Risk Money Places vs. Safe Money Places
A safe money place is one where it is very, very unlikely that you will lose interest and credited gains – CDs and fixed annuities would be examples. A risk money place is one where you could lose principal and gains due to circumstances beyond your control – a growth mutual fund is a risk money place.
A safe money place is one where your principal is protected from loss as long as you follow the initial guidelines, and if you do decide to take your money and leave, you know pretty much what leaving early will cost. A risk money place is one where if you decide to take your money you don’t know what you will get back. It could be more than you put in - risk money places offer the potential for much higher returns than safe money places – but it could also be less than you started with or even zero.
Example: Historically, real estate in America has generally been a good investment and gone up in value. If you buy a house today could you sell it without a loss tomorrow? Maybe. Maybe not. Home prices are affected by mortgage rates, the local economy, changes in zoning and many other elements, all of which are outside the control of the homeowner. Real estate is a risk money place because principal can be lost due to events beyond your control.
Why Aren’t Treasury Bonds Listed As A "Safe Money Place?"
U.S. Treasury Bonds and Bills are direct government obligations and if you hold them to maturity you will get the stated value. What do you get back if you need to sell the bonds before maturity? There is no way of knowing, and this is why they are not included as a safe money place.
There Is Nothing Wrong With A Risk Money Place
Risk money places are expected to produce higher returns than safe money places to justify the added risk of loss, and over time many risk money places have produced significantly higher returns than the safe money places discussed on this site. But the focus of this site is safe money.
A Tale Of The First Stock Exchange
One of the first stock exchanges was founded in Holland in the 17th century. A group of Dutch merchants would invest in the cargo of a ship. If the ship survived the storms and the pirates and sold the cargo at a profit, the merchants would receive their share of the riches. If a merchant needed money before the cargo was sold they would offer their share for sale to others and the new owner would then be entitled to any profits (or could lose their investment if the ship sank).
The Dutch brought this financial medium to the New World when they settled New Amsterdam and they conducted their share exchanges near the fencing which contained the pig sty. The street with the fencing became known as Wall Street, and over two hundred years ago under a Buttonwood tree on Wall Street, in a city renamed New York, the New York Stock Exchange was founded. The origins of the site of the Exchange gave rise to a Wall Street saying that “Bulls may make money on Wall Street and Bears may make money on Wall Street, but hogs always get slaughtered.”
In the final analysis, stock prices and returns are based on actual earnings over time. If the earnings of a company grows over time the price of the company’s shares will grow. If you believe that the nation’s economy will continue to expand, stock indexes will increase in value.
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