million that ultimately became worthless, as Lehman Brothers ultimately spiraled into bankruptcy and ended up on the chopping block for sale due to failed investments in subprime mortgages.
The moral of the story in terms of flight to quality is to seek out high yield bank accounts and U.S. Treasuries for safety first before seeking out money market funds. While money market funds are significantly more secure than stock based mutual funds and are generally still considered decently safe places to invest your money, in today's dangerous and ever shifting credit markets, they simply do not offer the same 100% protection as that offered by savings accounts, CD's, and U.S. Treasuries.
5) Gold Investments - This is most definitely not a recommendation but rather the raising of another interesting alternative way to hedge against economic risk, inflation, and the weakening dollar. I hesitated to even mention gold and such hedged investments against risk, but everytime the economic and credit markets head south, the subject of buying and investing in gold always comes up. Gold, silver, and other valuable commodities are tangible material investments that always skyrocket in value during difficult economic times. When there is political and social instability due to frozen credit markets or news of terrorist attacks that shake up the financial system, the housing market, or the stock market, the value of commodities not tied to a variable money system but that is instead linked to underlying rarity based on exchange driven supply and demand goes up.
But remember, buyers beware - one thing to keep in mind is that gold is just like any other investment - it's still a bet against economic times and prices do fluctuate with great volatility. Like with any other educated bet, your gamble may pay off big or backfire significantly. While prices of gold are almost certain to remain high as the economy flirts with a full blown economic recession and the financial markets continue to flounder, prices of gold have the potential to decline significantly should there be signs of an economic recovery. Thus for the conservative investor who is seeking a flight to quality in his or her investments with pure asset preservation in mind during times of economic instability, I would recommend treading with great caution when it comes to investing in gold. Unless you have experience with gold investments, stick with Treasuries, high yield bank accounts, and CD's instead.