June 7, 2010
In my first post on this topic, I mentioned that safety is a subjective term and will mean different things to different people.
A common definition of "safe" is: will I get my original investment back? If you invest a dollar, you expect a dollar back by a certain date, plus interest. All such fixed-income investments carry a promise by the borrower to repay you (you are the lender in this case). The borrower will typically be a bank, federal or state government entity, or a corporation or other private business entity. In each case the promise to repay carries different weight.
With a bank, one expects to see FDIC insurance to back that promise of repayment. Most people consider this to be a very secure promise, since bank failures generally result in depositors being made whole. The FDIC fund absorbs the losses. But there is risk here too: don't forget that FDIC insurance has limits; over those limits your deposit may not be insured. Credit unions have similar insurance backing.
Bonds, notes, and bills issued by the United States Treasury are considered to be the safest available. The promise of the Treasury to repay its obligations is backed by a power unavailable to any other issuer on earth: the power to print US dollars. In fact, as investment advisors this is one area where we can state that your investment is guaranteed. All US Treasury bonds, notes, and bills are backed by the full faith and credit of the US government. If you have such an investment you will be paid, period. Sometimes people ask if Treasury securities are insured by the FDIC. The answer is no, Treasury securities are not insured - they are safer because there is no bank to fail, no insurance fund to which one must appeal for recompense. The bonds are backed by the folks with the printing press.
Next post will focus on state and local government debt (municipal bonds). These are the favored tax-free investment of many savvy investors.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).