---
title: "What is a Safe Investment?"
description: "What is a safe investment? What makes an investment safe? How do you choose a level of safety for your portfolio?"
canonical_url: https://trendshare.org/how-to-invest/what-is-a-safe-investment
markdown_url: https://trendshare.org/ai/what-is-a-safe-investment.md
published: 2014-08-11
last_updated: 2017-08-28
content_license: https://trendshare.org/about/disclaimer
---
# What is a Safe Investment?

Source: https://trendshare.org/how-to-invest/what-is-a-safe-investment
Updated: 2017-08-28
Safety is often overlooked. Yet it's essential to good investing. The very
nature of business makes safety a tricky quality to measure; it's multifaceted
and unpredictable. Risk itself is only a measurement of expected and
unexpected circumstances and the confidence you have that you understand them
appropriately. You can truly account for everything only if you have complete
knowledge (and if you have complete knowledge, you've already chosen the
perfect stocks to buy).

Before you make any investment, you must [gauge your appetite for risk](https://trendshare.org/how-to-invest/understanding-investment-risk) and
consider the safety or risk of that investment to your satisfaction. You must
also understand this: a safe investment is one which protects your capital and
preserves your ability to earn and to buy.

## What is the Risk of Losing Your Principal?

Suppose you invest $1000 in a Canadian maple syrup company stock. What's the
worst that could happen? It's a stock. There are no guarantees in business. If
the company goes out of business, your stock could be worth nothing. In that
worst case scenario, you would lose all $1000 of the principal you put into the
stock.

### What is the risk of losing more than the principal?

Suppose you short sell the stock. With these more complex investments, your
exposure to risk is higher. You short 100 shares at $10 per share (gaining you
$1000, less commissions) and it keeps going up to $100 a share, so you owe
$10,000, losing you $9,000. Oops. You've lost the $1000 you thought you had
and are liable for even *more* money, because the value of the
underlying investment moved in a way you didn't expect.

Both cases (bankruptcy or an unfortunate short) are riskier than socking
away your money in an [FDIC](https://www.fdic.gov/)-insured savings
account in the United States (deposits guaranteed up to $250,000) or an
investment in a [US Treasury Bond](https://www.treasurydirect.gov/),
backed by the full faith and credit of the United States. Unless the United
States collapses into anarchy where there's no money supply, no US dollar, and
only rampaging hordes of raiders, the $1000 you put into a T-bill will be
there.

That's still not 100% safety.

## What is the Risk of Inflation?

A far more insidious risk is not earning enough on your investment to beat
taxes and inflation. If you calculate [a good annual rate of return](https://trendshare.org/how-to-invest/what-is-a-good-annual-rate-of-return),
remember that the buying power of a dollar tends to go down over time ([average inflation of 2-3% annually as measured over decades](https://inflationdata.com/Inflation/Inflation_Rate/Long_Term_Inflation.asp)). Taxes will eat
between 15-25% of your profits.

If you invest in a US Government Bond (no principal loss unless the
government collapses) and make 1% interest (good luck with that) but inflation
is 2%, you've effectively lost 1% of your buying power. That's a balloon with a
slow leak.

That might be the *right* choice—if keeping a lot of money
safe is more important than keeping your buying power at the same level or
expanding it—but that depends on your investing goals. Investment safety
may not be your top priority, you ignore it at your own peril.

## What Makes an Investment Safe?

The risk of an investment depends on the stability of the entity which the
investment represents. With a government bond, your risk is whether that
government will continue to be a viable political entity. With a stock, your
risk is whether the business will go bankrupt in whole or in part.

Your risk of losing buying power depends on the strength of the business
entity (and [the price you pay per share](https://trendshare.org/how-to-invest/how-to-double-your-money)).

You can't predict the future of any company, but understanding the
underlying business and its financial structure will give you clues about
companies which are valued fairly, overvalued, or undervalued. Even this basic
information can help you choose wiser investments!

## What are the Risk and Safety Categories of Stocks?

You can measure the relative safety of a stock by the size and longevity of
the business it represents. A business in the [Dow Jones Industrial Average](https://trendshare.org/how-to-invest/dow-sandp-nasdaq) is about as big and stable as a company gets. It's
relatively safe for a stock. Similarly, a stock in the [S&P 500 index](https://trendshare.org/how-to-invest/buy-the-s&p-index-fund) represents one of the
largest, most successful companies in the world today. It's not quite as
impressive as a Dow stock, but it's big and stable.

As you go down the list of [market capitalization](https://trendshare.org/how-to-invest/what-is-market-capitalization) and company size, you can find medium and [small cap stocks](https://trendshare.org/how-to-invest/what-is-a-small-cap-stock) worth investing in but
without the history (sometimes) or market size to weather large economic
storms. Of course, there's always an Enron or an AIG or a GM to get in trouble,
but a well-managed company in a stable business can do a lot when it's larger
than when it's smaller.

Finally, [penny stocks are risky](https://trendshare.org/how-to-invest/risks-of-penny-stock-trading).
You can't predict anything—except that most of them historically are
worthless—so they're not safe at all.

Diversity may or may not help; the risk of compounding a loss of buying
power is present in diversity, but [the S&P 500 index fund is always worth considering](https://trendshare.org/how-to-invest/buy-the-s&p-index-fund). As far as stocks go,
it's a safe investment. (Treasury bills are very safe investments in terms of
preserving principal, but they won't earn you much return.)

## Can Stock Investing Be Safe?

There are no 100% no risk safe stocks to invest in. Even a venerable [Coca-Cola](/stocks/KO/view) or [Exxon](/stocks/XOM/view)
may get in financial trouble, lose market share to a competitor, or find
itself in a world where people don't want the liquids it sells. That's very,
very unlikely (both are safe stocks), but it's *possible*.

There's no way to avoid risk altogether with any investment. The risk of
losing your principal is ever present, but the risk of losing buying power
from inflation, [surreptitious fees](https://trendshare.org/how-to-invest/broker-fees), and taxes is
insidious and subtle. Only when you measure both accurately can you truly
judge the safety of an investment and the long-term fidelity of your investing
goals.