Which Investment Vehicle Is the Safest?

If you are close to retirement or have a low risk tolerance, then you should consider moving some of your investments into a safe investment vehicle. That’s because soon enough you will need to pull from your investments to pay for monthly expenses. And you don’t want any high-risk investments ruining all your efforts over the years and destroying some or all the capital you’ve built up.

Of course, you don’t want to go overboard with safe investing either, as these usually have lower returns. That’s why we have created this short guide on the best investment vehicle for you from safest to higher risk.

Certificates of Deposit (CDs)

If you leave all your money in a savings account, you aren’t earning enough interest to keep up with inflation, which means you are losing money. That’s why CDs, which are offered by banks, are a better option here. They are insured by the Federal Deposit Insurance Corporation which means they are as safe as putting your money into a savings account.

You can keep your money in CDs from 3 months to 60 months. Withdrawing before that will cost you a penalty, so leave money in these CDs that you know you won’t need any time soon.

U.S. Government Bills, Notes, and Bonds

U.S. Government bills, notes, and bonds are also known as treasuries. The U.S. Federal government has a high credit rating. This means that short-term U.S. Treasuries are considered to be the safest investment, especially during a recession.

If you are going to retire soon and the economy isn’t that strong, consider moving some of your investments into U.S. Treasuries, as these are backed by the government.

Municipal Bonds

State and local governments sell bonds as well because they can use these funds to build infrastructure and improve the local economy. These are safe and tax-free, which makes them a great investment outside of your IRA or 401(k). Always do your research on the best municipal bonds to invest in, before putting your money into them.

Bond Mutual Funds

If you don’t wish to buy bonds directly, bond mutual funds are a great option for you, because the mutual fund manager will research the best bonds to invest in, and include only those in the fund’s portfolio. The three types of bond funds that are considered to be the safest are government bond funds, municipal bond funds, and short-term corporate bond funds.

Each Person Will Need To Choose the Investment Vehicle That Suits Their Circumstance Best

Everyone is in a unique situation with regards to investments, lifestyle, and retirement, so that’s why there’s no one-size-fits-all investment vehicle or strategy. Consider your situation carefully to figure out the best investment vehicle mix for you.

Looking for more investing tips? Check out Savvy Investor. It’s a community that’s dedicated to increasing the knowledge and experience of investors.

Loan Constant

Is a measure of your annual Cash Outflow as a percentage of the loan amount. It is calculated as Annual Loan Payment/Loan Amount

Annual Spread %

Cap Rate – Loan Constant

Annual Spread $

Cash inflow – Cash Outflow

Unleveraged Return

Calculated by Net Operating Income divided by Cash Required to Close. It is important to compare your Unleveraged Return to Leverage return to determine if you have Positive Leverage (ideal), Neutral Leverage or Negative Leverage.

PMI

Mortgage Insurance if required

Effective Return on Investment

This is similar to Cash on Cash Return but also includes appreciation, and mortgage principal paydown to illustrate a more complete return.

Cash on Cash Return

An annual measure of a real estate investor’s earnings on a property compared to the amount the investor initially spent to purchase it and make it operational.

Your cash-on-cash return is your annual cash flow (pre-tax) divided by your total cash investment.

Capitalization Rate

Calculated by dividing a property’s net operating income by its asset value, the cap rate is an assessment of the yield of a property over one year. For example, a property worth $14 million generating $600,000 of NOI would have a cap rate of 4.3%. That means that you can expect a roughly 4.3% annual operating cash flow given the price paid for the property.

Gross Rent Multiplier

is a screening metric used by investors to compare rental property opportunities in a given market against each other. The GRM functions as the ratio of the property’s market value over its annual gross rental income.

Debt Coverage Ratio

is a metric that looks at a property’s income compared to its debt obligations. Properties with a DCR of more than 1 are considered profitable, while those with a DSCR of less than one are losing money.

Other

Any other costs you will be covering for the property. i.e. if you are going to pay for the pool maintenance then the Gross rent would be higher but you would include that cost here.

Maintenance Percentage

What do you anticipate it will cost per year to maintain the home from a Landlords perspective? Older homes will be higher than newer homes.

Real Estate Appreciation

What do you anticipate the property appreciating annually?

Closing/Fixup/Misc Costs

Include all Buyer costs at closing AND the cost you will put into the property after closing to get it ready to rent.