Safe investments are the best for anyone who wants to build wealth in the long run. They are very low risk, promise steady return, and are partly boring, providing a sense of security riskier options can not. Sometimes, however, investments that are advertised as “safe” are actually slowly draining your wealth, like a dripping faucet that drips only a few cents a day, but leaves you with a big water bill at the end of the month. They can lull you into a false sense of security, while slowly eating away at your money’s growth potential.
If you’re looking to build long term wealth, you need to understand how some of these ‘safe’ choices can actually end up working against you. Below are 18 investments that might seem safe, but could be holding your money back from growing as much as it could.
Long Terms and Low Returns CDs
Certificates of deposit (CDs) are hailed as safe investments, but if interest rates are low, you’re not exactly getting the most for giving your money away for years. Inflation may have eaten away any growth you gained by the time it matures. Longer term CDs can be particularly problematic, some financial advisors argue, because you’re locking in a low yield for a long time.
Low Interest Rate Environments and Treasury Bonds
Low risk investments such as treasury bonds are popular, but when interest rates are low, these bonds don’t yield much. Low yield bonds may not keep pace with inflation over the long haul. In other words, your money may be “safe,” but it’s not growing enough to keep pace with inflation.
High Fee Money Market Accounts
High fee money market accounts offer slightly better rates than regular savings accounts, but you’ll pay fees and those can eat away your returns. However, if you don’t have a high enough balance to meet account requirements, fees can eat up any gains you earn, making this investment a bad idea for wealth building.
Companies With Low Rating Corporate Bonds
Corporate bonds from reputable companies are generally safe, but lower rated corporate bonds can offer higher yields, and higher risk. During economic downturns, companies with poor ratings may default, and you can lose your investment. These bonds might sound attractive due to their ‘guaranteed’ returns but their true hidden dangers lurk.
Low Interest Savings Accounts
Most bank interest rates are hovering around 0.05% and your money barely grows, yet many people think their money is safest in a savings account. The interest can easily be eaten by inflation, and you are basically losing the buying power over time. As of 2023, the average savings account interest rate is less than 0.25%, according to Bankrate, so money sitting in the account is slowly losing value.
High Fee Fixed Annuities
A lot of people buy annuities, which are sold as a way to get steady income in retirement, but they come with high fees, low returns and restrictions on when you can withdraw. High fees alone can eat into your earnings, and over the long term, reduce what you get out of the investment. Before you consider an annuity, you should know the costs involved.
Low-Yield Dividend Stocks
Dividend stocks are famous for being able to hand you reliable income, but not all dividends are created the same way. You may not make enough money from low yield stocks to justify the investment, and if you don’t reinvest dividends, you forgo the compounding growth that wealthier investors depend on. If you’re looking for more growth, it’s worth looking for higher yield dividends.
Savings Accounts With High Yields That Don’t Keep Up With Inflation
Regular savings accounts typically pay slightly higher rates than high yield savings accounts, but even ‘high yield’ usually doesn’t come close to keeping pace with inflation. This means that your money’s purchasing power is continuously being eroded. Even these accounts may not be enough to protect your savings in times of high inflation.
Rental Properties in Poor Markets
Rental properties in declining markets can become money pits, even if real estate can be a good investment. If property values fall or rental demand drops, you could be left with a property you can’t sell and which brings in little or no income. These traps can be avoided with real estate investing if you do the proper market research.
High Buy-Sell Spreads for Precious Metals
While gold and silver are often thought of as ‘safe’ assets, the buy-sell spread can consume your returns. When you buy, you might be paying a premium, and when you sell, you’ll receive less, which leaves you needing significant price appreciation to turn a profit. While precious metals can be a good hedge, they’re not the best place to park large sums for growth.
Penny Stocks with High Fees
While penny stocks may sound like a cheap way to invest in the stock market, they’re usually volatile and have high transaction fees. Many of these penny stocks are speculative and don’t have the liquidity of major stocks, so while they may seem safe because of their low prices, they’re often risky.
Low-Yield Municipal Bonds
One reason municipal bonds are so appealing is they are often tax free. But many municipal bonds have low returns, and if you’re not in a high tax bracket, the tax advantage may not be worth the low yield. In many cases, for folks who tend to be younger investors or people who can get by with a lower tax burden, municipal bonds may not be the optimal source of growth.
Bonds With Long Maturity Dates
Traditional “safe” investments such as savings bonds can take decades to mature and your money is tied up for a long time with low returns. This may not be appropriate for people who are wanting to build their wealth within the shorter time period. Often, savings bonds don’t offer enough return to really grow.
Investing in Whole Life Insurance
Whole life insurance policies are sold as life insurance and an investment vehicle, but they are expensive, have low returns, and limited flexibility. The cash value doesn’t grow quickly, and fees can cut into whatever gains the policy might make. Term life insurance is often suggested by many financial advisors as a simpler, more cost effective option.
Low Rate Environments and Fixed Income Funds
Fixed income funds can be attractive because of their low volatility, but at low interest rates, the returns can be low too. The principal may be safe, but because of a lack of growth, these funds may barely keep pace with inflation. If you want to invest for growth, a balanced fund—one of bonds and stocks—might be a better option.
Low-Risk Mutual Funds
Capital preservation is the main priority of low risk mutual funds, but this means low returns. Many of these funds don’t grow enough to make a significant difference in long term wealth. Low risk funds may not provide the amount of return required to build wealth for those with a longer investment horizon.
Cash-Value Insurance Policies
Cash value insurance policies like whole life insurance promise ‘safe’ growth, but they tend to come with high fees, and have a complex structure that makes it nearly impossible to grow your money freely. Other investment vehicles are often found to offer better growth potential along with better flexibility at lower costs by many investors.
Disclaimer: This list is solely the author’s opinion based on research and publicly available information.
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