Where Are The Safe Investments?

Have you heard of Warren Buffett’s two famous investing rules?

Rule number one:  never lose money
Rule number two:  never forget rule number one

As virtually all investors know…  Safety matters in investing.

But what investment class offers real safety to investors?

In one sense, interest bearing savings accounts with less than the $250,000 Federal Deposit Insurance Corporation amount in them are as safe as possible. But, the average interest rate offered at savings accounts is around 0.17%.

An interest rate of 0.17% means you get a ‘nice’ return of $170 dollars a year for every $100,000 invested… Unless you are already a multi-billionaire with a frugal lifestyle, you will never reach financial independence with those type of returns.

There is a time and place for savings accounts, CDs, T-bills, and other short-term investments in an ultra-low yield environment. If you will need all of the money you have to invest in under a few years, there’s no since in investing in riskier asset classes.

When discussing safety and investments, we must not forget about the effects of inflation.

Inflation Destroys Low Return Investments

In August of 1971, President Nixon removed the United States dollar from the gold standard. This marks a significant shift in United States policy.

From 1972 on (the first full year of a full fiat monetary system), the inflation rate in the United States has averaged 4.2% a year.

Inflation from year 2000 to now has averaged 2.3% a year. Currently,inflation is hovering near 0%. The Federal Reserve Bank of St. Louis is expecting an average inflation rate over the next 5 years of 1.8%.

Some people expect hyperinflation in the coming decade. Anything is possible, but I prefer to look at history to guide expectations.

Let’s take the mainstream view and assume that inflation will continue on at around 3% a year over the long run. This number is lower than inflation since 1972, but 1.2 percentage points higher than expected inflation over the next 5 years.