The safest investment has always been defined as the investment that carries absolutely no risk of losing the principal. Thus, fixed debt investments such as U.S. Treasury notes and bonds, as well as FDIC insured bank CDs have forever been cited as the safest investments, as they are backed by the full faith and credit of the U.S. government.
So what will be the best safe investment for the next 5 years? There are four main categories of investments that can be used in the asset allocation of a portfolio…
- Safe Investments
- Alternative Investments, such as real estate or commodities (think gold or silver, not corn or soybean).
Outlook For Fixed Debt Investments
- Although still considered the safest of any asset class, direct investments in CDs or U.S. government notes and bonds have returned next to nothing lately, and in light of present economic conditions, the outlook for these instruments is not about to change anytime soon, with the total return actually being negative when inflation is factored into the equation. Even money market funds are not faring any better, as they are also constrained by the same factors that influence fixed debt instruments.
- Municipal bonds are great because of tax considerations, particularly if you happen to reside in the same state you are purchasing the bonds from.However, municipalities are facing rapidly declining revenues from their tax bases, and the danger of default is commensurate with these developments, as evidenced by the recent bankruptcy petitions of three separate California cities within the span of two weeks.
- If the economy stays weak, the likelihood of additional municipalities defaulting increases. The only possible bright picture within this universe is medium term U.S. government bond mutual funds, those that stay within the 5 year or less range. Long term bonds of any type are still under tremendous downward pressure at the moment, therefore should be shied away from.
- Extreme volatility perfectly describes this sector and the same holds true on a global scale. Although some stocks can still shine, the danger is the risk that they can be dragged down along with their peers in a sector meltdown, notwithstanding fundamentals. Slower global growth will continue to exert pressure on equities, especially for companies that have global exposure.
- It is anyone’s guess as to will happen to the real estate sector in the next several years to come. The housing crisis not only envelops the U.S., but is also a major factor in countries such as Spain. Residential real estate is not the only major concern, as the same slower global growth phenomenon can furthermore negatively impact the commercial and industrial real estate sectors for the foreseeable future.
- Gold and silver, on the other hand, have retained their status of reserves of wealth for troubled times. Slight gyrations can still occur in the next several months; however, if gold starts touching the $1,200 to $1,300 level, this may be a compelling buy signal, as gold just may be on the threshold of breaking away from its fundamentals and entering the geopolitical arena. Watch for upcoming gold reports and find out how the world may be changing to its core.
- In conclusion, safest investment for the next 5 years may well be medium term U.S. government bond funds for the first year or so, so that you can sit on the sidelines and watch what transpires, then gold will most likely come into sharper focus as the safe investment for the next 5 years.