Good Safe Investments – The Best For 2011 and Beyond

We’re all shopping for good safe investments for 2011 and beyond, but be careful in your search for the best. Some that look like good investments aren’t safe at all. Others are just relatively safe.

Good safe investments have been scarce for years as interest rates have fallen to record lows. In 2011 and beyond the future course of interest rates could separate the best from those that only appeared to be good investments. Here we define safe or fixed investments, and then look into the average person’s best alternatives in each of the three basic categories on the safe side of the fence.

Safe investments are fixed in nature vs. variable investments like stocks, real estate or commodities. Your income or interest rates, principal, or both can be fixed and maybe guaranteed by the government. You are basically acting as a money lender to a borrower like a bank, government entity, or a private enterprise like a corporation. In any case, the borrower offers terms for payment of interest and for repayment of their debt to you. Your three basic choices in the safe or relatively safe investments arena: CASH EQUIVALENTS where only your PRINCIPAL (money invested) is fixed, BONDS where only INTEREST RATES are fixed, and SAVINGS VEHICLES where BOTH principal and interest rates are fixed for a period of time.

Taking them in order, the first category is often simply referred to as CASH. Examples include bank savings and money market accounts, and money market mutual funds that invest in high-quality safe short-term money market securities for their investors. Safety with high liquidity is the signature here. You can get your principal back intact quickly and easily. These will be especially good investments for 2011 and beyond if interest rates go up because your interest income is not fixed and should follow suit. Your best investments here will be money market funds where your interest income automatically goes up with interest rates. Banks raise rates at their own discretion.

Bonds have fixed interest rates that do not change for the life of the security. They pay higher interest income and were good investments for years as rates were falling. These are basically long-term debt securities that trade in the open market like stocks do. Bonds promise to pay back your principal when they mature… but maturity can be 20 or 30 years away. Meanwhile your principal or the value of your bonds will fluctuate. The longer the term until maturity the greater the influence of changing interest rates. The value of bonds will fall if rates go up in 2011 or beyond, which only makes them relatively safe investments.

The best investments for the average investor in the bond department, looking down the road, will be short-term to intermediate-term bond funds. These hold bonds that mature in a few years vs. long- term funds with average maturities in their portfolios of 20 years or more. The latter pay more interest income and might look like good safe investments if you look at their performance records. But remember, the trend in interest rates could change drastically in 2011 and beyond. We’ve been hovering near all-time lows in interest rates and highs is bond prices. Don’t be the last to get the word when the party is over.

Some safe investments like bank certificates of deposit (CDs) and Savings Bonds come with fixed interest rates (for a period of time) and government guarantees for safety of principal. If the rate offered on a certificate or promissory note looks too good to be true, check to assure that it’s insured by the government. Some advertisements are misleading. The best investments here simply amount to shopping for good interest rates without locking in a rate for too long. If rates go up and you liquidate early you face penalties. Stagger your maturities. If you lock in a rate of 2% for 5 years or more, you won’t be a happy camper if rates go north. For the very best investments here look to your stable or fixed account if you have a 401k or other retirement plan that has one.

Finding good safe investments for 2011 and beyond can best be accomplished by putting together your own package consisting of the best investments from each of the three safe and relatively safe options just discussed. For most people this means a combination of money market funds, shorter-term bond funds (with average maturities of 7 years or less), and CDs with various maturities. This way you can make the best of it while interest rates are low – without putting yourself at significant risk if rates take off in the not too distant future.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.