Can your money ever really be safe?

I feel like there are a lot more radio programs of a financial nature than there used to be.

This might be a confirmation bias, in that I’m seeking these things out. I could just as easily say that I see fewer commercials for toys and sugary cereal, but that’s because I don’t watch cartoons anymore.

(Though Animaniacs is still the best.)

But anyway, I was driving to the coffee shop where I still typically write this blog even after so many years, and there was a radio show, more of an infomercial, claiming how a financial company could keep your money completely safe, with no loss of principal.

I’m often more interested in the mechanics of selling than I am about the actual thing being sold (for example, beer commercials are so much more interesting when you see how inclusion and sexual desirability are being employed) but this was intriguing to me. And it made me think: can our money ever really be considered safe?

Being “safe”

The first step we need to take is to define what “safe” means in a money context. I think the most straightforward definition to start is “money that is always retained”, or no losses of principal.

That certain does feel safe, doesn’t it? Knowing that you can’t lose?

It’s actually quite easy to have a financial product that guarantees principal. The simplest case is that of a savings account or money market account. In fact, in the U.S., the FDIC is designed to ensure that your principal for your savings accounts (up to $250,000) will never lose money. So any account that is backed by the FDIC is “safe”.

The problem is that you’d never really have more than $250,000, because interest rates on savings accounts are very low, almost 0%. And in fact, you’d actually be losing money slowly, because of inflation.

Believe it or not, $250,000 isn’t what it used to be.

Getting returns “safely”

So it’s not important just to not lose principal, but to gain principal. And that’s where things get tough.

Investments that have a return without losing principal do exist. For example, there is a vehicle called an “equity-indexed annuity” (or just “indexed annuity”). This is an insurance product that links your returns to an index, such as the S&P 500. When returns are positive, they are a percentage of the actual index’s return, while the account is frozen when returns are negative.

Note well that this is an “insurance” product, and insurance costs you money. That means that you need to pay for this somehow. It isn’t free.

It’s hard to get an independent analysis of this kind of product, but as far as I can tell, you’re likely to net somewhere between 1%-3% returns after all fees are taken into account. This is indeed better than your savings account, though at the cost of potentially being locked into to a plan you may not always want.

For me, given that how this product is usually marketed to placate your basest fears (“guarantees! peace of mind! no losses! everything will be rosy!”), and my gut-level aversion to all but the most basic insurance products, I put this in the “too good to be true” category.

I’d rather work on a strategy of diversification and a long-term view.

Rewards without risk

What people really want, regardless of the product, is actual market returns when the market is going up, and no losses when the market goes down.

Unfortunately, this is impossible. There are two reasons for this.

• You cannot time the market. No one can. Really, not even really smart people can. If you try to do this yourself, you will fail and lose money, probably lots of it.
• A service that would guarantee no losses would need to pay for it in some way, as it’s a form of insurance. They’re not going to offer the product out of the kindness of their heart. This will reduce your earnings, potentially eliminating the major benefit of the product.

The only way a viable financial product exists is because the people who offer it make money offering it. That money needs to come from somewhere: either your fees, or a cut of your returns.

This is math. Anyone that promises otherwise is trying to fool you.

My “safety”

You know what I think is safe? I think the most safe I can be is to be in the market for the long haul. Yes, there are recessions and sometimes big losses, but over the long term we have a dependable track record of profits and returns. You don’t need to be concerned with the short term fluctuations. Markets sometimes tank, and that’s a good thing.

The biggest threat to our financial security isn’t market returns, it’s that we don’t put enough money away. So start with that problem first, and then worry about maximizing gains later.