Even the safest investments in the world carry risks, such as losing principal, loss of purchasing power following inflation, and illiquidity. The risk is higher or lower depending on your investment, of course. Below are some scenarios where these risks affect your safe investments.
- Your bank closes
All bank deposits are insured by the government through FDIC insurance. However, the amount insured is limited to the first $250,000 per account, per institution. In case your funds excess this limit, you can get additional coverage by having multiple account titles in one bank, spreading your money across multiple banks, and using a brokerage account to purchase CDs from different banks.
- Your money market fund loses value
Money market funds go into short-term investments such as commercial paper where they offer short-term loans between companies. This investment is considered safe since there is only a small chance a company will go under in a year or less. Of course, there are no guarantees. Money market funds are intended to maintain a stable price of $1 a share then pay interest. Most funds pay no interest at all given the current low interest rate environment.
- Your insurance company goes bankrupt.
The higher the rating of your insurance company, the safer their financial position, which means they can pay you if you file a claim. However, your insurer can still go under. In this unfortunate situation, the National Organization of Life & Health Insurance Guaranty Associations ensures that insurance policies are transferred to a healthy insurer. Also, assets in a variable annuity are considered your assets and not that of the insurance company. Their creditors canot claim it in case of a bankruptcy.
- You lose purchasing power from inflation
Safe investments usually aim to preserve capital. This works as long as interest keeps flowing. If it does not, you can actually lose purchasing power over time. For example, if your investment earns 2% and inflation that year is at 4%, your principal is safe but it cannot buy as many goods or services. If you are investing for the long-term, move some of your investments into growth or income producing investments to protect yourself from loss of purchasing power.