I’ve previously written about the need to understand risk when it comes to investing in the stock market. Too often we as investors get caught up in our emotions and act in the exact wrong way. For some of us, that means being too scared to invest in the stock market at all. For these investors, they are looking for safe types of investments.

Safe Types of Investments

For the most part, safe types of investments usually include cash, savings and checking accounts, certificates of deposits, and to a certain extent, money market mutual funds. Of course, if you listen to any sort of talk radio, there will be ads touting all sorts of safe types of investments, many of which are nowhere near safe and others even I haven’t heard of. Aside from these outliers, are cash types of investments safe? Well, it depends on how you look at it.

Your Principal Is Safe

The overwhelming majority of times, when investing in checking, savings, and certificates of deposits, the principal you invest is 99.9% of the time safe. The only way you will lose your principal is if the bank where the investment is held at goes under and it wasn’t covered by FDIC insurance or you had more invested than the FDIC coverage amount. In this sense of the word “safe”, then yes, these are safe types of investments.

You Risk Losing Money

However, even though these are safe types of investments in the sense you will never lose principal, depending on the interest rate you are earning, you still risk losing money to inflation. I’ve talked before about inflation, even hidden inflation. but too many investors ignore it when they are investing for the long-term.

Over time, inflation eats away at the purchasing power of you money. We see this all the time. I remember as a kid a pack of gum costing me $0.50. Now it costs $0.99. This is the effect inflation has on prices – it causes them to rise over time.

Historically, inflation runs between 2-3% annually. If your savings account earns you 1% per year, you are losing out to inflation. Let’s look at the numbers to see this in action.

Let’s say you have $1,000 and you invest in a savings account earning 1% annually and inflation is running at 3% annually.

After one year, you earned $10 in interest, making your investment worth $1,010. Because of inflation, an item that cost $1,000 when started your investment now costs $1,030 at the end of the year. Your savings account investment is a safe type of investment in the sense that you didn’t lose your original $1,000 but your savings account is not a safe type of investment because inflation is outpacing your return .

High Yielding Safe Types of Investments

The next question you probably have is what are some safe, high yield types of investments to invest in? Unfortunately, there is no such thing, regardless of what the man on the radio or late night television is trying to sell you. Always remember that risk and return are related. The higher the risk, the higher the potential return you can expect. The lower the risk, the lower the potential return you can expect .

What Are Your Options?

So what are you left to do? For most investors, keeping money in a savings account for emergencies is the ideal thing to do. Depending on the amount of the account, you could look into buying certificates of deposit with various maturity dates to get a little more return.  Otherwise, you are left with entering into the bond market, specifically, short-term bonds. Realize though that currently even these are not yielding much.

The fact is that we are a very low interest rate environment right now. The Federal Reserve has said it will continue to keep rates low until the end of the year at the minimum, possibly to the end of 2014. Until the economy picks back up and interest rates begin to rise, short-term and risk-adverse investors are left with very few options.

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