The Three Classes Of Legitimate Guaranteed Investments

There’s a lot of negative press about the current state of the investment ecosystem. Scams abound from those of Bernie Madoff-proportions to much more mundane examples of financially-naive investors being sold an investment they think is guaranteed against lost but is, in fact, not. It’s buyer beware out there today, which I think is an unfortunate byproduct of today’s bottom-line-oriented society.

But never fear! I’ve decided to make things very easy for you. Below I’ve compiled a list of three legitimately-guaranteed investments. If you are being pitched a “guaranteed” investment not on the list below, there is a 99% chance you are being misled. Sure, there are exceptions to every rule and from time to time there probably are guaranteed or near-guaranteed investments other than those on the list below that do pop up. But it bears repeating and I cannot stress this enough, there is a 99% chance you are being misled! I don’t know about you, but I don’t like those odds. And let’s face if, if you are the type of person to be attracted to “guaranteed” investments, chances are you don’t know enough to be able to sort the good opportunities from the bad. In this situation, it’s best to just say no. Yeah, you may occasionally (once in a hundred years) miss out on some huge opportunity, but it’s much more likely the only thing you’ll miss out on is losing your life savings.

The Three Classes Of Legitimate Guaranteed Investments

So is there such a thing as a guaranteed investment? As it turns out, there is. There are three classes of truly guaranteed investments I’m aware of, all of them coming with some sort of explicit government guarantee, which is what makes them so safe. As you may have guessed, these are all low-yielding investments.

1. U.S. Treasury And Savings Bonds – The United States Treasury offers a variety of guaranteed bond products whose repayment of principal is backed by the full faith and credit of the United States Government, making them perhaps the safest investments on earth. These include short-term Treasury Bills, savings bonds, TIPS (Treasury Inflation Protected Securities), etc. While all longer-term Treasury bonds except TIPS do have inflation risk. or the risk that your interest payments won’t be enough to keep up with inflation, at least your principal is guaranteed. Those interested in absolute safety should stick with the lowest-yielding 90-day Treasury bills.
2. Certificates Of Deposit and FDIC-insured Savings Accounts – Following closely behind U.S. Treasury obligations on the risk scale are CD’s, savings accounts, and any other account insured by the FDIC, a branch of the federal government. The short-term risk-free nature of FDIC-insured accounts makes them ideal for short-term savings for purchases you’ll need to make within the next few years. A word about foreign bonds or CD’s: even though some of these investments may be guaranteed by foreign governments in no danger of defaulting on their obligations, these guarantees almost never extend to exchange rate risk. That is, while those UK bonds may be guaranteed to repay your principal in British Pounds, if the dollar loses value against the Pound you will still lose money. Hence, these aren’t guaranteed investments, at least from the perspective of the American investor.
3. Immediate Annuities – While immediate annuities are issued by private insurance companies and not the government, their value is usually explicitly guaranteed by state regulatory bodies up to a certain limit (similar to FDIC insurance). I won’t argue the merits of buying an immediate annuity (for the record, I believe an immediate annuity is appropriate for some modest percentage of your portfolio especially if your family is long-lived) and I won’t delve into the merits of the plethora of insurance riders you can buy in addition to the basic income stream, but I will say that these products are extremely safe so long as you stay under the state limits. Since state finances tend to be a bit shakier than federal finances and there is insurance party risk, perhaps I should stop short of calling these a truly guaranteed investment, but I believe they are close for all practical purposes.